UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 1999
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Commission File Number 0-6072
EMS TECHNOLOGIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1035424
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(State or other jurisdiction of (IRS Employer Identification 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
been 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 May 1, 1999:
Class Number of Shares
---------------------------- ----------------
Common Stock, $.10 Par Value 8,678,426
PART I
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Financial Information
Item 1. Financial Statements
EMS TECHNOLOGIES, INC.
Consolidated Statements of Earnings (Unaudited)
(In thousands, except net earnings per share)
Quarter ended
-----------------------
April 2 April 3
1999 1998
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Net sales $55,193 42,676
Cost of sales 35,511 27,266
Selling, general and
administrative expenses 11,455 9,343
Research and development expenses 4,707 2,821
------ ------
Operating income 3,520 3,246
Non-operating income (expense), net (11) 51
Interest expense (554) (476)
------ ------
Earnings before income taxes 2,955 2,821
Income tax expense (993) (1,078)
------ ------
Net earnings $ 1,962 1,743
====== ======
Net earnings per share:
Basic $ .23 .20
Diluted .22 .20
Weighted average number shares:
Common 8,699 8,631
Common and dilutive common equivalent 9,306 8,873
See accompanying notes to interim consolidated financial statements.
EMS TECHNOLOGIES, INC.
Consolidated Balance Sheets (Unaudited)
(In thousands)
April 2 December 31
1999 1998
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ASSETS
- ------
Current assets:
Cash and cash equivalents $ 7,892 4,384
Trade accounts receivable, net 61,156 57,455
Inventories:
Work in process 7,337 5,164
Parts and materials 21,565 19,657
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Total inventories 28,902 24,821
Deferred income taxes 6,054 6,620
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Total current assets 104,004 93,280
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Property, plant and equipment:
Land 2,936 1,150
Building and leasehold improvements 24,923 15,493
Machinery and equipment 92,183 54,351
Furniture and fixtures 7,019 4,735
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Total property, plant and equipment 127,061 75,729
Less accumulated depreciation
and amortization 85,035 40,849
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Net property, plant and equipment 42,026 34,880
Other assets (note 4) 22,597 7,684
Goodwill, net of accumulated amortization 11,412 11,542
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$180,039 147,386
======= =======
See accompanying notes to consolidated financial statements.
EMS TECHNOLOGIES, INC.
Consolidated Balance Sheets (Unaudited), continued
(In thousands except share data)
April 2 December 31
1999 1998
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current installments of long-term debt $ 7,605 2,197
Accounts payable 20,991 11,815
Income taxes 907 1,580
Accrued compensation costs 4,703 4,503
Accrued retirement costs 1,128 959
Deferred revenue 4,057 2,895
Other liabilities 2,400 1,154
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Total current liabilities 41,791 25,103
Long-term debt, excluding
current installments 32,967 19,150
Deferred income taxes 2,473 2,473
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Total liabilities 77,231 46,726
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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 8,713,000 in
1999 and 8,689,000 in 1998 871 869
Additional paid-in capital 34,714 34,615
Accumulated other comprehensive income -
foreign currency translation adjustment (2,178) (2,263)
Retained earnings 69,401 67,439
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Total stockholders' equity 102,808 100,660
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$180,039 147,386
======= =======
See accompanying notes to interim consolidated financial statements
EMS TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Quarter Ended
April 2 April 3
1999 1998
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Cash flows from operating activities:
Net earnings $ 1,962 1,743
Adjustments to reconcile net earnings
to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,182 1,443
Goodwill amortization 130 256
Deferred income taxes 566 -
Changes in operating assets
and liabilities:
Trade accounts receivable (441) 1,238
Inventories (2,555) (3,607)
Accounts payable 3,175 (2,520)
Income taxes (566) (599)
Accrued costs, deferred revenue
and other current liabilities (174) 1,079
Other 182 804
------ -----
Net cash (used in) provided by
operating activities 4,461 (163)
Cash flows used in investing activities:
Purchase of property, plant and equipment (2,438) (1,550)
Initial payment for asset acquisition (6,227) -
------ -----
Net cash used in investing activities (8,665) (1,550)
------ -----
Cash flows from financing activities:
Borrowing of long-term debt 7,641 1,099
------ -----
Net change in cash and cash equivalents 3,437 (614)
Effect of exchange rates on cash 71 (355)
Cash and cash equivalents at
beginning of period 4,384 4,300
----- -----
Cash and cash equivalents at
end of period $ 7,892 3,331
====== =====
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 457 476
===== =====
Cash paid for income taxes $ 1,059 1,677
===== =====
Noncash Investing and Financing:
In January 1999, the Company acquired (through its subsidiary, EMS
Technologies Canada, Ltd.) the Space Systems and Products Division of
Spar Aerospace Limited and Spar Holdings, Inc. (a wholly-owned
subsidiary of Spar Aerospace Limited) located near Montreal, Quebec.
The transaction was accounted for as an asset purchase valued at
$17,353,000. The Company paid $6,227,000 of the purchase price at
closing, with funds provided under the Company's credit line with a
U.S. bank. The remaining $11,126,000 of the purchase price was financed
by the seller in four installments over a three-year period. See note
4 for further details of the acquisition and its financing.
See accompanying notes to interim consolidated financial statements.
EMS TECHNOLOGIES, INC.
Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The interim consolidated financial statements include the accounts of
EMS Technologies, Inc. (formerly known as Electromagnetic Sciences,
Inc.) and its wholly-owned subsidiaries LXE Inc. and EMS Technologies
Canada, Ltd. (formerly known as 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, 1998.
(2) Acquisition
In January 1999, the Company acquired (through its subsidiary, EMS
Technologies Canada, Ltd.) the Space Systems and Products Division of
Spar Aerospace Limited and Spar Holdings, Inc. (a wholly-owned
subsidiary of Spar Aerospace Limited) -- collectively, the Space
Division, located near Montreal, Quebec. The transaction was accounted
for as an asset purchase valued at $17,353,000, representing the
$20,276,000 price per the purchase agreement, as adjusted for $376,000
of debt owed by the seller and assumed by the Company, which related to
Canadian government support for Space Division research activities, and
a $2,547,000 adjustment for the amount by which the Space Division's
actual working capital at the closing date was less than the working
capital that had been projected in the purchase agreement.
The Company paid $6,227,000 of the purchase price at closing, with
funds provided under the Company's credit line with a U.S. bank. The
remainder of the purchase price was financed by the seller in four
equal installments, with the second installment to be adjusted for
actual versus projected working capital determined as of the closing
date. Subsequent to the end of the first quarter of 1999, the Company
paid the first installment in cash, with funds drawn from the Company's
credit line with a U.S. bank. The other three installments are due,
with annual interest of 5.5%, on December 31 of the year of closing and
the two subsequent years. These installments are payable, at the
Company's option, either in cash or equivalent value of the Company's
common stock.
The following schedule (in thousands, except per share data) presents
pro forma consolidated financial data, as though the acquisition had
occurred at the beginning of the period reported on:
First Quarter Ended
----------------------
April 2 April 3
1999 1998
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Pro Forma Consolidated Data:
Revenue $ 59,233 53,431
Net income 1,567 400
Earnings per share:
Basic .18 .05
Diluted .18 .05
(2) Earnings per Share
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.
The Company has granted stock options that are potentially dilutive to
basic earnings per share, summarized as follows (shares in thousands):
April 2 April 3
1999 1998
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Dilutive stock options,
included in earnings per
share calculations:
Shares 241 438
Average price per share $ 11.20 $ 8.33
Antidilutive stock options,
excluded from earnings per
share calculations:
Shares 738 559
Average price per share $ 17.24 $ 21.06
The Company's earnings per share were also diluted by the effect of
convertible debt, calculated as if the debt were converted on the first
day of the period, with net income adjusted for interest expense (net
of taxes) that would have been avoided if such conversion had occurred.
Following is a reconciliation of the numerator and denominator for
first quarter basic and diluted earnings per share calculations (in
thousands except earnings per share data):
Net Common Earnings
Earnings Shares Per
(Numerator) (Denominator) Share
------------- ------------- -----------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Basic $1,962 1,743 8,699 8,631 $.23 .20
Common equivalent shares:
From stock options 47 242
From convertible debt 560 -
Add: Interest expense on
convertible debt, net
of income taxes 60 -
----- ----- ----- -----
Diluted $2,022 1,743 9,306 8,873 $.22 .20
===== ===== ===== =====
(3) Comprehensive Income
Beginning in fiscal 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income," which established 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
April 2 April 3
1999 1998
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Net income $ 1,962 1,743
Other comprehensive expense -
foreign currency translation adjustment 85 (218)
----- -----
Comprehensive income $ 2,047 1,525
===== =====
(4) Other Assets
Other assets increased to $22.6 million at April 2, 1999 compared with
$7.7 million at December 31, 1998, mainly because of the acquisition of
the Montreal operations.
The most significant of these other acquired assets was a 5% equity
investment in a limited partnership, valued at $9.5 million. The
general partner in this venture is a large, international aerospace
firm. The goal of the investment is to enable the Montreal operations
to participate in the development and implementation of a satellite
network that will provide high-data-rate wireless services.
Another significant asset acquired with the Montreal operations was a
$3.9 million net pension asset, representing the excess of the market
value of pension assets compared with the pension benefit obligation
under defined benefit plans for the Montreal operation's employees.
This net pension asset will be used to fund future benefit obligations
arising from the plans.
Following is a summary of other assets:
April 2 December 31
1999 1998
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Other assets $ 9,160 7,684
Investment in limited partnership 9,534 -
Net pension asset 3,903 -
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Total other assets $22,597 7,684
====== =====
(5) Interim Segment Disclosures
The Company is organized into two reportable segments: Space and
Electronics, and Wireless Products. Each segment is separately managed
and comprises a range of products and services that share distinct
operating characteristics. The Company evaluates each segment
primarily upon operating profit.
These were the same two reportable segments disclosed as of the end of
the preceding fiscal year, however, the Company has reclassified its
satellite communications (SATCOM) product lines (comprising earth-based
terminal products for communicating via satellite) from Space and
Electronics to Wireless Products.
The Company reported a significant increase in assets attributable to
Space and Electronics as a result of the acquisition of the Montreal
operations.
Following is a summary of the Company's interim segment data (in
thousands)
First Quarter Ended
----------------------
April 2 April 3
1999 1998
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Revenues:
Space and electronics $ 26,221 16,615
Wireless products 28,972 26,061
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Total $ 55,193 42,676
====== ======
Operating income
Space and electronics $ 1,893 1,177
Wireless products 1,627 2,069
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Total $ 3,520 3,246
====== ======
Net earnings
Space and electronics $ 1,113 638
Wireless products 807 998
Corporate 42 107
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Total $ 1,962 1,743
====== ======
Assets:
Space and electronics $ 92,342 59,708
Wireless products 80,248 75,664
Corporate 7,449 8,449
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Total $180,039 143,821
======= =======
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
- ---------------------
In January 1999, the Company acquired the Space Systems and Products
Division of Spar Aerospace Limited and Spar Holdings, Inc. (a wholly-
owned subsidiary of Spar Aerospace Limited) located near Montreal,
Quebec. The transaction was accounted for as an asset purchase valued
at $17 million, and no goodwill resulted.
Consolidated net sales for the first quarter were $55.2 million in
1999, compared with $42.7 million in 1998. Most of this growth was in
the space and electronics segment, which benefited from acquisition of
the Montreal operations. Revenues in the wireless products segment
also increased as a result of higher sales of network products for
logistics applications in North America.
Cost of sales, as a percentage of consolidated net sales, was 64% for
the first quarter of 1999 and 1998, but the components of cost of sales
varied in those two periods. The cost of sales percentage for the
space and electronics segment is generally higher than for the wireless
products segment. The increase in space revenues in 1999 did not cause
an increase in the consolidated cost of sales percentage, because the
Company also benefited from a favorable sales mix and lower cost of
sales percentage for wireless products, especially in logistics and
aeronautical SATCOM markets.
Selling, general and administrative expenses, as a percentage of net
sales, were 22% in 1999, compared with 21% in 1998. An important
factor in this increase was higher expenses in the wireless products
segment, particularly to develop new markets and new distribution
channels for wireless infrastructure products for PCS/cellular
telecommunications.
Research and development expenses represent the cost of the Company's
internally funded efforts. Significant research and development effort
also occurs under many specific customer orders in the space and
electronics segment and, accordingly, is reflected in cost of sales.
The increase in research and development expenses is related to
specific products being developed for new wireless applications in
space, satellite communications, and private local area networks.
Interest expense increased in 1999 compared with 1998 due to the
increased debt levels associated with the assets purchased in Montreal.
The effective income tax rate for 1999 was 34%, compared with 38% for
1998. This decrease related to a comparatively higher proportion of
1999 pre-tax profits being derived from the Company's Canadian
operations, which benefit from research-related income tax incentives.
For the remainder of the year, the Company expects that a higher
proportion of pre-tax profits will be derived from the U.S. and other
tax jurisdictions; as a result, the consolidated effective rate for the
year is expected to be higher than the first quarter but slightly less
than the 39% rate reported for the preceding fiscal year.
Liquidity and Capital Resources
- -------------------------------
The increase in cash was mainly a result of cash provided by operating
activities. 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. Additional sources of liquidity will be needed over
the next few years if the Company and its markets continue to grow.
Long-term debt increased in the first quarter of 1999 mainly due to the
financing of the assets purchased in Montreal. One third of the
purchase price was financed at closing through the Company's credit
line with a U.S. bank. The remainder of the purchase price was financed
by the seller in four equal installments, with the second installment
to be adjusted for actual versus projected working capital determined
as of the closing date. Subsequent to the end of the first quarter of
1999, the Company paid the first installment in cash, with funds drawn
from the Company's credit line with a U.S. bank. The other three
installments are due, with annual interest of 5.5%, on December 31 of
the year of closing and the two subsequent years. These installments
are payable, at the Company's option, either in cash or equivalent
value of the Company's common stock.
In January 1999, the Company entered into a $7.5 million term loan
agreement with an insurance company, secured by a mortgage on one of
the Company's owned buildings. The loan is payable in equal monthly
installments over 15 years with a fixed interest rate of 7.1%. In
addition, in February 1999, the Company amended its existing revolving
credit agreement with a bank in Canada to fund Canadian operations,
increasing available borrowings to $24 million under a demand note
through February, 2001.
Year 2000
- ---------
For the past two years, the Company has pursued a plan to modify
existing information systems or implement new systems, as necessary, to
become "Year 2000" compliant in a timely manner. This plan involved
identification and remediation of potential problems, as well as
testing of new systems and processes and the development of contingency
plans. Efforts encompassed not only the hardware and software that
support the Company's information technologies, but also manufacturing
hardware and other equipment and processes that may rely on embedded
software. The Company has completed the main phase of the plan, which
focused on internal operations; only one minor software program for
tracking fixed assets is not yet compliant, but it is scheduled to be
replaced before mid-year 1999. In addition, the Company's new
Canadian-based operations (acquired shortly after the end of 1998) are
still in the process of implementing new enterprise software that will
be Year 2000 compliant, and this process is expected to be completed
during the third quarter of 1999. The Company's Year 2000 efforts are
currently focused on communications with suppliers, to confirm that the
Year 2000 issue will not have a significant effort on the Company's
supply chain.
The Company believes that neither (1) the cost of addressing Year 2000,
or (2) the consequences of untimely resolution of remaining Year 2000
issues, will have a material effect on the Company's results of
operations; however, management believes that the Company could be
affected, particularly late in 1999, if potential customers for the
Company's wireless network products delay purchases until after the end
of the year due to the Year 2000 efforts required of their own
information technology personnel.
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, the timeliness of orders and payments from
customers, the 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. In
addition, actual results could be affected by the Company's ability to
achieve expected levels of research efforts that qualify for tax
incentives, and apportionment of pre-tax income among various tax
jurisdictions.
PART II
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Other Information
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.
On February 16, 1999, the Company filed a Report on Form 8-K, reporting
the Company's acquisition (through its subsidiary, EMS Technologies
Canada, Ltd.),on January 29, 1999, of the Space Systems and Products
Division of Spar Aerospace Limited and Spar Holdings, Inc. (a wholly-
owned subsidiary of Spar Aerospace Limited).
On March 24, 1999, the Company filed a Report on Form 8-K, reporting
that the Company had changed its name, effective March 15, 1999, to EMS
Technologies, Inc.
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.
EMS TECHNOLOGIES, INC.
By: /s/ Thomas E. Sharon Date: 5/16/99
----------------------------- -------
Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Don T. Scartz Date: 5/16/99
------------------------------ -------
Don T. Scartz
Senior Vice President and Chief
Financial Officer, Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> APR-02-1999
<CASH> 7,892
<SECURITIES> 0
<RECEIVABLES> 61,156
<ALLOWANCES> 0
<INVENTORY> 28,902
<CURRENT-ASSETS> 104,004
<PP&E> 127,061
<DEPRECIATION> 85,035
<TOTAL-ASSETS> 180,039
<CURRENT-LIABILITIES> 41,791
<BONDS> 0
0
0
<COMMON> 35,585
<OTHER-SE> 67,223
<TOTAL-LIABILITY-AND-EQUITY> 102,808
<SALES> 55,193
<TOTAL-REVENUES> 55,193
<CGS> 35,511
<TOTAL-COSTS> 35,511
<OTHER-EXPENSES> 16,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 554
<INCOME-PRETAX> 2,955
<INCOME-TAX> 993
<INCOME-CONTINUING> 1,962
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,962
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
