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 June 30, 1997
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Commission File Number 0-6072
ELECTROMAGNETIC SCIENCES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-1035424
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(State or other jurisdiction of (IRS Employer ID Number)
incorporation of organization)
660 Engineering Drive
Norcross, Georgia 30092
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(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 July 27, 1997:
Class Number of Shares
Common Stock, $.10 par Value 8,529,046
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings -
Three Months and Six Months Ended
June 30, 1997 and 1996 3
Consolidated Balance Sheets - June 30,
1997 and December 31, 1996 4-5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 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
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Earnings (Unaudited)
(In thousands, except net earnings per share data)
Three months ended Six months ended
June 30 June 30
----------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
Net sales $41,046 35,674 80,677 68,863
Cost of sales 26,710 22,662 52,745 44,168
Selling, general and
administrative expenses 8,828 7,802 17,463 15,676
Research and development
expenses 2,389 3,105 4,739 6,074
------ ------ ------ ------
Operating income 3,119 2,105 5,730 2,945
Interest income and other
non-operating items
(note 4) 186 (151) 102 141
Interest expense (396) (273) (791) (538)
------ ------ ------ ------
Earnings before income
taxes and LXE minority
interest 2,909 1,681 5,041 2,548
Income tax expense (1,163) (681) (1,992) (1,046)
Minority interest in
LXE net (earnings)loss -0- (16) -0- 193
------ ------ ------ ------
Net earnings $ 1,746 984 3,049 1,695
====== ====== ====== ======
Net earnings per common and
common equivalent share $ .20 .13 .34 .22
====== ====== ====== ======
Weighted average number
of common and common
equivalent shares 8,941 7,808 8,927 7,597
See accompanying notes to interim consolidated financial statements.
Consolidated Balance Sheets (Unaudited)
(In thousands)
June 30 December 31
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 2,560 4,321
Trade accounts receivable, net 52,903 45,452
Inventories:
Work in process 8,704 5,688
Parts and materials 14,145 14,548
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Total inventories 22,849 20,236
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Deferred income taxes 2,098 2,098
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Total current assets 80,410 72,107
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Property, plant and equipment:
Land 1,150 1,150
Building and leasehold improvements 14,988 14,829
Machinery and equipment 57,194 59,137
Furniture and fixtures 4,024 4,426
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Total property, plant
and equipment 77,356 79,542
Less accumulated depreciation and
amortization 45,586 49,107
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Net property, plant and
equipment 31,770 30,435
Other assets 7,562 7,304
Goodwill, net of accumulated amortization 17,200 17,231
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$136,942 127,077
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See accompanying notes to interim consolidated financial statements.
Consolidated Balance Sheets (Unaudited), continued
(In thousands except share data)
June 30 December 31
1997 1996
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 3,874 4,497
Accounts payable 12,483 14,798
Income taxes payable 2,316 -0-
Accrued compensation costs 3,449 3,404
Accrued retirement costs 596 327
Deferred revenue 2,658 1,340
Other liabilities 1,339 1,104
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Total current liabilities 26,715 25,470
Long-term debt, excluding current
installments 18,540 12,230
Deferred income taxes 2,127 2,127
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Total liabilities 47,382 39,827
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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 8,529,000 in
1997 and 8,445,000 in 1996 853 844
Additional paid-in capital 32,854 32,581
Foreign currency translation adjustment (1,068) (47)
Retained earnings 56,921 53,872
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Total stockholders' equity 89,560 87,250
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$136,942 127,077
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See accompanying notes to interim consolidated financial statements.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Six Months Ended June 30
1997 1996
-------- --------
Cash flow from operating activities:
Net earnings $ 3,049 1,695
Adjustments to reconcile net earnings to
net cash used in operating activities:
LXE minority interest - (193)
Depreciation and amortization 2,786 2,706
Goodwill amortization 549 282
Changes in operating assets and
liabilities:
Trade accounts receivable (8,313) (601)
Inventories (2,894) (517)
Accounts payable (1,761) 1,564
Income taxes 2,127 (148)
Accrued costs, deferred revenue
and other current liabilities 1,670 825
Other (286) (909)
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Net cash provided by (used in)
operating activities (3,073) 4,704
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Cash flows from investing activities:
Purchase of property, plant and equipment (4,121) (3,277)
Purchase of subsidiary common stock from
minority shareholders (519) (500)
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Net cash used in investing
activities (4,640) (3,777)
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Cash flows from financing activities:
Borrowing of long-term debt 5,687 102
Proceeds from exercise of stock options 282 219
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Net cash provided by
financing activities 5,969 321
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Net change in cash and cash
equivalents (1,744) 1,248
Effect of exchange rates on cash (17) -
Cash and cash equivalents at January 1 4,321 5,766
------ ------
Cash and cash equivalents at June 30 $ 2,560 7,014
====== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 791 538
Cash paid for income taxes $ 259 1,034
See accompanying notes to interim consolidated financial statements.
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. and LXE Inc., and it's
majority-owned subsidiary 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, 1996. Certain
reclassification of 1996 financial data were made to conform to
classifications adopted in 1997.
(2) Earnings per Share
Earnings per common and common equivalent share for the
interim periods were based on the weighted average number of
shares outstanding and equivalent shares derived from dilutive
stock options.
(3) Acquisition of LXE Minority Shares
On October 3, 1996, the Company announced its offer to
exchange .75 shares of its common stock (ELMG stock) for each of
the 1.0 million outstanding shares of the common stock of LXE
Inc., held by third parties. The exchange offer expired on
December 30, 1996, at which time approximately 800,000 shares had
been tendered; upon acceptance of those shares, the Company held
96% of the outstanding LXE shares. On December 31, 1996, the
Company exercised its right as the holder of at least 90% of the
LXE shares to cause a merger in which all remaining LXE shares
not held by the Company were each converted into .75 ELMG shares.
The acquisition of LXE shares was accounted for as a
purchase transaction, resulting in additional goodwill of
approximately $12.5 million that will be amortized on the
straight-line method over twenty-five years.
(4) Accounting Policy on Currency Translation for Foreign
Subsidiaries
In 1997, the accounting policy was changed for currency
translation and remeasurement of the European subsidiaries'
financial statements. Prior to 1997, the functional currency of
the European subsidiaries was considered to be the U.S. dollar.
These subsidiaries have experienced continued growth, and more
recently, greater operational autonomy and expanding business
activity, and beginning in 1997, the functional currency is now
considered to be the local currency. As a result of this change
in accounting policy, remeasurement adjustments arising from the
translation of the subsidiaries' financial statements are now
reflected as a separate component of stockholders' equity, rather
than as a non-operating gain or loss in the results of
operations.
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 1997 were $41.0 million and $80.7 million respectively,
compared with $35.7 million and $68.9 million for the same
respective periods in 1996. A majority of this revenue growth
came from increased sales of mobile communications infrastructure
(PCS/Cellular) products, and wireless network products and
services, especially for healthcare information systems.
Cost of sales, as a percentage of net sales, was 65% for both the
second quarter and first six months of 1997, compared with 64%
for the same periods in 1996. This net increase includes a
higher cost of sales percentage in the wireless logistics
segment, reflecting more distribution through indirect channels
that typically carry lower gross profit margins, as well as a
competitive pricing environment. The space and advanced
communication segment, on the other hand, achieved more favorable
operating margins than in 1996, due to a more profitable mix of
development contracts, and the introduction of new antenna
products.
Selling, general and administrative expenses decreased in 1997 as
a percentage of net sales, mainly as a result of low growth in
the expense base related to wireless logistics. Research and
development expenses, which represent internally-funded efforts,
decreased in 1997 as the Company directed a comparatively higher
proportion of its total R&D effort towards customer-funded
projects, the cost of which is reported in cost of sales.
Other non-operating income in 1997 has fluctuated from 1996
mainly due to the Company's change in accounting policy at the
beginning of 1997 related to the translation of foreign
subsidiaries' financial statements. The functional currency of
the subsidiaries was formerly considered to be the U.S. dollar,
and remeasurement adjustments in 1996 that resulted from the translation
of the subsidiaries' financial statements were reported in the consolidated
statement of operations. Due to the subsidiaries' greater operational
autonomy and expanding activity, the functional currency is now
considered to be the local currency, and the remeasurement
adjustment in 1997 was reported in stockholders'
equity on the consolidated balance sheet. Interest expense
increased with the Company's higher level of borrowing in 1997
compared with 1996. The effective income tax rate for the first
half of 1997 was 40%, which is comparable with the rate for 1996
and previous years, excluding the beneficial effect in 1996 of a
non-recurring adjustment of deferred income tax liability.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity and capital resources have been affected
by several factors during 1997, including an increase in unbilled
revenues under certain long-term, development contracts; these
revenues are expected to be billed and collected during the next
six months. In addition, the Company has made significant
expenditures in 1997 for property, plant and equipment to support
continued sales growth. As a result, the Company's cash has
decreased and its long-term debt has increased during the first
half of 1997. The Company expects a net cash increase for the
remaining six months of the fiscal year. 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 capital investment plans.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 2, 1997.
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
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Anthony J. Iorillo 6,614,449 17,478 21,077
Jerry H. Lassiter 6,626,920 5,007 21,077
John H. Levergood 6,615,607 16,320 21,077
John B. Mowell 6,607,137 24,790 21,077
John E. Pippin 6,602,707 29,220 21,077
Don T. Scartz 6,607,407 24,520 21,077
Thomas E. Sharon 6,607,407 24,520 21,077
At the Meeting, the Shareholders also considered and
approved the adoption of the Electromagnetic Sciences, Inc. 1997
Stock Incentive Plan, by the following vote:
Abstain or
For Withheld Broker Non-Votes
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6,320,991 295,092 36,921
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this
report:
11.1 Statement re: Computation of Per Share Earnings
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 June 30, 1997.
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/ Date: 7/31/97
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Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Date: 7/31/97
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Don T. Scartz
Treasurer and Chief Financial
Officer