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 September 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
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The number of shares outstanding of each of the issuer's classes of
common stock, as of the close of business on November 14, 1997:
Class Number of Shares
Common Stock, $.10 par Value 8,616,185
FORM 10-Q
-2-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Balance Sheets - September 30,
1997 and December 31, 1996 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 8-9
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 10
FORM 10-Q
-3-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Net sales $42,306 37,908 122,983 106,771
Cost of sales 27,986 24,926 80,731 69,094
Selling, general and
administrative expenses 8,083 7,377 25,546 23,053
Research and development
expenses 2,406 3,062 7,145 9,136
------ ------ ------ ------
Operating income 3,831 2,543 9,561 5,488
Interest income net of
other non-operating items
(note 4) (66) (39) 36 102
Interest expense (506) (293) (1,297) (831)
------ ------ ------ ------
Earnings before income
taxes and LXE
minority interest 3,259 2,211 8,300 4,759
Income tax expense (1,307) (897) (3,299) (1,943)
Minority interest in LXE
net (earnings) loss - (93) - 100
------ ------ ------ ------
Net earnings $ 1,952 1,221 5,001 2,916
====== ====== ====== ======
Net earnings per common
and common equivalent
share $ .22 .16 .56 .38
====== ====== ====== ======
Weighted average number
of common and common
equivalent shares 8,990 7,808 8,950 7,669
See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-4-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Balance sheets (Unaudited)
(In thousands)
September 30 December 31
1997 1996
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ASSETS
Current assets:
Cash and cash equivalents $ 2,321 4,321
Trade accounts receivable, net 55,827 45,452
Inventories:
Work in process 8,054 5,688
Parts and materials 14,422 14,548
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Total inventories 22,476 20,236
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Deferred income taxes 2,098 2,098
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Total current assets 82,722 72,107
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Property, plant and equipment:
Land 1,150 1,150
Building and leasehold improvements 15,026 14,829
Machinery and equipment 58,923 59,137
Furniture and fixtures 4,215 4,426
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Total property, plant
and equipment 79,314 79,542
Less accumulated depreciation and
amortization 47,012 49,107
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Net property, plant and
equipment 32,302 30,435
Other assets 7,707 7,304
Goodwill, net of accumulated amortization 17,291 17,231
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$140,022 127,077
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See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-5-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Balance sheets (Unaudited)
(In thousands except share data)
September 30 December 31
1997 1996
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 4,505 4,497
Accounts payable 13,122 14,798
Income taxes payable 2,767 -
Accrued compensation costs 4,529 3,404
Accrued retirement costs 506 327
Deferred revenue 2,130 1,340
Other liabilities 1,652 1,104
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Total current liabilities 29,211 25,470
Long-term debt, excluding current
installments 17,001 12,230
Deferred income taxes 2,127 2,127
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Total liabilities 48,339 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 8,609,000 in
1997 and 8,445,000 in 1996 861 844
Additional paid-in capital 33,225 32,581
Foreign currency translation adjustment
(note 4) (1,276) (47)
Retained earnings 58,873 53,872
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Total stockholders' equity 91,683 87,250
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$140,022 127,077
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See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-6-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30
1997 1996
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Cash flow from operating activities:
Net earnings $ 5,001 2,916
Adjustments to reconcile net earnings
to net cash from operating activities:
LXE minority interest - (100)
Depreciation and amortization 4,212 4,219
Goodwill amortization 712 379
Changes in operating assets and liabilities:
Trade accounts receivable (11,198) (5,394)
Inventories (2,373) (1,865)
Accounts payable (1,290) 2,933
Income taxes 2,578 84
Accrued costs, deferred revenue
and other current liabilities 2,445 1,351
Other (373) (1,638)
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Net cash provided by (used in)
operating activities (286) 2,885
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Cash flows from investing activities:
Purchase of property, plant and equipment (6,079) (5,269)
Purchase of subsidiary common stock from
minority shareholders (773) (500)
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Net cash used in investing
activities (6,852) (5,769)
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Cash flows from financing activities (note 3):
Borrowing of long-term debt 4,779 916
Proceeds from exercise of stock options 661 412
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Net cash provided by
financing activities 5,440 1,328
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Net change in cash and cash
equivalents (1,698) (1,556)
Effect of exchange rates on cash (302) -
Cash and cash equivalents at January 1 4,321 5,766
------ ------
Cash and cash equivalents at September 30 $ 2,321 4,210
====== ======
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 1,297 831
Cash paid for income taxes $ 1,192 1,558
See accompanying notes to interim consolidated financial statements.
FORM 10-Q
-7-
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The interim consolidated financial statements include the accounts
of Electromagnetic Sciences, Inc., and 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, 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.
FORM 10-Q
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ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
ITEM 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Results of Operations
- ---------------------
Consolidated net sales for the third quarter and first nine months of
1997 were $42.3 million and $123.0 million respectively, compared with
$37.9 million and $106.8 million for the same respective periods in 1996.
Wireless infrastructure (PCS/cellular antenna) products and wireless
local area network products for logistics applications made the most
significant contributions to the Company's net growth in revenues.
Revenues from the healthcare business slowed in the third quarter due to
a product transition, but the Company expects this business to recover in
the fourth quarter.
Cost of sales, as a percentage of net sales, was approximately 66% for
the interim periods in both 1997 and 1996, despite a changing product
mix. The benefits from sales growth in higher-margin products for
wireless infrastructure and certain space applications helped offset the
adverse effects of comparatively higher distribution of wireless local
area network products through indirect channels (which typically have a
lower gross profit margin), as well as costs incurred for increased
proposal efforts in the space business.
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 local area networks. Research and development
expenses, which represent internally-funded efforts, decreased in 1997 as
the Company directed a higher proportion of its total R&D effort toward
customer-funded projects, the cost of which is reported in cost of sales.
Interest expense increased with the Company's higher level of borrowing
in 1997 compared with 1996. The effective income tax rate for the first
nine months 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
primarily by an increase in accounts receivable related to unbilled
revenues under certain long-term development contracts. 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 from the levels
reported at the beginning of the year. However, the Company generated
positive net cash flow in the third quarter, which was utilized to reduce
long-term debt. The Company expects to generate further positive cash
flow in the fourth quarter, as certain unbilled revenues are expected to
be billed and collected during that period. Management believes that the
Company's present liquidity, together with cash from operations and
FORM 10-Q
-9-
sources of external financing, will support its current business
activities and near-term capital investment plans, but 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.
Business Risk Factors
- ---------------------
Forward-looking statements with respect to the potential development of
various markets and products, as well as expected cash flows, 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 wide
variety of factors. Such factors include, but are not limited to, the
availability of third-party-manufactured hardware for integration into
Company products, 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. Additional information concerning such factors is
contained in the Company's Report on Form 8-K dated October 15, 1997.
FORM 10-Q
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ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
10.1 Electromagnetic Sciences, Inc. 1997 Stock Incentive Plan,as
adopted January 24, 1997 and amended effective August 29, 1997.
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 September 30, 1997.
FORM 10-Q
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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: 11/14/97
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Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Date: 11/14/97
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Don T. Scartz
Treasurer and Chief Financial
Officer