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 September 30, 1995
Or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________.
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
incorporation of organization) Identification Number)
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 November 1, 1995:
Class Number of Shares
Common Stock, $.10 Par Value 7,004,254
Page 1 of 11 including exhibits
2
Index
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings -
Three Months and Nine Months Ended
September 30, 1995 and 1994 3
Consolidated Balance Sheets - September
30, 1995 and December 31, 1994 4-5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1995 and 1994 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
3
PART I.
FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Operations (Unaudited)
(In thousands, except net earnings per share data)
Three months ended Nine months ended
September 30 September 30
1995 1994 1995 1994
Net sales $28,135 31,076 93,930 84,705
Cost of sales 19,303 19,548 61,629 52,431
Selling, general and adminis-
trative expenses 8,040 6,923 22,410 20,302
Research and development expenses 3,002 2,100 7,654 6,009
Operating income (loss) (2,210) 2,505 2,237 5,963
Interest and other income 28 62 509 138
Interest expense (257) (120) (592) (343)
Earnings (loss) before income
taxes and LXE minority
interest (2,439) 2,447 2,154 5,758
Income taxes (926) 1,009 803 2,469
LXE minority interest (576) 293 (83) 728
Net earnings (loss) $ (937) 1,145 1,434 2,561
Earnings (loss) per common and
common equivalent share $ (.13) .16 .20 .35
Weighted average number of
common and common equivalent
shares 6,984 7,010 7,124 7,004
See accompanying notes to interim consolidated financial statements.
4
Consolidated Balance Sheets (Unaudited)
(In thousands)
September 30 December 31
1995 1994
ASSETS
Current assets:
Cash and cash equivalents $ 5,683 13,071
Marketable securities 400 400
Trade accounts receivable, net 34,494 36,355
Inventories:
Work in process 6,964 4,905
Parts and materials 9,761 6,809
Total inventories 16,725 11,714
Deferred income tax benefit 992 992
Total current assets 58,294 62,532
Property, plant and equipment:
Land 1,150 1,150
Building and leasehold improvements 13,682 13,626
Machinery and equipment 53,984 47,256
Furniture and fixtures 3,681 3,367
Total cost of property, plant
and equipment 72,497 65,399
Less accumulated depreciation and
amortization 42,861 38,868
Net property, plant and equipment 29,636 26,531
Other assets 7,721 2,142
Goodwill, net of accumulated amortization 5,283 5,546
$100,934 96,751
See accompanying notes to interim consolidated financial statements.
5
Consolidated Balance Sheets (Unaudited), Continued
(In thousands, except share data)
September 30 December 31
1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
and short-term borrowing $ 7,213 3,830
Accounts payable 11,234 10,762
Income taxes - 1,490
Accrued compensation costs 3,363 3,656
Accrued retirement costs 574 1,305
Deferred revenue 955 1,147
Other liabilities 999 976
Total current liabilities 24,338 23,166
Long-term debt, excluding current
installments 4,262 4,592
Deferred income taxes 3,881 3,881
Total liabilities 32,481 31,639
Minority interest in LXE 9,236 8,681
Stockholders' equity:
Preferred stock of $1.00 par value
per share. Authorized 10,000,000 shares;
none issued or outstanding - -
Common stock of $.10 par value per
share. Authorized 75,000,000 shares;
issued and outstanding 7,004,000 in 1995
and 6,821,000 in 1994 700 682
Additional paid-in capital 10,447 9,329
Foreign currency translation adjustment 101 (115)
Retained earnings 47,969 46,535
Total stockholders' equity 59,217 56,431
$100,934 96,751
See accompanying notes to interim consolidated financial statements.
6
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended September 30
1995 1994
Cash flows from operating activities:
Net earnings $ 1,434 2,561
Adjustments to reconcile net earnings
to net cash from operating activities:
LXE minority interest (83) 728
Depreciation and amortization 4,256 3,990
Changes in assets and liabilities:
Trade accounts receivable 1,861 (4,954)
Inventories (5,011) 1,391
Accounts payable 459 450
Income taxes (1,628) 116
Accrued costs and other current
liabilities (1,193) 115
Other (835) 97
Net cash provided by (used in)
operating activities (740) 4,809
Cash flows from investing activities:
Purchase of property, plant and equipment (7,098) (3,683)
Capitalized product software costs and
other market-related investments (3,143) -
Net proceeds from sale of marketable
securities - 1,590
Net cash used in investing
activities (10,241) (2,093)
Cash flows from financing activities:
Proceeds from short-term borrowing 4,650 (208)
Proceeds from (repayments of) long-term debt (1,597) 172
Proceeds from exercise of stock
options, net of withholding taxes paid 540 472
Net cash provided by financing
activities 3,593 264
Net change in cash and cash
equivalents (7,388) 2,980
Cash and cash equivalents at January 1 13,471 8,411
Cash and cash equivalents at September 30 6,083 11,391
Supplemental disclosure of cash flow
information:
Cash paid for interest 592 460
Cash paid for income taxes 2,215 2,453
See accompanying notes to interim consolidated financial statements.
7
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 subsidiary, EMS Technologies,
Inc., and its majority-owned subsidiaries, 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, 1994.
(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 (except in loss periods). For
purposes of calculating primary earnings per share, the Company's proportionate
share of the net earnings of LXE Inc. has been adjusted to reflect the dilutive
effect of LXE's outstanding stock options. Fully diluted earnings per share
are not significantly different from the primary earnings per share presented.
(3) Other Assets
In the second quarter of 1995, the Company's LXE subsidiary acquired a
minority ownership in a non-public U.S. company. This investment is valued
using the cost method, and is included in other assets in the accompanying
balance sheet.
(4) Capitalization of Software Costs
In 1995, the Company has capitalized $643,000 of certain costs incurred to
develop software which will be licensed to customers. Capitalized software
costs, which are included in other assets, will be amortized using the greater
of the ratio of current gross revenues for the product to the total of current
and anticipated future gross revenues or the straight-line method over three
years.
(5) New Accounting Standard
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was
issued in March 1995. No adjustments to the carrying value of recorded assets
were required as a result of adopting SFAS 121.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company reported a net decrease in consolidated revenues for the third
quarter of 1995 compared with the third quarter for 1994. This net decrease
was due to lower sales ($11.3 million in 1995 and $17.0 million in 1994) and
underlying orders activity at LXE from its transition to an expanded product
line of wireless data communication systems that will support DOS, Windows and
client/server networks. The decrease in LXE revenues was partially offset by a
20% increase in third quarter sales ($16.8 million in 1995 compared with $14.0
million in 1994) of advanced antennas and space communications products. For
the first nine months of 1995, all of the increase in consolidated sales
related to advanced antenna and space communications products, which grew to
$48.7 million in 1995 from $39.3 million in 1994. The nine month revenues
from LXE wireless data communications systems were $45.1 million in 1995 and
$45.4 million in 1994.
The Company has undertaken efforts during the expansion of its wireless data
communications product line to stimulate orders for its current products,
including an initiative to encourage customers to upgrade their systems from
the earlier generations of LXE equipment. As a result of this initiative and
other specific orders expected to be received, the LXE subsidiary's orders and
sales activity should increase in the fourth quarter compared with the third
quarter. However, the LXE subsidiary is expected to be significantly less
profitable in the fourth quarter of 1995 than the fourth quarter of 1994; as a
result, the Company's consolidated fourth quarter profitability is also
expected to be lower in 1995 than in 1994.
Cost of sales, as a percentage of net sales, was 69% in the third quarter
of 1995 and 66% in the first nine months of 1995, compared with 63% and 62%,
respectively, in the same periods in 1994. The increases in the 1995 cost of
sales percentage reflect increased distribution of the Company's wireless data
communications products through indirect channels, which generally have a lower
profit margin than direct sales, and a more competitive pricing environment in
that market. Selling, general and administrative expenses increased due to
expansion of the European sales and marketing efforts for wireless data
communications systems, increased marketing support for the Company's cellular
antenna product line, and additional personnel for management information
systems. Research and development expenses in 1995 also increased to develop
new LXE products with DOS, Windows and client/server capabilities, as well as
antennas, terminals and other products for advanced mobile communications.
Other income for the interim periods has been higher in 1995 compared with
1994 due to currency translation gains associated with the Company's European
operations.
The effective tax rate for the first nine months of 1995 was 37%, compared with
41% for the 1994 fiscal year, primarily as a result of a more favorable tax
position for certain foreign operations.
Liquidity and Capital Resources
Cash and cash equivalents decreased as a result of several factors, mainly the
transition to the expanded line of wireless data communications products and
the associated increase in inventories. In addition, the Company has had
total capital expenditures of $10.2 million for market related investments,
development of product software and the purchase of equipment and internal
software. As a result of the use of cash in the first nine months of the year,
the Company increased its use of available credit facilities with a
commercial bank, with interest at the bank's prime rate.
Management does not expect to generate significant positive cash flow in the
fourth quarter of 1995, however, the Company's sources of cash and financing
are believed to be sufficient to fund current business activities.
9
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:
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 September 30, 1995.
10
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: 11/14/95
Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Date: 11/14/95
Don T. Scartz
Senior Vice President - Finance
and Treasurer
11 Exhibit 11.1
ELECTROMAGNETIC SCIENCES, INC.
AND SUBSIDIARIES
Statement re: Computation of Per Share Earnings
(In thousands, except per share data)
Three months ended Nine months ended
September 30 September 30
1995 1994 1995 1994
Common and common equivalent
shares:
Common stock - weighted average
shares outstanding 6,984 6,773 6,906 6,752
Dilutive effect of outstanding
common stock options (as deter-
mined by the treasury stock
method using the average market
price for the period) - 237 218 252
Total common and common
equivalent shares 6,984 7,010 7,124 7,004
For purposes of calculating
primary earnings per share
the Company's proportionate
share of the net earnings of
LXE Inc. has been adjusted
to reflect the dilutive
effect of LXE's outstanding
stock options. Following is
a summary of net earnings
applicable to earnings per
common and common equivalent
share:
Net earnings excluding LXE Inc. $ 510 329 1,650 495
Adjusted proportionate share
of net earnings (loss) of LXE
Inc. (1,447) 765 (216) 1,927
Total net earnings (loss)
applicable to earnings
per common and common
equivalent share $ (937) 1,094 1,434 2,442
Net earnings (loss) per common
and common equivalent share $ (.13) .16 .20 .35