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 October 1, 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 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
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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, 1999:
Class Number of Shares
----- ----------------
Common Stock, $.10 par Value 8,713,110
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
EMS Technologies, Inc.
Consolidated Statements of Earnings (Unaudited)
(In thousands, except net earnings per share data)
Quarter ended Nine months ended
--------------- -----------------
Oct. 1 Oct. 2 Oct. 1 Oct. 2
1999 1998 1999 1998
------ ------ ------- ------
Net sales $54,274 47,393 176,922 136,300
Cost of sales 36,143 29,847 118,704 86,517
Selling, general and
administrative expenses 10,760 9,692 33,201 29,025
Research and development expenses 5,760 3,682 16,049 9,544
------ ------ ------- ------
Operating income 1,611 4,172 8,968 11,214
Non-operating income(expense), net (138) 100 (218) 132
Interest expense (821) (441) (2,044) (1,341)
------ ------ ------ ------
Earnings before income taxes 652 3,831 6,706 10,005
Income tax expense (126) (1,480) (2,128) (3,873)
------ ------ ------ ------
Net earnings $ 526 2,351 4,578 6,132
====== ====== ====== ======
Net earnings per share:
Basic $ .06 .27 .53 .71
Diluted .06 .27 .52 .69
Weighted average number
of shares:
Common 8,709 8,675 8,702 8,654
Common and dilutive
common equivalent 8,809 8,843 9,109 8,874
See accompanying notes to interim consolidated financial statements.
EMS Technologies, Inc.
Consolidated Balance Sheets (Unaudited)
(In thousands)
October 1 December 31
1999 1998
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,772 4,384
Trade accounts receivable, net 59,543 57,455
Inventories:
Work in process 8,706 5,164
Parts and materials 22,012 19,657
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Total inventories 30,718 24,821
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Deferred income taxes 3,859 6,620
------- -------
Total current assets 105,892 93,280
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Property, plant and equipment:
Land 2,970 1,150
Building and leasehold improvements 25,311 15,493
Machinery and equipment 95,229 54,351
Furniture and fixtures 7,771 4,735
------- -------
Total property, plant and equipment 131,281 75,729
Less accumulated depreciation
and amortization 86,699 40,849
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Net property, plant and equipment 44,582 34,880
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Other assets 21,718 7,684
Goodwill, net of accumulated amortization 11,152 11,542
------- -------
$183,344 147,386
======= =======
See accompanying notes to interim consolidated financial statements.
EMS Technologies, Inc.
Consolidated Balance Sheets (Unaudited), continued
(In thousands except share data)
October 1 December 31
1999 1998
--------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 8,318 2,197
Accounts payable 18,153 11,815
Income taxes 722 1,580
Accrued compensation costs 4,452 4,503
Accrued retirement costs 630 959
Deferred revenue 3,910 2,895
Other liabilities 1,436 1,154
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Total current liabilities 37,621 25,103
Long-term debt, excluding current installments 37,473 19,150
Deferred income taxes 2,473 2,473
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Total liabilities 77,567 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 8,695,000 in 1998 871 869
Additional paid-in capital 34,502 34,615
Accumulated other comprehensive income -
foreign currency translation adjustment (1,613) (2,263)
Retained earnings 72,017 67,439
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Total stockholders' equity 105,777 100,660
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$183,344 147,386
======= =======
See accompanying notes to interim consolidated financial statements.
EMS Technologies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
---------------------
Oct. 1 Oct. 2
1999 1998
------ ------
Cash flows from operating activities:
Net earnings $ 4,578 6,132
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 6,004 4,400
Goodwill amortization 390 912
Changes in operating assets
and liabilities:
Trade accounts receivable 2,502 (3,907)
Inventories (4,471) (3,746)
Accounts payable (160) (1,126)
Income taxes 2,010 1,192
Accrued costs, deferred revenue
and other current liabilities (1,321) 2,278
Other (264) (894)
------ -----
Net cash provided by operating activities 9,268 5,241
------ -----
Cash flows from investing activities:
Purchase of property, plant and equipment (9,341) (5,380)
Payments for asset acquisition (9,622) -
------ -----
Net cash used in investing activities (18,963) (5,380)
------ -----
Cash flows from financing activities:
Borrowing of long-term debt 15,225 338
Proceeds from exercise of stock options,
net of withholding taxes paid (110) 32
------ -----
Net cash provided by financing activities 15,115 370
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Net change in cash and cash equivalents 5,420 231
Effect of exchange rates on cash 938 187
Cash and cash equivalents at
beginning of period 4,384 4,300
------ -----
Cash and cash equivalents at
end of period $10,742 4,718
====== =====
EMS Technologies, Inc.
Consolidated Statements of Cash Flows (Unaudited), continued
(In thousands)
Nine Months Ended
---------------------
Oct. 1 Oct. 2
1999 1998
------ ------
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 1,632 1,341
Cash paid for income taxes $ 1,121 2,862
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 Holding, 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 and $3,395,000 for the first installment of the deferred portion of
the purchase price, with funds provided under the Company's credit line
with a U.S. bank. The remaining $7,731,000 of the purchase price is
financed by the seller in three additional installments over a three-year
period. See note 2 for further details of the acquisition and its
financing.
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
$376,700 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 and
$3,395,000 as the first installment of the deferred portion of the purchase
price, 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
three additional equal installments, with the first installment to be
adjusted for actual-versus-projected working capital determined as of the
closing date. The remaining three installments are due, with annual
interest of 5.5%, on December 31, 1999 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:
Quarter ended Nine months ended
--------------- -----------------
Oct. 1 Oct. 2 Oct. 1 Oct. 2
1999 1998 1999 1998
------ ------ ------- -------
Pro Forma Consolidated Data:
Net sales $54,274 57,393 176,922 173,231
Net income 526 2,134 4,578 5,573
Earnings per share:
Basic .06 .25 .53 .64
Diluted .06 .24 .52 .62
(3) Agreement to Acquire Controlling Interest In Satellite Venture
On September 30, 1999, the Company entered into an agreement to acquire
controlling interest of NetSat28, LLC, based in Annapolis, Maryland.
NetSat28 has been licensed by the U.S. Federal Communications Commission
(FCC) to launch and operate a Ka-band satellite over the continental United
States. Once implemented, the NetSat28 system would provide high-speed
Internet access and other broadband services. The NetSat28 service would
target small businesses, as well as home office and high-end residential
users. The Company believes that NetSat28's patented approach to its
satellite architecture is complementary to the Company's advanced
communications technologies and systems-engineering capability.
Under the agreement, the Company would invest $3.8 million in exchange for
a 50.1 percent equity stake in NetSat28, and also would contribute
significant developmental efforts for the ground infrastructure. As
specified milestones are met, the Company would acquire an additional 45
percent of NetSat28 equity, in exchange for up to 1.25 million shares of
the Company's common stock. The transaction is contingent upon the FCC's
approval of the transfer of control of NetSat28, and several parties have
filed motions in opposition to the requested approval.
(4) 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
Page 9
EMS Technologies, Inc.
Notes to Interim Consolidated Financial Statements (Unaudited), continued
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):
Outstanding as of
--------------------
Oct. 1 Oct. 2
1999 1998
------ ------
Dilutive stock options,
included in earnings per
share calculations:
Shares 484 598
Average price per share $ 9.33 9.78
Anti-dilutive stock options,
excluded from earnings per
share calculations:
Shares 736 312
Average price per share $ 19.33 21.41
The Company's earnings per share for the nine months 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
basic and diluted earnings per share calculations for the second
quarter and first six months (in thousands, except earnings per share
data):
Net Common Earnings
Earnings Shares Per
(Numerator) (Denominator) Share
----------- ------------- ----------
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
Third Quarter
- -------------
Basic $ 526 2,351 8,709 8,675 $.06 .27
Common equivalent shares:
From stock options 100 168
----- ----- ----- -----
Diluted $ 526 2,351 8,809 8,843 $.06 .27
===== ===== ===== =====
Nine Months
- -----------
Basic $4,578 6,132 8,702 8,654 $.53 .71
Common equivalent shares:
From stock options 82 220
From convertible debt 325 -
Add: Interest expense on
convertible debt, net
of income taxes 167 -
----- ----- ----- -----
Diluted $4,745 6,132 9,109 8,874 $.52 .69
===== ===== ===== =====
(5) 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 notes to 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 Nine months ended
--------------- -----------------
Oct 1 Oct 2 Oct 1 Oct 2
1999 1998 1999 1998
------ ------ ------ ------
Net income (as reported in the
consolidated statements of
earnings) $ 526 2,351 4,578 6,132
Other comprehensive income
(expense) - foreign currency
translation adjustment (283) 50 650 (235)
----- ----- ----- -----
Comprehensive income $ 243 2,401 5,228 5,897
===== ===== ===== =====
(6) Other Assets
Other assets increased to $21.7 million at October 1, 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 $9.7 million. The
general partner in this venture is a large, international aerospace
firm. The investment's objective 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
$4.0 million net pension asset, representing the excess of pension
assets compared with pension liabilities under defined 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:
Oct 1 December 31
1999 1998
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Other assets $ 8,021 7,684
Investment in limited partnership 9,719 -
Net pension assets 3,978 -
------ -----
Total other assets $21,718 7,684
====== =====
(7) Interim Segment Disclosures
The Company is organized into two reportable segments: Space and
Electronics, and Wireless Products. Each segment is separately
managed and encompasses 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, effective for 1999, 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 net sales and assets for
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):
Quarter ended Nine months ended
--------------- -----------------
Oct. 1 Oct. 2 Oct. 1 Oct. 2
1999 1998 1999 1998
------ ------ ------- -------
Net sales:
Space and electronics $24,307 15,631 88,200 47,202
Wireless products 29,967 31,762 88,722 89,098
------ ------ ------- -------
Total $54,274 47,393 176,922 136,300
====== ====== ======= =======
Operating income (loss):
Space and electronics $ 374 (212) 4,470 624
Wireless products 1,237 4,384 4,498 10,590
------ ------ ------- -------
Total $ 1,611 4,172 8,968 11,214
====== ====== ======= =======
Net earnings (loss):
Space and electronics $ (58) (290) 2,389 (104)
Wireless products 574 2,533 2,128 5,863
Corporate 10 108 61 373
------ ------ ------- -------
Total $ 526 2,351 4,578 6,132
====== ====== ======= =======
Oct 1 December 31
1999 1998
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Assets:
Space and electronics $ 98,450 61,781
Wireless products 78,168 77,803
Corporate 6,726 7,802
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Total $183,344 147,386
======= =======
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 third quarter and first nine months of 1999
were $54.3 million and $176.9 million respectively, compared with $47.4
million and $136.3 million for the same respective periods in 1998. This
net growth was attributable to the space and electronics segment, which
benefited from acquisition of the Montreal operations. Revenues in the
wireless products segment were slightly lower in 1999 compared with 1998
due to schedule deferrals by certain large customers that had ordered
wireless networks, and due to lower sales of healthcare products.
Cost of sales, as a percentage of consolidated net sales, was 67% for both
the third quarter and the first nine months of 1999, compared with 63% for
the same periods in 1998. These increases were due to the significant
growth of the Company's space operations, which on average have a higher
cost of sales percentage than the remainder of the Company's operations.
The Company also had lower absorption of overhead costs than in 1998 at the
Company's Atlanta facilities; this resulted from lower-than-expected sales
caused by customer delays in initiation of major new satellite programs in
which the Company expects to participate.
Selling, general and administrative expenses, as a percentage of net sales,
was 20% for the third quarter and 19% for the first nine months of 1999,
compared with 20% and 21% for the same respective periods in 1998. The
decrease in the first nine months of 1999 compared with 1998 was
attributable to the growth in the Company's space operations, which
generally had a lower selling, general and administrative expense
percentage than the remainder of the Company's operations.
Research and development expenses represent the cost of the Company's
internally funded efforts. In the Company's space and electronics segment,
significant research and development effort also occurs under specific
customer orders and, accordingly, is reflected in cost of sales. The
increase in research and development expenses is related to 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 increased debt
associated with the assets purchased in Montreal.
The year-to-date effective income tax rate for 1999 was 32%, compared with
39% 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.
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. However, additional sources of liquidity will be needed over the
next few years if the Company and its markets continue to grow, and
particularly if the Company completes the acquisition of a controlling
interest in NetSat28, LLC and proceeds with the proposed design,
construction and launch of a geostationary Ka-band satellite for broadband
communications.
Long-term debt increased in the first nine months 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 being adjusted for
actual versus projected working capital determined as of the closing date.
In the second 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, totaling $7,731,000, are due, with annual
interest of 5.5%, on December 31 of 1999 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 on a demand note, under a credit
agreement extending 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. 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 effect on
the Company's supply chain.
The Company believes that neither (1) the cost of addressing Year 2000, nor
(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 in the fourth quarter of 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 program participation,
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;
- - the strength and timing of end-user demand for new communications
services, such as broadband services;
- - the effects of technology and communications systems that may be
developed by competitors; and,
- - the outcome of Federal Communications Commission proceedings in which
several parties have filed opposing motions related to the Company's
proposed control of NetSat28 LLC.
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
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
2.1 Member Interest Purchase Agreement, dated September 30, 1999,
by and among EMS Technologies, Inc., NetSat28, LLC and NationNet LLC.
3.1 Second Amended and Restated Articles of Incorporation of EMS
Technologies, Inc. effective March 22, 1999 (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
3.2 Bylaws of EMS Technologies, Inc., as amended through March 15,
1999 (Incorporated by reference to the Company's annual Report on Form 10-K
for the year ended December 31, 1998).
27.1 Financial Data Schedule
(b) Reports on Form 8-K - No Reports on Form 8-K were filed during the
quarter ended October 1, 1999
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: 11/12/99
----------------------------- --------
Thomas E. Sharon
President and Chief Executive
Officer
By: /s/ Don T. Scartz Date: 11/12/99
----------------------------- --------
Don T. Scartz
Treasurer and Chief Financial
Officer