UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
Commission file number 0-6072
EMS TECHNOLOGIES, INC.
| Georgia | 58-1035424 | |
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| (State or other jurisdiction of incorporation or organization) |
(IRS Employer ID Number) |
660 Engineering Drive
Norcross, Georgia 30092
(770) 263-9200
Registrant’s Telephone Number, Including Area Code
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on August 6, 2003:
| Class | Number of Shares | |
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| Common Stock, $.10 par Value | 10,664,267 |
AVAILABLE INFORMATION
EMS Technologies, Inc. makes available free of charge, on or through its website at www.ems-t.com, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
EMS Technologies, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
| Quarters Ended | Six Months Ended | ||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net sales |
$ | 64,381 | 82,870 | 130,917 | 153,309 | ||||||||||||
Cost of sales |
54,188 | 56,106 | 98,985 | 102,054 | |||||||||||||
Selling, general and administrative
expenses |
16,721 | 14,952 | 31,490 | 29,156 | |||||||||||||
Research and development expenses |
6,710 | 7,537 | 13,044 | 14,188 | |||||||||||||
Operating (loss) income |
(13,238 | ) | 4,275 | (12,602 | ) | 7,911 | |||||||||||
Non-operating (expense) income, net |
(265 | ) | 55 | (343 | ) | (11 | ) | ||||||||||
Foreign exchange gain |
1,724 | 200 | 1,996 | 484 | |||||||||||||
Interest expense |
(860 | ) | (972 | ) | (1,656 | ) | (1,809 | ) | |||||||||
Earnings (loss) before income taxes |
(12,639 | ) | 3,558 | (12,605 | ) | 6,575 | |||||||||||
Income tax expense |
(1,431 | ) | (1,067 | ) | (1,443 | ) | (1,972 | ) | |||||||||
Net earnings (loss) |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | ||||||||||
Net earnings (loss) per share: |
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Basic |
$ | (1.32 | ) | 0.24 | (1.32 | ) | 0.44 | ||||||||||
Diluted |
$ | (1.32 | ) | 0.23 | (1.32 | ) | 0.43 | ||||||||||
Weighted average number of shares: |
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Basic |
10,658 | 10,527 | 10,658 | 10,486 | |||||||||||||
Diluted |
10,658 | 10,802 | 10,658 | 10,734 | |||||||||||||
See accompanying notes to interim consolidated financial statements.
2
EMS Technologies, Inc.
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 11,293 | 12,430 | |||||||
Trade accounts receivable |
84,861 | 101,828 | ||||||||
Inventories |
46,766 | 41,003 | ||||||||
Deferred income taxes |
1,693 | 1,693 | ||||||||
Total current assets |
144,613 | 156,954 | ||||||||
Property, plant and equipment: |
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Land |
3,843 | 3,450 | ||||||||
Building and leasehold improvements |
21,593 | 20,512 | ||||||||
Machinery and equipment |
91,333 | 81,516 | ||||||||
Furniture and fixtures |
7,080 | 6,751 | ||||||||
Total property, plant and equipment |
123,849 | 112,229 | ||||||||
Less accumulated depreciation and amortization |
68,631 | 60,821 | ||||||||
Net property, plant and equipment |
55,218 | 51,408 | ||||||||
Investment in SkyBridge LLP |
17,909 | 17,909 | ||||||||
Deferred income taxes – non-current |
1,875 | 1,780 | ||||||||
Accrued pension asset |
3,019 | 2,739 | ||||||||
Intangible assets, net |
3,294 | 3,499 | ||||||||
Goodwill, net |
13,526 | 13,526 | ||||||||
Other assets |
7,195 | 8,487 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
See accompanying notes to interim consolidated financial statements.
3
EMS Technologies, Inc.
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current installments of long-term debt |
$ | 38,946 | 33,920 | |||||||
Accounts payable |
31,796 | 35,734 | ||||||||
Accrued compensation |
6,058 | 7,297 | ||||||||
Accrued retirement costs |
1,421 | 2,511 | ||||||||
Accrued post-retirement benefits |
3,423 | 2,767 | ||||||||
Deferred service revenue |
5,191 | 4,108 | ||||||||
Other liabilities |
2,965 | 3,212 | ||||||||
Total current liabilities |
89,800 | 89,549 | ||||||||
Long-term debt, excluding current installments |
18,678 | 20,768 | ||||||||
Total liabilities |
108,478 | 110,317 | ||||||||
Stockholders’ equity: |
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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 10,658,000 in 2003
and 2002 |
1,066 | 1,066 | ||||||||
Additional paid-in capital |
60,867 | 60,867 | ||||||||
Accumulated other comprehensive income (loss) |
413 | (5,821 | ) | |||||||
Retained earnings |
75,825 | 89,873 | ||||||||
Total stockholders’ equity |
138,171 | 145,985 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
See accompanying notes to interim consolidated financial statements.
4
EMS Technologies, Inc.
| Six Months Ended | ||||||||||||
| June 28 | June 29 | |||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
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Net earnings (loss) |
$ | (14,048 | ) | 4,603 | ||||||||
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
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Depreciation and amortization |
5,799 | 5,725 | ||||||||||
Deferred income taxes |
(95 | ) | — | |||||||||
Changes in operating assets and liabilities: |
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Trade accounts receivable |
23,421 | (2,254 | ) | |||||||||
Inventories |
(2,756 | ) | (4,069 | ) | ||||||||
Non-trade foreign government receivable |
3,045 | (2,398 | ) | |||||||||
Accounts payable |
(10,247 | ) | (758 | ) | ||||||||
Income taxes payable |
(199 | ) | 2,214 | |||||||||
Accrued costs, deferred revenue and other current liabilities |
(1,286 | ) | (1,071 | ) | ||||||||
Other |
414 | 349 | ||||||||||
Net cash provided by operating activities |
4,048 | 2,341 | ||||||||||
Cash flows used in investing activities: |
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Purchase of property, plant and equipment |
(5,455 | ) | (8,790 | ) | ||||||||
Cash flows from financing activities: |
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Proceeds from new term debt |
— | 2,446 | ||||||||||
Repayments of term debt |
(930 | ) | (1,272 | ) | ||||||||
Net increase in revolving debt |
963 | 4,317 | ||||||||||
Proceeds from exercise of stock options, net of withholding |
— | 1,097 | ||||||||||
Net cash provided by financing activities |
33 | 6,588 | ||||||||||
Net change in cash and cash equivalents |
(1,374 | ) | 139 | |||||||||
Effect of exchange rates on cash |
237 | (615 | ) | |||||||||
Cash and cash equivalents at beginning of period |
12,430 | 11,777 | ||||||||||
Cash and cash equivalents at end of period |
$ | 11,293 | 11,301 | |||||||||
Supplemental disclosures of cash flow information: |
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Cash paid for interest |
$ | 1,657 | 1,880 | |||||||||
Cash paid for income taxes |
453 | 117 | ||||||||||
5
Non-Cash Investing and Financing:
In April 2002, the Company acquired Ottercom Ltd., a leading provider of Inmarsat communication terminals located in Tewkesbury, UK. Ottercom Ltd. products include critical components for EMS SATCOM’s high-speed aeronautical data products. The company, now called EMS SATCOM UK, Ltd., operates as a unit of the Company’s SATCOM segment. Management believes that this acquisition will help strengthen the Company’s presence in global mobile Internet/e-mail access and communications, and will enable the Company to broaden its wireless product offerings and in-house development capability.
To accomplish this transaction, EMS issued 81,245 new shares of its common stock (valued at $1.9 million) and assumed liabilities totaling approximately $1.2 million. No goodwill was recognized in this transaction; rather, the $3.1 million total of net assets acquired was recorded as an intangible asset on the balance sheet. This intangible represents the value of Ottercom Ltd.’s satellite communications technologies, intellectual property and product designs. This intangible will be amortized over an estimated useful life of 6 years.
See accompanying notes to interim consolidated financial statements.
6
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. and its wholly-owned subsidiaries LXE Inc. and EMS Technologies Canada, Ltd. (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. Certain prior period financial statement balances have been reclassified to conform to the current period’s classification. 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, 2002. | ||
| — Stock Option Plans | ||
| Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123. | ||
| The Company has adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” including the interim reporting requirements. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value method to measure stock-based compensation (in thousands, except net earnings per share): |
| Quarters Ended | Six Months Ended | ||||||||||||||||
| Jun 28 | Jun 29 | Jun 28 | Jun 29 | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net earnings (loss): |
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As reported |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | ||||||||||
Less: Stock-based employee compensation
expense determined under the fair value method, net of tax |
(486 | ) | (676 | ) | (1,076 | ) | (1,115 | ) | |||||||||
Pro forma |
$ | (14,556 | ) | 1,815 | (15,124 | ) | 3,488 | ||||||||||
Basic net earnings (loss) per share: |
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As reported |
$ | (1.32 | ) | 0.24 | (1.32 | ) | 0.44 | ||||||||||
Pro forma |
$ | (1.37 | ) | 0.17 | (1.42 | ) | 0.33 | ||||||||||
Diluted net earnings (loss) per share: |
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As reported |
$ | (1.32 | ) | 0.23 | (1.32 | ) | 0.43 | ||||||||||
Pro forma |
$ | (1.37 | ) | 0.17 | (1.42 | ) | 0.32 | ||||||||||
7
| 2. | Derivative Financial Instruments | |
| The Company uses derivative financial instruments (forward exchange contracts) to hedge currency fluctuations in future cash flows denominated in foreign currencies, thereby limiting the Company’s risk that would otherwise result from changes in exchange rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into derivative financial instruments for trading or speculative purposes. | ||
| SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, requires the Company to recognize all derivatives on the balance sheet at fair value. Under SFAS No. 133, certain of the Company’s routine long-term contracts to deliver Space & Technology products are considered to be derivative instruments, because these contracts create long-term obligations for non-U.S. customers to pay the Company’s Canadian subsidiary in U.S. dollars. Changes in the fair values of these embedded derivatives are included in current earnings. | ||
| The derivative activity as reported in the Company’s financial statements during the second quarters and six months ended was (in thousands): |
| Quarters Ended | Six Months Ended | |||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net asset (liability) for derivatives, beginning of
period |
$ | 893 | 142 | (246 | ) | (166 | ) | |||||||||||
Sales: |
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Gain in value of embedded derivatives |
12 | — | 100 | 159 | ||||||||||||||
Foreign exchange gain (loss) on derivative
instruments: |
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Gain (loss) in value on derivative instruments
that do not qualify as hedging instruments |
814 | (217 | ) | 1,689 | (68 | ) | ||||||||||||
Matured foreign exchange contracts |
(634 | ) | (50 | ) | (458 | ) | (50 | ) | ||||||||||
Net statement of operations gain (loss) from
changes in value of derivative instruments |
192 | (267 | ) | 1,331 | 41 | |||||||||||||
Net asset (liability) for derivatives, end of period |
$ | 1,085 | (125 | ) | 1,085 | (125 | ) | |||||||||||
8
| All of the foreign currency contracts currently in place will expire by the end of the fourth quarter of 2003. | ||
| 3. | Earnings Per Share | |
| Basic earnings per share is the per share allocation of income available to common stock-holders 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): |
| June 28 | June 29 | ||||||||
| 2003 | 2002 | ||||||||
Dilutive stock options, included in earnings
per share calculations: |
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Shares |
286 | 1,603 | |||||||
Average price per share |
$ | 11.83 | 15.74 | ||||||