UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File #0-6072
EMS TECHNOLOGIES, INC.
| Georgia | 58-1035424 | |
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| (State or other jurisdiction of | (IRS Employer ID Number) | |
| incorporation or 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
(Title of Class)
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K: [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act): Yes[X] No[ ]
The aggregate market value of voting stock held by persons other than directors or executive officers on June 28, 2003 was $142 million, based on a closing price of $13.52 per share. The basis of this calculation does not constitute a determination by the registrant that all of its directors and executive officers are affiliates as defined in Rule 405.
As of March 8, 2004, the number of shares of the registrant’s common stock outstanding was 11,067,798 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Company’s definitive proxy statement for the 2004 Annual Meeting of Shareholders of the registrant is incorporated herein by reference in Part III of this Annual Report on Form 10-K.
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.
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Part I.
ITEM 1. Business
GENERAL
SUMMARY
EMS Technologies, Inc. (the “Company” or “EMS”) designs, manufactures and markets products that are important in many kinds of wireless communications. The Company focuses on the needs of the mobile information user, with an increasing emphasis on broadband applications for high-data-rate, high-capacity wireless communications.
The Company is organized into five reportable business segments: Space & Technology, LXE, EMS Wireless, SATCOM and SatNet. Each segment is separately managed and comprises a range of products and services that share distinct operating characteristics. However, the Company believes that one of its competitive strengths is the technological and marketing synergy that occurs among the segments, as well as among the Company’s various product lines. The Company believes that this synergy creates a path to broader markets for highly advanced technologies developed for niche markets in space and defense.
1. Space & Technology
| This segment manufactures custom-designed, highly engineered hardware for use in space electronics (both commercial and defense satellite applications), and aerospace (both commercial and defense electronics applications). Orders in this segment typically involve long-term contracts with development and production schedules that can extend a year or more, and most revenues are recognized under percentage-completion accounting. The Space & Technology segment’s products are sold primarily to space and defense prime contractors or commercial communications systems integrators rather than end-users. The Space & Technology segment accounted for 19%, 22% and 17% of consolidated net sales in 2003, 2002 and 2001, respectively. | ||
| A major source of business is the defense electronics market. Orders in this market remained strong in 2003, with defense sales exceeding the prior year. The Company believes that applications for secure communications, surveillance, and electronic counter-measures will continue to offer opportunities that are well-suited to the Company’s unique technology base and its considerable experience on such programs. | ||
| In the third quarter of 2003, EMS announced that its Board of Directors had approved a formal plan to seek to sell the Company’s commercial space operations located in Montreal. As a result, all of the activities, operations and financial results of the Montreal commercial space business, which had been included in the Space & Technology segment in prior years, were moved to discontinued operations for all periods presented in the Company’s consolidated financial statements. |
2. LXE
| The LXE business is conducted through a wholly owned subsidiary, LXE Inc., and manufactures wireless mobile computers and wireless local area network (“LAN”) products for logistics and other enterprise applications. Typical uses include real-time data communications on inventory movement in a large warehouse, manufacturing facility, or container yard. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to end-users and to third parties that incorporate their products and services with the Company’s hardware for delivery to end-users. The LXE segment accounted for 39%, 37% and 43% of consolidated net sales in 2003, 2002 and 2001, respectively. |
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3. EMS Wireless
| The EMS Wireless segment manufactures base-station antennas and repeaters for PCS/cellular communications systems. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to wireless service providers and to original equipment manufacturers (“OEMs”) for mobile voice/paging services, as well as for other emerging high-speed wireless systems. The EMS Wireless segment accounted for 20%, 20% and 22% of consolidated net sales in 2003, 2002 and 2001, respectively. |
4. SATCOM
| The SATCOM segment is a division of the Company’s wholly owned Canadian subsidiary, EMS Technologies Canada, Ltd. (“EMS Canada”), and manufactures earth-based antennas, terminals and other hardware for communications via satellite link. Typical applications include voice/data communications aboard corporate jets, high-speed data systems for military applications, search-and-rescue systems that use satellite surveillance, and tracking/messaging for long-haul trucks. The manufacturing cycle for most orders is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to third parties who incorporate their products and services with the Company’s hardware for delivery to end-users. The SATCOM segment accounted for 17%, 14% and 11% of consolidated net sales in 2003, 2002 and 2001, respectively. |
5. SatNet
| In mid-2002, the “EMS Satellite Networks” (“SatNet”) division was formed as a result of the Company’s strategic emphasis on the development of broadband technologies for use in high-data-rate, high-capacity satellite communication systems. This segment focuses on high speed, two-way Internet via satellite hubs and terminals that use the DVB-RCS open standard pioneered by EMS. The manufacturing cycle for each order is generally just a few days, and revenues are recognized upon shipment of hardware. Hardware is marketed to third parties that incorporate their products and services with the Company’s hardware for delivery to end-users. The SatNet segment accounted for 5%, 6% and 6% of consolidated net sales in 2003, 2002 and 2001, respectively. |
6. Discontinued Operations
| In 1999, the Company added expertise in space systems, payload integration and ground terminal technologies by acquiring the Space Systems and Products Division of Spar Aerospace Limited, based in Montreal. This division (now the Space & Technology/Montreal division of EMS Canada) has long been a leading participant in the Canadian and international, commercial and civil space industries. It has produced payloads and full antenna systems for major communications and remote sensing satellites, as well as robotics for NASA’s Space Shuttle and the International Space Station. In the third quarter of 2003, EMS announced that its Board of Directors had approved a formal plan to sell this business. As a result, all of the activities, operations and financial results of the Montreal commercial/civil space business were moved to discontinued operations for all periods presented. | ||
| The Space & Technology/Montreal business designs and manufactures innovative satellite communications products. These products include satellite systems, subsystems and components that address the need for reliable, high-speed communications. The products marketed and manufactured by this business comprise the following lines: space systems, antenna products and electronic products for space. |
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The discussion of the Company’s business set forth in this Item 1 is qualified by the materials appearing below under the headings “Risk Factors” and “Forward-Looking Statements.”
BACKGROUND
In its Space & Technology segment, the Company has developed strong expertise in microwave components and subsystems over a period of more than 30 years. In the mid-1970’s, the Company pioneered the use of ferrite materials for electronic beam-forming. Electronic beam-forming networks (“BFNs”) allow a satellite to steer and adjust the shape of its antenna pattern. BFN technology was originally used in military communication satellites to avoid interference from the ground. This segment also produced the first all-electronic switch matrix to provide flexible interconnectivity between microwave uplink and downlink channels in communication satellites.
The core technologies of the Space & Technology segment are directly applicable to a range of current defense applications, including line-of-sight communications, radar, signal intelligence and electronic countermeasure systems. These applications are generally referred to as “information dominance.” Further, the Space & Technology segment has produced highly-engineered antenna, signal-management, and signal processing hardware that are used in numerous mission-critical weapon systems.
In the early 1980’s, the Company sought to diversify its predominantly defense-related business base by moving into commercial markets. As a result, the Company used its expertise in wireless technologies to develop the LXE product line of wireless mobile computers and network products. By communicating with the host computer network in real-time, these LXE products enhance the productivity of mobile workers and improve the accuracy and timeliness of transaction-processing data. LXE’s principal market is for material management functions in warehouses and distribution centers (the “logistics” market), including seaports. A major factor in the long-term growth of the logistics market and the LXE product line has been expanding use by many industries of more advanced information technologies, including wireless networking, enterprise software and auto-identification technologies (such as bar-coding and RFID).
The EMS Wireless segment includes PCS/cellular base station antennas and repeaters. The leading product in this line (marketed under the “DualPol” trademark) employs polarization-diversity technology. These antennas allow cell-site tower structures that are simpler, less expensive, and less obtrusive than conventional antenna towers. In addition, these antennas offer superior coverage and resistance to signal-fading, as compared with networks with conventional vertically-polarized antennas. The Company also offers a line of repeaters and in-building products, as well as a full line of lower-priced, conventional antennas for both cellular and PCS networks. These infrastructure products, along with a family of accessory products, are marketed to service providers and to OEMs domestically and internationally.
The Company has also established an industry-leading position in the market for mobile earth-based SATCOM (“satellite communications”) antennas and terminals. The initial SATCOM products
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were developed for international search and rescue, in which satellite technology helps locate downed aircraft or ocean-going ships in distress. The most successful component of the Company’s current SATCOM product lines was developed for advanced communications by corporate jets. In these aeronautical applications, the Company’s antennas are mounted atop the jet’s tail fin and are automatically steered to remain pointed at a communications satellite during flight; these systems provide voice, data and video communications via satellite.
The Company has introduced other SATCOM products, including (1) a high-speed data product and variants to provide both voice and data connections with speeds up to 256 kbps, (2) Global Area Network (“GAN”) satellite data terminal products, which allow access to corporate networks and the Internet from anywhere in the world, either at the standard ISDN speed of 64 kbps, or at speeds of up to 128 kbps, using the Inmarsat satellite network, (3) a packet-data terminal to provide two-way real-time data communications for messaging, tracking and monitoring in the transportation, public safety and remote industrial controls markets, and (4) a maritime high-speed terminal for digital communications at sea over the Inmarsat network. SATCOM has also made initiatives with software products used for incident management for search-and-rescue applications with customers around the world.
EMS’s SatNet division originated from the Space & Technology segment, which had
been studying the implementation of multimedia satellite systems since 1993.
In 1994, EMS was commissioned to study the feasibility of developing new
satellite system architectures built upon the existing DVB broadcast standard.
The intent of the study was to pave the way for two-way satellite Internet
access through a central satellite ground hub gateway. This study led to the
development by EMS and satellite operators of a satellite return channel
concept based on multi-
frequency TDMA and a set of scheduling algorithms
designed for the emerging multimedia environment. The resulting DVB Return
Channel System (“DVB-RCS”) air interface standard was
adopted by European Telecommunication Standards Institute in 2000.
In 2002, EMS created the SatNet group, initially within its Space & Technology segment to
focus on this new business opportunity.
SatNet has now deployed more than 30 systems in Europe, North America and Asia. SatNet supplied Societe Europeene des Satellites (“SES”) – the world’s largest satellite service provider, with its Broadband Interactive Return Link Sub System (“RLSS”), which has subsequently been included as part of the SatLynx joint venture with Gilat, SES and Alcatel. SatNet has also signed an agreement with Alcatel Space, to integrate EMS RLSS’s into systems being marketed and delivered worldwide.
SatNet has now developed its fourth generation satellite interactive user terminal. The first generation was deployed in 2000 with EMS’s first demonstration hub in Europe. EMS is now offering an enterprise model (Series 2000), and a professional model (Series 3000). Both the Series 2000 and the Series 3000 are available in various transmit/receive frequency bands (e.g. Ku/Ku, Ka/Ku, etc). As a result of enhanced design and improved manufacturing techniques, these new terminals have a significantly lower cost than those from earlier generations, which has enabled EMS to offer terminals at lower prices than most legacy VSAT offerings.
MARKETS AND PRODUCTS
Space & Technology Markets
The Company believes that its Space & Technology business will be able to make significant contributions in defense systems of national importance, such as secure satellite communications, secure intelligence and imagery collection satellites, advanced electronic warfare, radar, and secure line-of-sight communications. These systems are applied across
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space, airborne, terrestrial and naval domains. Many such systems are being newly developed or significantly upgraded as part of the U.S. Department of Defense transformational communications and information dominance initiatives. European defense ministries are also pursuing significant new and upgraded systems.
EMS’s base of technologies, including ferrite ceramics for microwave radio frequency management, and advanced antennas for low-observable aircraft, are well suited to many advanced defense applications. As a result, EMS continues to supply hardware to important U.S. and international military programs for communication, sensing and surveillance.
The Company’s products are incorporated in a number of significant weapon and defense systems such as the F/A-22 (air dominance fighter), B-2 (stealth bomber), Phalanx (Close-in Weapon System), Advanced EHF (military communication satellites), Special Operations Forces Aircraft (Suite of Integrated RF Counter-Measures Subsystems), Skynet 5 (United Kingdom military communication satellites), and Predator Unmanned Aerial Vehicle (observation and attack aircraft).
Additionally, EMS products are also used in a selection of technology-based commercial/civil ventures such as LiveTV (direct broadcast television reception on commercial aircraft), XM Radio (direct broadcast radio in North America), COSMO (Italian imagery satellites), and SARLupe (German imagery satellites).
Space & Technology Products
Through its Space & Technology segment, the Company designs and manufactures innovative microwave products for space and defense applications. This segment’s products comprise three main lines:
| 1. | Ferrite components, | ||
| 2. | Electronic subsystems, and | ||
| 3. | Antenna subsystems. |
- Ferrite Components
EMS pioneered the use of ferrite materials in space and defense systems. Ferrite products provide phase and amplitude control of communications signals. The design, development and manufacture of ferrite products require considerable specialized in-house capabilities. These products include ferrite circulators, isolators, phase shifters, switches and switching networks, and transmit-receive networks. Ferrite products are integrated into satellite, shipboard, ground-based and airborne applications, including direct broadcast, direct audio, commercial and military communications, earth observation, multimedia, and defense systems. The Company’s ferrite products have been utilized in XM Radio, DirecTV, ENVISAT, CloudSAT, Anik F2, TDRSS, MILSTAR/AEHF, F-14, F-16 and B-2.
- Electronic Subsystems
The Company’s electronic subsystems are an integral part of many space systems. These subsystems control the microwave communications signals processed in satellites and spacecraft, and include switch networks, beam-forming networks, auto-track modulators, and solid-state power amplifiers. The Company’s microwave subsystems have been utilized in Intelsat, Telstar, DSCS, MILSTAR/AEHF and ACTS.
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This segment has developed unique signal processing capabilities that are key to advanced electronic warfare systems. These capabilities, combined with our antenna, ferrite, and microwave products, create significant subsystems in aircraft electronic protection suites. Major programs that use these products include AN/ALQ-172 Low Band, and AN/ALQ-211 Suite of Integrated RF Countermeasures, (“SIRFC”). In addition, this segment has developed and manufactures the radar illuminator subsystems that provide directed radar energy used to assist the tracking and control of land-based rocket systems.
- Antenna Subsystems
The Company’s aeronautical antenna subsystems are used in a variety of commercial and military aircraft. The multi-channel commercial aircraft video system, which is now deployed with airlines based in New York and Denver, combines the Company’s antennas with electronics and small flat-panel video screens installed in each seat back. The aeronautical antenna subsystems used in, the USAF F/A-22 air dominance fighter combine the Company’s antenna with modem and signal processing equipment on-board the aircraft to enable an intra-flight datalink capability between aircraft. The antenna subsystems in unmanned aerial vehicles combine the Company’s antenna with modem and signal processing equipment on board the aircraft to enable satellite communication links and/or line-of-sight datalinks.
The Space & Technology segment is also developing terrestrial antenna subsystems for ground vehicles. The antenna subsystems are combined with modem and signal processing equipment on board ground vehicles such as HUMVEEs and tanks, to enable various functions such as satellite communications, line-of-sight communications, and combat identification while on the move.
LXE Markets
Major technological advances and changes in the regulatory environment have led to the development and proliferation of wireless data networks that extend the reach of existing hard wired networks. Wireless local area networks (“LANs”) now accommodate notebook, pen-based, and other handheld computers, as well as rugged computers mounted on vehicles, such as forklifts. By providing network connectivity for mobile users, these products increase the accuracy, timeliness and convenience of data collection and information access. In the past, wireless LAN systems were developed for operation using proprietary narrow-band UHF radios at 450 or 900 MHz. Current wireless LAN systems comply with open system (IEEE 802.11) standards and operate at data rates of 11 Mbps at 2.4 GHz. Evolving IEEE 802.11-based products increase data transmission rates to 54 Mbps in both the 2.4 GHz and 5.7 GHz bands. The development of these advanced products and widespread adoption of the 802.11 wireless LAN standard is creating new applications in established industrial markets and in other vertical markets, such as transportation and service applications.
The Company’s rugged computers and wireless LANs have been installed at more than 6,500 sites world-wide, including the facilities of many Fortune 500 companies and some of the world’s largest materials-handling installations.
LXE Products
The Company’s wireless data systems, which generally incorporate barcode scanning or other auto-identification capabilities, are increasingly based on the IEEE 802.11 open system standard and feature rugged mobile computers specifically designed for demanding industrial
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environments. A typical system consists of mobile computers which incorporate wireless LAN radios and auto-identification capabilities, network access points which provide a radio link to the wired network and host computers, and software that manages and facilitates the communications process.
- Mobile Computers
The Company offers several types of mobile computers, all of which utilize radio frequency technology:
| 1. | Hand-held mobile computers are small and lightweight, and are available in several form factors with varying degrees of ruggedization; and | ||
| 2. | Vehicle-mounted mobile computers are larger, heavy-duty products for use on forklifts, cranes and other mobile materials handling equipment. These can also be used in fixed positions where network cabling is impractical, or in cart-mounted solutions using a self-contained battery and power supply. |
All mobile computers incorporate built-in radios that operate on wireless networks using either the IEEE 802.11 network standard at 2.4 GHz, or a licensed, narrowband frequency. The Company’s mobile computers incorporate Intel® processors that allow support for terminal emulation, client-server, or browser-based applications.
The Company’s latest generation of mobile computers has significantly more computing power than previous models, as well as improved power-management features and superior ergonomics. The MX3 mobile handheld computer supports the Windows® CE operating system and offers many of the performance features of a desktop PC in a handheld computer. Recent handheld product introductions include the Windows® CE-based MX5 and MX6, both designed for extremely demanding environmental conditions in the warehouse and in the terminal yard. The “VX” series of vehicle-mounted computers feature even better environmental specifications and ruggedization, and includes a Pentium-class model that supports the Windows® 2000, XP and .Net operating systems.
- Wireless Networks
The wireless communications link between a mobile computer and a host network consists of: (1) a series of access points that are attached to a customer’s hardwired network at appropriate locations, and (2) wireless transceivers located in each mobile computer. The access points connect the wireless network to the hardwired network. The wireless transceivers act as wireless LAN interface cards.
LXE provides and supports wireless network equipment compatible with the existing IEEE 802.11 standards, as well as its proprietary system at 900 MHz. LXE also offers a complete suite of supporting products and services for its wireless networks, including wireless network management tools, wireless security tools, facility analysis, installation and support.
- Host Connectivity Software
LXE also provides terminal emulation software and communications gateways that allow any of LXE’s mobile computers to interface seamlessly to a customer’s legacy applications. LXE’s host connectivity software supports UNIX, IBM midrange, and IBM mainframe legacy systems.
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- Other Products and Services
In addition to the basic system hardware and software, the Company offers a wide range of accessory products and services, including barcode scanners, battery chargers, portable printers, pre- and post-sale professional services, and repair and maintenance services.
EMS Wireless Markets
National and international infrastructure for terrestrial-based wireless communications has expanded since the mid-1990’s to support growing worldwide demand, although the infrastructure build-out has slowed from its peak in about the year 2000. The demand for wireless communications has been fueled by:
| • | decreasing prices for wireless handsets, | ||
| • | a more favorable regulatory environment, | ||
| • | greater competition among service providers, and | ||
| • | more availability of services and RF spectrum. |
In addition, many developing countries are installing wireless telephone networks as an alternative to installing, expanding or upgrading traditional hardwired networks. Emerging wireless data applications may also expand the market by allowing service providers to increase revenue-generating traffic on their networks.
Specific technological trends have also affected the wireless industry. For example, in the late 1990’s the continuing growth of the wireless communications market strained the capacity of traditional analog cellular systems that can carry only one call per channel of radio spectrum. As a result, most service providers have installed digital equipment to increase per-channel capacity by factors ranging from three to eight. In addition, service providers have constructed PCS digital networks that operate at twice the frequency level of cellular systems; this provides the greater bandwidth necessary for an expanded range of voice and data services. However, PCS technology requires smaller cells than analog technology and, as a result, approximately four times the number of base stations to complete its geographical build-out.
The Company is a preferred supplier to the leading wireless service providers in North America, and based on industry analysts’ reports, and information from customers and other distribution-channel participants, the Company believes that it is, for North American PCS/cellular communications systems, the leading supplier of base station antennas of the types designed and manufactured by the Company. The Company has manufacturing facilities in Brazil, from which it is also exporting to other South American countries and to Eastern Europe.
In addition to technical performance of the antennas, key competitive factors in this market are manufacturing capacity and ability to provide quick turnaround time in response to an order. The Company believes its turnaround times are among the fastest in the industry.
EMS Wireless Products
The Company has developed several advanced base station antennas for the PCS/cellular wireless infrastructure market and has a line of repeaters and other wireless signal distribution products.
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- Dual Polarization Antenna Products
The Company’s DualPol™ antenna utilizes polarization diversity to combine the functionality of three vertically polarized antennas (two receive and one transmit) into a single, compact device. With fewer antennas required, DualPol™ technology allows the supporting antenna tower to be much smaller and less expensive than for a traditional PCS/cellular antenna site, which must support the weight and wind-loading of a large mounting structure atop the tower. An increasingly important factor in establishing the location of a cell site is the aesthetics of the tower structure. Unlike traditional vertical-polarization cellular antennas, the Company’s DualPol™ antennas can be mounted in a very compact configuration that can fit on top of existing utility poles, or be disguised, for example, in a clock tower. The mounting flexibility benefits the service provider in obtaining site approvals, and lowers installation and structure costs. Further, these antennas offer superior coverage and resistance to signal-fading, as compared with networks with conventional vertical-polarization antennas.
The Company’s AcCELLerator™ antenna combines multiple DualPol™ antennas pre-packaged in a compact cylindrical enclosure that provides the same multi-sector coverage as a large, nine-antenna, spatially diverse base station, yet with a less visually obtrusive structure.
The Company’s Micro AcCELLerator™ antenna is a much smaller version of the AcCELLerator™, and was originally designed to help a service provider gain zoning approval for new cell sites. Micro AcCELLerator™ antennas provide a complete, three-sector cell site in a highly integrated package as small as six inches in diameter, which is mounted atop an unobtrusive monopole. This configuration led to a line of custom site solutions consisting of the micro version of the AcCELLerator™ in an aesthetically pleasing mounting fixture (most often used atop a light pole) that has application in shopping malls and office centers.
- Vertical-Polarization Antenna Products
The Company’s lower-cost vertically polarized antennas apply “beam-shaping” techniques of amplitude and phase weighting to achieve the most effective antenna performance for specific applications. The Company’s OptiFill™ antennas are designed for use in a typical crowded coverage area. These antennas utilize null filling, upper sidelobe suppression and electronic down tilt to lower co-channel interference, reduce the number of dropped calls, and improve sound quality. The Company’s OptiRange™ antennas are designed to maximize gain, and are useful in systems that have large cells, such as rural areas or initial urban system roll-outs with a small number of base stations.
- Repeaters and Other Wireless Signal Distribution Products
The 2001 acquisition of a small manufacturer of repeaters and other wireless signal distribution products provided two new product lines from which we are starting to see growth. The first product line enables carriers to extend indoor RF coverage through the use of indoor repeaters and fiber-optic-based RF distribution systems. One example of this is our new Link2Cell product, which provides an easy and economical means to provide wireless coverage in small, borderline coverage areas. Customers simply plug it in and experience improved coverage.
The Company has continued to see an increase in the demand for indoor RF coverage solutions. The expanded data services now offered by the wireless carriers require a higher RF signal strength to maintain quality service. This higher signal strength requirement coupled with the inherent signal losses associated within buildings and other structures require that an RF distribution system be used to maintain service quality. In many cases a RF indoor repeater drives the RF distribution systems.
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The second product line helps carriers extend their coverage in rural areas or uneven terrain through the use of outdoor repeaters. Rural areas are typically characterized by a low call density and inconsistent signal strength. In these situations, it is not cost effective for the wireless carrier to install a new base station to increase the coverage footprint. A cost-effective solution for the wireless carrier is to use outdoor repeaters to expand its coverage footprint.
Repeater products can also provide other cost efficiencies. A typical base station uses an expensive T1 data line to transfer the telephone calls from the base station back into the hardwire network for all call routing “backhaul” service. The Company has introduced DataNex, a wireless backhaul solution that will utilize a portion of the unused PCS frequency spectrum that the wireless carrier already owns for backhaul services, thereby eliminating the expense of installing and maintaining a T1 connection to the base station. This product has undergone several successful trials and is gaining market acceptance.
SATCOM Markets
The first aeronautical systems for telephony utilized a ground-based network. These networks were not only limited in the voice quality of their communications, but they were unable to provide coverage over water for international travel. Evolution of aeronautical telephony involved a special antenna aboard the aircraft that allowed the use of satellite transmissions, not only for voice but also for limited data and fax capabilities. Reflecting the need for mobile communications in the business world, aeronautical satellite communications systems of some type are now commonly used in corporate jets around the world. Current developments are directed towards higher-speed satellite-based video and Internet-access applications. The market acceptance of the Company’s HSD-128 high speed data products has positioned EMS as a market leader for this application, serving both military and commercial applications.
The Company believes that it is the top supplier of antennas for voice/data communications aboard corporate aircraft, with an over-90% share of this market. To date, there are more than 1,000 EMS installations on over 50 different types of aircraft. The Company has contracts with Rockwell Collins, Honeywell and Bombardier - the industry’s largest users of general aviation communications equipment. In addition, the Company supplies over 90% of all Inmarsat Airborne High Speed Data systems used by the U.S. Military.
The Company has also pursued opportunities in the land mobile market. The Company offers two types of satellite terminals; satellite packet data terminals and GAN terminals. The GAN (global area network) satellite data terminal products allow access to corporate networks and the Internet from anywhere in the world, either at the standard ISDN speed of 64 kbps, or at speeds of up to 128 kbps, using the Inmarsat satellite system. More recently, the Company has been successful in deploying its land-based high speed data products into the U.S. and certain European military organizations. These systems have been particularly useful in supplying data communications to mobile command posts. Packet data terminals are used in functions such as tracking and two-way messaging for transportation or public safety, or remote monitoring of industrial process controls. A growing concern in this market is that terminals utilize an open architecture that would be compatible with other communications systems. The Company’s satellite packet data terminals (“PDT-100”) addresses many of this market’s needs, with its compact size, strong and reliable performance, and open architecture.
For over two decades, satellite-based surveillance systems have saved lives and led to the safe recovery of thousands of disaster and accident victims. One of the world’s largest search-and-rescue systems is COSPAS-SARSAT, sponsored by Canada, France, Russia and the U.S. The COSPAS-SARSAT satellites continuously listen for distress transmissions, determine the location of those transmissions, and provide alerts to worldwide search-and-rescue operations. The Company believes that it is a leading provider to COSPAS-SARSAT search-and-rescue systems of ground station equipment, including high-performance terminals that handle a system’s vital communications function.
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SATCOM Products
The Company’s SATCOM line of products includes the following:
- Aeronautical Antennas
The Company has developed a family of aeronautical communications products, including an industry-leading Inmarsat antenna, the AMT-50, which is a mechanically-steered antenna that is connected to an aircraft’s navigational system and automatically remains directed toward a geostationary communications satellite for voice and low data-rate communications. This antenna is either mounted within the aircraft’s tail or under a small, unobtrusive radome atop an aircraft’s tail. The Company believes that this product has the leading market share in the high-end corporate jet market.
The Company has also developed a steerable antenna system designed to provide live television to a private jet aircraft from a broadcast satellite. The system includes a mechanically steerable antenna system, mechanical positioner, and a beam-steering unit to keep the antenna properly pointed at the satellite during the motion associated with flight. This DBS antenna and the AMT-50 Inmarsat antenna can be mounted together under a single radome (designed and supplied by the Company) atop a jet’s tail fin. These products are sold by the Company as part of a full system provided by Honeywell for delivery of live video service to aircraft.
- Aeronautical Terminals
EMS has an aeronautical product, called the HSD-128, that provides aircraft operators with high-speed data capability using the Inmarsat Aeronautical Swift64 and Mobile Packet Data Services. These services will support data rates of up to 64 kbps per channel (which the HSD-128’s multi-channel capability increases to 128 kbps), a considerable advance on other service offerings currently available in the market. These services are heavily used by military and other governmental command aircraft as well as corporate aircraft. One example is our Viper II terminal, which can handle 16 simultaneous STU-III calls, multi-media video/voice/data applications. The roll-on/roll-off capability of the Viper II enables this communications platform to be used while flying enroute and at the command post on the ground. These services also provide economical airborne access to the business support services typically found in a ground-based office, including voice, data, e-mail, Internet and corporate Intranet products. The Company has developed further capability in its new products and can now provide data rates to 256 kbps.
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- GAN (global area network) Terminals
With its STORM global area network portable satellite terminal EMS customers can work and keep in touch from remote locations, far from telephone networks, and access corporate networks, manage vital communications for disaster relief and peacekeeping, send up-to-the-minute broadcast quality audio, pictures and video clips for on-air transmission and quickly establish secure communications channels in government and defense applications. Depending on configuration, customers can utilize up to 256 kbps data rates while on the move. The Company has also added a maritime high-speed terminal to complement its land-mobile and industry-leading aeronautical products. The maritime terminal delivers clear digital voice communications, as well as e-mail and Internet capabilities, through Inmarsat’s global maritime service. In 2003, the Company launched new land mobile products, marketed under the names Cyclone and Thunder, to provide mobile broadband communications capabilities, largely intended for the public safety and military markets.
- Satellite Packet Data Terminals
EMS’s packet-data terminal provides fail-safe, two-way messaging and location information anywhere in North America. The PDT-100 terminal features GPS technology and combines what the Company believes are the fastest response times with the lowest terminal and airtime prices currently offered in this market. The PDT-100 is commercially available and in use throughout North and Central America providing tracking and messaging to the transportation industry.
The PDT-100 also serves as a valuable tool for the public safety market, offering communications to police, enforcement officers and other public safety employees who must travel outside of traditional wireless coverage maps.
- Emergency Management Products
The Company is a leading provider of the ground-station equipment associated with satellite-based search-and-rescue systems, including the local-user terminals (“LUTs”) that process information received from satellites. Using a low-earth-orbit satellite system, a LUT can determine the location of the maritime or aviation beacons that transmit distress signals, and display the results for intervention by emergency authorities. This terminal technology can also be adapted for routine tracking and management of aviation and maritime fleets.
Another LUT model uses satellites in geostationary orbit, which reduces the critical time needed to detect and identify distress beacon signals. This system is PC-based and can be efficiently managed through Internet protocols. In addition to satellite ground stations for search-and-rescue, EMS offers software for incident management and rescue coordination. The Company has also combined new communications technologies with Web-based geographic information systems and graphical tools. The Company believes that fast, widespread distribution of graphical data via the Web allows for more effective coordination of rescue efforts.
SatNet Markets
SatNet offers ground segment equipment for the satellite broadband communications market in the broadcast and fixed services sector. Within this market, SatNet targets operators of high-speed, two-way, multimedia access networks. These operators range in size and scope from niche satellite service providers providing voice-over-IP telephony services to developing countries, to incumbent telecommunications companies offering satellite overlay high-speed Internet services to complement their existing terrestrial networks. SatNet has also become increasingly involved in national projects in many countries to provide high speed satellite Internet connections for distance education and health services. SatNet targets these customers primarily through integrators and resellers, although SatNet also maintains a small direct sales force for unique opportunities.
SatNet Products
The Company designs and manufactures ground segment equipment for the satellite broadband communications market. SatNet has two principal product lines – DVB-RCS hubs and terminals.
– DVB-RCS hubs
SatNet offers hub products ranging from stand-alone Return Link Sub-Systems (“RLSSs”) that
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are sold to integrators or operators wishing to integrate into an existing one-way platform, to complete gateways. These hubs can economically support network sizes ranging from less than one hundred terminals to substantially more then ten thousand terminals.
– DVB-RCS terminals
SatNet is currently marketing two families of DVB-RCS terminals - the Series 2000 enterprise terminal, which is designed to support a full range of features and performance, and the Series 3000 professional/SOHO terminal, which is designed to minimize cost while maintaining DVB-RCS compliance and performance.
SALES AND MARKETING
The Company’s sales and marketing strategy varies depending upon the segment. Due to the technical nature of the Company’s products, internal personnel with strong engineering backgrounds must conduct some of these sales efforts. This is particularly true of the Space & Technology segment. The Company also utilizes independent marketing representatives, both in the U.S. and internationally. These individuals are selected for their knowledge of the local markets and their ability to provide technical support and ongoing, direct contact with the Company’s current and potential customers.
In the Space & Technology segment, the development of major business opportunities often involves significant bid-and-proposal effort; this work can include complex, pre-award engineering to determine the technical feasibility and cost-effectiveness of various design approaches. Most of the Company’s bid-and-proposal costs are reported in cost of sales, although a portion of these costs is classified as selling, general and administrative expense. Total bid-and-proposal costs from continuing operations were $3.6 million in 2003, $2.5 million in 2002 and $1.9 million in 2001.
The markets for space and defense electronics comprise a relatively small number of customers, which are typically well known large corporations. The Company’s Space & Technology marketing efforts rely on ongoing communications with this base of potential customers, both to determine the customers’ future needs and to inform customers of the Company’s capabilities and recent developments. Because the Company can often receive multiple orders from many of these customers, technical support and service after the sale are also crucial to maintaining a strong relationship.
The Company’s sales and marketing strategy for its other business segments involves:
| 1. | direct sales to end users, and | ||
| 2. | indirect sales through third parties that often incorporate their products and services with the Company’s hardware for delivery to end-users. Third parties include: |
| a. | strategic partners, | ||
| b. | value-added resellers, | ||
| c. | original equipment manufacturers, and | ||
| d. | distributors and sales representatives in approximately 35 countries. |
Direct sales of LXE systems are performed by an internal sales support staff, by 20 regional salespersons in North America, and by nine international subsidiaries (seven in Europe). For EMS Wireless, an internal staff and three regional sales offices in North America perform sales and marketing. For marketing of SATCOM products, the Company relies on its relationships with major airframe manufacturers, avionics manufacturers, a network of completion centers that install aeronautical products, and value-added resellers. SatNet sells through strategic partners such as Alcatel, as well as directly to service providers using an internal staff.
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BACKLOG
The backlog of consolidated orders related to continuing operations at December 31, 2003, was $83.2 million, compared with $85.4 million one year earlier. EMS Wireless, LXE and many SATCOM and SATNET customers typically require short delivery cycles; as a result, these segments usually convert orders into revenues within a few weeks, and they do not build up an order backlog that extends substantially beyond one fiscal quarter. However, backlog is very important in the Space & Technology segment, due to the long-term nature of that business. The backlog for Space & Technology at December 31, 2003 was $50.1 million compared with $49.4 million one year earlier.
MATERIALS
Materials used in the Company’s Space & Technology products consist of magnetic microwave ferrites, metals such as aluminum and brass, permanent magnet materials and electronic components such as transistors, diodes, IC’s, resistors, capacitors and printed circuit boards. Most of the magnetic microwave ferrite materials are purchased from two suppliers, and permanent magnet materials are purchased from a limited number of suppliers. Electronic components and metals are available from a larger number of suppliers and manufacturers.
The electronic components and supplies, printed circuit assemblies, and molded parts needed for the Company’s various standard products are generally available from a variety of sources. However, LXE systems include barcode scanners in almost all orders, and a significant number of the scanners are purchased from Symbol Technologies, Inc. (“Symbol”), which is also a competitor of the Company; however, there are alternative suppliers that manufacture and sell barcode scanners under license agreements with Symbol. The Company believes that LXE’s competitors also rely on scanning equipment purchased from or licensed by Symbol. In addition, Symbol and the Company have a license agreement, which allows the Company to utilize Symbol’s patented integrated scanning technology in certain products.
The Company’s advanced technology products often require sophisticated subsystems supplied or cooperatively developed by third parties having specialized expertise, production skills and economies of scale. Important examples include critical specialized components and subsystems required for successful completion of particular Space & Technology programs, and application-specific integrated circuitry and computers incorporated in LXE products. In such cases, the performance, reliability and timely delivery of the Company’s products can be heavily dependent on the effectiveness of those third parties.
The Company believes that its present sources of required materials are adequate. The Company does not believe that the loss of any supplier or subassembly manufacturer would have a material adverse effect on its business. In the past, shortages of supplies and delays in the receipt of necessary components have not had a material adverse effect on shipments of the Company’s products. However from time to time, the Company’s rollout of new standard products or its performance on Space & Technology programs has been affected by quality and scheduling problems with developers/suppliers of critical subsystems.
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COMPETITION
The Company believes itself to be, in sales, a major independent supplier of (1) satellite components, subsystems and systems, (2) wireless local-area computer network products for logistics systems, (3) base station antennas and other wireless infrastructure products for cellular and PCS mobile networks, (4) aeronautical SATCOM communications systems for voice, telephony and video and (5) satellite networking equipment for two way broadband connectivity. However, the Company’s markets are highly competitive. Some of the Company’s competitors have substantial resources and facilities that exceed those of the Company, but the Company also competes against smaller, specialized firms.
In the Space & Technology segment, the Company competes with divisions of certain U.S. industrial concerns, such as Boeing Electron Dynamic Devices, Inc., L3 Communications, Harris Corporation, Raytheon, M/A-Com, Hieco Corporation, and Titan Corporation, as well as non-U.S. companies such as COMDEV of Canada, and Chelton, Ltd of the U.K. Some of these companies, as well as others, are both potential competitors of the Company for certain contracts and potential customers on other contracts. Certain major customers could also elect to internally develop and manufacture the products that they presently purchase from the Company.
In the LXE market, the Company’s principal competitors are Unova, Symbol Technologies (which holds patents protecting the barcode scanning devices supplied to LXE for incorporation in these products), and Psion Teklogix. In the EMS Wireless segment, the Company competes with divisions of certain large U.S. and international companies, including Allen Telecom, Andrew Corporation and Alcatel. In the SATCOM market, the Company competes with Honeywell, Thales, Thrane & Thrane, Qualcomm and TSI. In the SatNet market, the Company competes with EB Nera, Newtec, ViaSat, Gilat and Hughes Network Systems.
The Company believes that the key competitive factors in all of its segments continue to be product performance, technical expertise and support to customers, adherence to delivery schedules and price.
RESEARCH AND DEVELOPMENT
The Space & Technology segment conducts most of its research and development in direct response to the unique technical requirements of a customer’s order, and most of these costs are included with the overall manufacturing costs for specific orders. The remaining segments conduct substantial internally funded research and development, and product development activities. In 2003, 2002 and 2001, the Company spent $19.3 million, $20.4 million and $20.4 million, respectively, on internally sponsored research and development and product development activities.
EMPLOYEES
As of December 31, 2003, the Company and its subsidiaries employed approximately 1,700 persons. Over 70% of the Company’s employees are directly involved in engineering or manufacturing activities.
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RISK FACTORS
The business operations of EMS Technologies, Inc. involve significant risks and uncertainties that could adversely affect its financial condition, results of operations, and future development, and this could also cause a decline or slow growth in the future market value of our shares. In addition to domestic economic conditions, which can change unexpectedly and generally affect U.S. businesses, these risks and uncertainties include the following:
Competing technology could be superior to ours, and could cause customer orders and revenues to decline.
The markets in which we compete are very sensitive to technological advances. As a result, technological developments by competitors can cause our products to be less desirable to customers, or even to become obsolete. Those developments could cause our customer orders and revenues to decline.
Our competitors’ marketing and pricing strategies could make their products more attractive than ours. This could cause reductions in customer orders or profits.
We operate in highly competitive technology markets. Our competition may pursue aggressive marketing strategies, such as significant price discounting. These competitive activities could cause our customers to purchase our competitors’ products rather than ours, and reduce our sales and profit margins below expected levels.
If our customers fail to find adequate funding for major potential programs, our sales could decline.
Major communications infrastructure programs, such as proposed satellite communications systems or PCS/cellular systems for large urban areas, are important sources of our current and anticipated future revenues. We also participate in a number of large defense programs. Programs of these types cannot proceed unless the customer can raise adequate funds, from either governmental or private sources. As a result, our expected revenues can be adversely affected by political developments or by conditions in private capital markets. Expected revenues can also be adversely affected if private capital markets are not receptive to a customer’s proposed business plans.
Slow public acceptance of new communications systems could limit purchases by our customers.
Construction and expansion of new communications systems depend on public demand for the new services. As a result, growth rates in our revenues from wireless infrastructure products and proposed high-speed satellite communications systems are likely to be heavily affected by the timing and extent of public willingness to buy mobile and/or broadband communications services. If public acceptance of the new systems does not develop as expected, our customers are unlikely to place the level of orders we expect, and our revenues and profits would also fall short of expectations.
Among the factors that could affect the growth of markets for new wireless communications systems is the potential concern about alleged health risks relating to radio frequency (“RF”) emissions. Media reports and some studies have suggested that RF emissions from wireless handsets and cell sites may be associated with various health problems, including cancer, and may interfere with electronic medical devices, including hearing aids and pacemakers. In addition, lawsuits have been filed against participants in the wireless industry alleging various
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adverse health consequences as a result of wireless equipment emissions. Additional studies of radio frequency emissions are ongoing. Consumers may be discouraged from purchasing new wireless services if consumers’ health concerns over radio frequency emissions increase. In addition, concerns over RF emissions could lead government authorities to increase restrictions on the location and operation of wireless-related hardware, or could result in wireless companies being held liable for costs or damages associated with these concerns.
We can encounter technical problems or contractual uncertainties, which can cause delays, added costs, lost sales, and liability to customers.
Technical difficulties can cause delays and additional costs in our technology development efforts. We are particularly exposed to this risk in new product development efforts, and in fixed-price contracts on technically advanced programs in our Space & Technology segment that require novel approaches and solutions. Technical difficulties could cause us to miss expected delivery dates for new product offerings, which could cause customer orders to fall short of expectations. Our products may perform mission-critical functions in space applications. If we experience technical problems and are unable to adhere to a customer’s schedule, the customer could experience costly launch delays or re-procurements from other vendors. The customer may then be contractually entitled to substantial financial damages from us. The customer would also be entitled to cancel future deliveries, which would reduce our future revenues and could make it impossible for us to recover our design, tooling or inventory costs, or our remaining commitments to third-party suppliers.
Due to technological uncertainties in new or unproven applications of technology, a contract may be broadly defined in its early stages, with a structure to accommodate future changes in the scope of work or contract value as technical development progresses. In such cases, management must evaluate these contract uncertainties and estimate the future expected levels of scope of work and likely contract value changes to determine the appropriate level of revenue associated with costs incurred. Actual changes may vary from expected changes, resulting in a reduction of revenues and earnings recognized in future periods.
Our transitions to new product offerings can be costly and disruptive, and could adversely affect our revenues or profitability.
Because our businesses involve constant efforts to improve existing technology, we regularly introduce new generations of products. During these transitions, customers may reduce purchases of older equipment more rapidly than we expect, or may choose not to migrate to our new products, which can cause lower revenues and excessive inventories. In addition, product transitions create uncertainty about both production costs and customer acceptance. These potential problems are generally more severe if our product introduction schedule is delayed by technical development problems. These problems could cause our revenues or profitability to be less than expected.
Our products may unexpectedly infringe third party patents, which could cause us to have substantial liability to our customers or the patent owners.
As we regularly develop and introduce new technology, we have a risk that our new products or manufacturing techniques infringe on patents held or currently being processed by others. The U.S. Patent Office does not publish patents until 18 months after their initial filing. Thus, we may be unaware of a pending patent until well after we have introduced an infringing product. In addition, questions of whether a particular product infringes a particular patent can involve significant uncertainty. As a result of these factors, third-party patents may interfere with
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marketing plans, or may, from time to time, create significant expense to defend or pay damages on infringement claims or to respond to customer indemnification claims.
We depend on highly skilled employees, who could become unavailable.
Because our products and programs are technically sophisticated, we must attract and retain employees with advanced technical and program-management skills. Other employers also often recruit persons with these skills, both generally and in focused engineering fields. If skilled employees were to become unavailable to us, our performance obligations to our customers could be affected and our revenues could decline.
We depend on highly skilled suppliers, who may become unavailable or fail to achieve desired levels of technical performance.
In addition to our requirements for basic materials and electronic components, our advanced technological products often require sophisticated subsystems supplied or cooperatively developed by third parties. To meet those requirements, our suppliers must have specialized expertise, production skills and economies of scale. Our ability to perform according to contract requirements, or to introduce new products on the desired schedule, can be heavily dependent on our ability to identify and engage appropriate suppliers, and on the effectiveness of those suppliers in meeting our development and delivery objectives. If key suppliers were unavailable when we needed them, our ability to meet our performance obligations to our customers could be affected and our revenues and earnings could decline.
Changes in government regulations that limit the availability of radio frequency licenses or cause us to incur increased expenses could cause our revenues or profitability to decline.
Many of our products are incorporated into wireless communications systems that are regulated in the U.S. by the Federal Communications Commission (“FCC”) and internationally by other government agencies. Changes in government regulations could reduce the growth potential of our markets by limiting either the access to or availability of frequency spectrum. Changes in government regulations could make the competitive environment more difficult by restricting our customers’ efforts to develop or introduce new technologies and products. Also, changes in government regulations could substantially increase the difficulty and cost of compliance with government regulations for both our customers and us. All of these factors could result in reductions in our profits and revenues.
The export license process for space products has become uncertain, increasing the chance that we may not obtain required export licenses in a timely or cost-effective manner.
As a result of 1998 legislation, products for use on commercial satellites are included on the U.S. Munitions List and are subject to State Department licensing requirements. The licensing process is time-consuming, and political considerations can increase the time and difficulty of obtaining licenses for export of technically advanced products. The license process may prevent particular sales, and in general has created schedule uncertainties that are encouraging foreign customers, such as those in Western Europe, to develop internal or other foreign sources rather than use U.S. suppliers. If we are unable to obtain required export licenses when we expect them or at the costs we expect, our revenues and profits could be harmed.
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Export controls on space technology restrict our ability to hold technical discussions with customers, suppliers and internal engineering resources, which reduces our ability to obtain sales from foreign customers or to perform contracts with the desired level of efficiency or profitability.
U.S. export controls severely limit unlicensed technical discussions with any persons who are not U.S. citizens. As a result, we are restricted in our ability to hold technical discussions between U.S. personnel and current or prospective non-U.S. customers or suppliers, between Canadian personnel and current or prospective U.S. customers or suppliers, and between U.S. employees and non-U.S. (including Canadian) employees. These restrictions reduce our ability to win cross-border space work, to utilize cross-border supply sources, to deploy technical expertise in the most effective manner, and to pursue cooperative development programs involving our U.S. and Canadian space facilities.
Economic or political conditions in other countries could cause our revenues or profitability to decline.
International sales significantly affect our financial performance. Almost $94 million in revenues for fiscal year 2003, or 37% of consolidated revenues, were derived from customers residing outside of North America. Adverse economic conditions in our customers’ countries, mainly in Western Europe, Latin America and the Pacific Rim, have affected us in the past, and could adversely affect future international revenues in all of our businesses, especially from our wireless local-area network and PCS/cellular infrastructure businesses. Unfavorable currency exchange rate movements can adversely affect the marketability of our products by increasing the local-currency cost. In addition to these economic factors directly related to our markets, there are risks and uncertainties inherent in doing business internationally that could have an adverse effect on us, such as potential adverse effects from changes in foreign income tax laws, as well as unfavorable changes in laws and regulations governing a broad range of business concerns, including proprietary rights, legal liability and employee relations. All of these factors could cause significant harm to our revenues or profitability.
Research incentives from the Canadian government subject to financial and scientific audits could be disallowed.
Research incentives from the Canadian government are subject to financial and scientific audits by the Canadian government concerning whether certain expenses qualify for incentive programs. Historically, these audits have not resulted in disallowances that had a material effect on the benefits recognized in the financial statements. However, a significant level of disallowances in the future could have an unfavorable effect on our statement of operations.
Unfavorable currency exchange rate movements could result in foreign exchange losses and cause our profitability to decline.
We have international operations, and we can use forward currency contracts to reduce – but not entirely eliminate – the earnings risk from holding certain assets and liabilities in different currencies. Furthermore, our SATCOM division derives a major portion of its sales from agreements with U.S. customers in U.S. dollars, and a stronger Canadian dollar would increase our costs relative to our U.S. revenues and we are unlikely to recover these increased costs through higher U.S. dollar prices due to competitive conditions. As a result of these factors, our financial results will continue to have an element of risk related to foreign exchange.
The level and profitability of our sales in certain markets depend on the availability and performance of other companies with which we have marketing relationships.
In some applications, including mobile satellite communications, we are seeking to develop marketing relationships with other companies that have, for example, specialized software and established customer service systems. In other markets, such as wireless local-area networks, a major element of our distribution channels is a network of value-added retailers and independent distributors. If we are unable to identify and structure effective relationships with other companies that are able to market our products, our revenues could fail to grow in the ways we expect.
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Customer orders in backlog may not result in sales.
Our order backlog represents firm orders for products and services. However, our customers may cancel or defer orders for wireless products, in most cases without penalty. Cancellation or deferral of an order in our Space & Technology business typically involves penalties and termination charges for costs incurred to date, but these termination penalties would still be considerably less than what we would have expected to earn if the order could have been completed. We make management decisions based on our backlog, including hiring of personnel, purchasing of materials, and other matters that may increase our production capabilities and costs. Cancellations, delays or reductions of orders could adversely affect our results of operations and financial condition.
Our business and revenue growth could be limited by our inability to obtain additional financing.
Our current cash and available credit facilities are not large enough to finance either potential growth in certain business areas, or synergistic acquisitions to complement our technical and product capabilities. We may not be able to secure sufficient additional credit or other financing, on acceptable terms, to support our growth objectives.
Our violation of debt covenants on the Company’s Canadian debt could require us to obtain alternative financing on unfavorable terms.
For the last two quarters of 2003, substantial third-quarter write-downs, related to the operations and discontinuance of our Space & Technology/Montreal division, caused our Canadian operations to fail to meet certain covenants contained in the credit agreement with the Canadian bank that finances those operations. On each occasion, the Canadian bank has waived our covenant violation. However, if the Company has not sold its Space & Technology/Montreal division, in future quarters the Company’s Canadian operations will continue to fail to meet the covenant requirements, and we cannot guarantee that we will continue to receive bank waivers in the future. In the absence of a waiver, the bank may require the debt to be repaid in its entirety at any time. If that occurs, we may not be able to secure sufficient additional credit or other financing from another lender, on terms similar to these we now have. This could increase our financing cost and could adversely affect our results of operations and financial condition.
We may not effectively manage possible future growth, which could result in reduced earnings.
Historically, we have experienced broad fluctuations in demand for our products and services. These changes in demand have depended on many factors and have been difficult to predict. In recent years, there has been a general growth trend in certain of our businesses, as well as increasing complexity in the technologies and applications involved. These changes in our businesses place significant demands on both our management personnel and our management systems for information, planning and control. If we are to achieve further strong growth on a profitable basis, our management must identify and exploit potential market opportunities for our products and technologies, while continuing to manage our current businesses effectively. Furthermore, our management systems must support the changes to our operations resulting from our business growth. If our management and management systems fail to meet these challenges our business and prospects will be adversely affected.
We may make acquisitions and investments that could adversely affect our business.
To support growth, we may continue in the future to make acquisitions of and investments in businesses, products and technologies that could complement or expand our businesses. However, if we should be unable to successfully negotiate with a potential acquisition candidate, finance the acquisition, or effectively integrate the acquired businesses, products or technologies into our existing business and products, we could be adversely affected. Furthermore, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent
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liabilities, or have amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.
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In addition to risks and uncertainties related to our operations, there are investment risks that could adversely affect the return to an investor in our common stock, and also could adversely affect our ability to raise capital for financing future operations.
Our quarterly results are volatile and difficult to predict. If our quarterly performance results fall short of market expectations, the market value of our shares are likely to decline.
The quarterly earnings contributions of some of our segments are heavily dependent on customer orders or product shipments in the final weeks or days of the quarter. This can create volatility in quarterly results, and hinders our ability to determine in advance whether quarterly earnings will meet prevailing analyst expectations. The market price for our shares is likely to be adversely affected by quarterly earnings results that are below analyst and market expectations.
Our share price may fluctuate significantly, and an investor may not be able to sell our shares at a price that would yield a favorable return on investment.
The market price of our stock will fluctuate in the future, and such fluctuations could be substantial. Price fluctuations may occur in response to a variety of factors, including:
| 1. | actual or anticipated operating results, | ||
| 2. | announcements of technological innovations, new products or new contracts by us, our customers, our competitors or our customers’ competitors, | ||
| 3. | government regulatory action, | ||
| 4. | developments with respect to wireless and satellite communications, and | ||
| 5. | general market conditions. |
In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the stocks of technology companies, and that have been unrelated to the operating performance of particular companies.
Future sales of our common stock may cause our stock price to decline.
Our outstanding shares are freely tradable without restriction or further registration, and shares reserved for issuance upon exercise of stock options will also be freely tradable upon issuance. Sales of substantial amounts of common stock by our shareholders, including those who have acquired a significant number of shares in connection with business acquisitions or private investments, or even the potential for such sales, may depress the market price of our common stock and could impair our ability to raise capital through the sale of our equity securities.
FORWARD-LOOKING STATEMENTS
The discussions of the Company’s business in this Report, and in other public documents or statements that may from time to time incorporate or refer to these disclosures, contain various statements that are or may be deemed to be forward-looking. Forward-looking statements include, but are not limited to:
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| 1. | statements about what the Company or management believes or expects, | ||
| 2. | statements about anticipated technological developments or anticipated market response to or impact of current or future technological developments or product offerings, | ||
| 3. | statements about trends in markets that are served or pursued by the Company, | ||
| 4. | statements implying that the Company’s technology or products are well suited for particular emerging markets, and | ||
| 5. | statements about the Company’s plans for product developments or market initiatives. |
These forward-looking statements may differ materially from actual results due to the variety of risks and uncertainties that affect the Company, including those set forth under the foregoing “Risk Factors” heading.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is set forth below:
Alfred G. Hansen, age 70, became President and Chief Executive Officer in January 2001. Mr. Hansen joined the Company as President and Chief Operating Officer in January 2000. He became a Director in 1999. From 1998 through 1999, Mr. Hansen was President of A.G. Hansen Associates, Inc., Marietta, Georgia, an aerospace marketing and manufacturing consultant. From 1995 to 1998, Mr. Hansen served as Executive Vice President of Lockheed Martin Aeronautical Systems, with broad operational responsibilities for its aerospace business, and as a Vice President of its parent company, Lockheed Martin Corporation. Mr. Hansen retired from the U.S. Air Force in 1989 as a four-star general, serving in his last assignment as commander of the Air Force Logistics Command.
Don T. Scartz, age 61, was elected Executive Vice President of the Company in February 2003, and is also Chief Financial Officer (since 1995) and Treasurer (since 1981). He served as Senior Vice President since 1995, as Vice President-Finance from 1981 to 1995, and as Secretary from 1982 to 1991. He joined the Company as Controller in 1978. He also serves as the Chief Financial Officer of each of the Company’s operating subsidiaries. He served as Director of the Company from 1995 to 2003.
William S. Jacobs, age 58, became General Counsel and Secretary of the Company in 1992, and Vice President in 1993. He is also responsible for the legal affairs of the operating subsidiaries. Previously, he was engaged in the private practice of law, and in such capacity had served as the Company’s principal corporate legal counsel since 1982.
James S. Childress, age 59, was appointed as a Vice President of the Company, and as President and General Manager of the LXE subsidiary, in 2001. He joined the Company in August 2000 as Vice President of Business Development at LXE. Prior to joining EMS, he served as Vice President of EG&G Technical Services, Inc., a leading provider of technical and support services to the U.S. Departments of Defense, Energy, Transportation, Treasury, Justice and Commerce, and to the National Aeronautics and Space Administration. He joined EG&G in 1998 following a career in the U.S. Air Force focused on logistics and systems acquisition. In the Air Force, he attained the rank of major general, and last served as commander of the San Antonio Air Logistics Center.
Jay R. Grove, age 41, is a Vice President of the Company, and Senior Vice President and General Manager of the Space & Technology/Atlanta Division. He accepted this position upon joining the Company in January 2001. Formerly, he was Director of Mobile SATCOM Systems
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for ViaSat, Inc., a California-based provider of advanced satellite communications, defense electronics, and wireless signal-processing equipment. Prior to his tenure at ViaSat, Mr. Grove contributed in management, marketing, and system engineering roles for defense electronics applications at Lockheed-Martin in Nashua, NH and TRW, Inc. in San Diego, CA.
Alan L. Haase, age 43, is Vice President of the Company, and Senior Vice President and General Manager, Space & Technology/Montreal (since 2003). Previously, he served as President (2000-2003), Chief Executive Officer (2000-2003) and Chief Strategy Officer (2002-2003) of SkyCross, Inc., a Melbourne, FL-based designer and manufacturer of antennas and other RF equipment for wireless telecommunications products. From 1998 until 2000, Mr. Haase was a senior officer at Andrew Corporation, a major manufacturer of radio and microwave transmission equipment, serving as Vice President of its Terrestrial Microwave Systems unit and also as Group President – Communications Products.
T. Gerald Hickman, age 63, is a Vice President of the Company, and Senior Vice President and General Manager, EMS Wireless (since March 2000). He joined the Company in 1988 as Vice President, Marketing, and prior to his current position was a Vice President in the Company’s EMS Wireless division.
Neilson A. Mackay, age 63, is a Vice President of the Company, and Senior Vice President and General Manager, SATCOM Products (since 2001). He joined the Company in January 1993, when the Company acquired an Ottawa, Ontario-based space satellite communications business of which he was serving as President.
Donald F. Osborne, age 44, is a Vice President of the Company, Senior Vice President and General Manager for the SatNet division. Prior to that position, he served as Senior Vice President and General Manager of the Space & Technology/Montreal operations. He joined the Company in January 1999, when the Company acquired the Spar Satellite Products business, where Mr. Osborne had been Vice President, Marketing since 1986. Mr. Osborne joined Spar in 1983 as a mechanical engineer.
ITEM 2. Properties
The Company’s corporate headquarters and its Georgia operations are located in two buildings owned by the Company (comprising 250,000 square feet of floor space on 21 acres), as well as in 136,000 square feet of leased office space (leases to expire in 2005, 2006 and 2009) in three other buildings, all located in or near Technology Park, Norcross, Georgia, a suburb of Atlanta. The combined Georgia facilities comprise clean rooms, a microelectronics laboratory, materials storage and control areas, assembly and test areas, offices, engineering laboratories, a ferrites laboratory, drafting and design facilities, a machine shop, a metals finishing facility and painting facilities.
The Company’s Canadian divisions lease approximately 69,000 square feet of office and manufacturing space, primarily for SATCOM’s operations, located in Ottawa, Ontario (lease expiring in 2007), and 30,000 square feet of office and manufacturing space for SatNet operations located in Montreal (lease expiring in 2009). The Company’s assets held for sale include a 330,000 square-foot facility surrounded by 34 acres of undeveloped land in a suburb of Montreal, which houses the Space & Technology/Montreal division. One-fourth of this facility comprises manufacturing, assembly and laboratory space, including advanced near-field and far-field test range areas and a subsystem and payload integration area. Three-fourths of the facility is used for engineering and administrative office space. The facility’s location in the province of Quebec affords it significant tax incentives and credits sponsored by the provincial government.
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The Company’s EMS Wireless division leases an 11,000 square-foot manufacturing facility in Curitiba, Brazil, from its local industrial partner (a manufacturer of antenna towers for wireless telecommunications). The lease is annually renewable, and management expects to continue the lease on terms comparable to those of the current lease.
The Company has leased several small sites in the U.S., U.K., Europe and Australia for LXE sales offices and a SATCOM engineering facility. If any of these leases were terminated, the Company believes that it could arrange for comparable replacement facilities on favorable terms.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The common stock of EMS Technologies, Inc. is traded in the over-the-counter market (NASDAQ symbol ELMG). At March 5, 2004, there were approximately 500 shareholders of record, and the Company believes that there were approximately 3,500 beneficial shareholders, based upon broker requests for distribution of Annual Meeting materials. The price range of the stock is shown below:
| 2003 Price Range | 2002 Price Range | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter |
$ | 18.39 | 11.30 | 22.65 | 14.77 | |||||||||||
Second Quarter |
15.03 | 10.00 | 25.60 | 17.10 | ||||||||||||
Third Quarter |
19.24 | 12.96 | 22.65 | 10.02 | ||||||||||||
Fourth Quarter |
22.64 | 16.86 | 17.36 | 10.30 | ||||||||||||
The Company has never paid a cash dividend with respect to shares of its common stock, and has retained its earnings to provide cash for the operation and expansion of its business. Future dividends, if any, will be determined by the Board of Directors in light of the circumstances then existing, including the Company’s earnings and financial requirements and general business conditions.
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ITEM 6. Selected Financial Data
| Years ended December 31 | ||||||||||||||||||||||
| (in thousands, except | ||||||||||||||||||||||
| earnings per share) | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Net sales |
$ | 256,213 | 235,771 | 201,391 | 186,800 | &n | ||||||||||||||||