EMS TECHNOLOGIES INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended July 3, 2004

Commission file number 0-6072

EMS TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


Georgia		58-1035424

(State or other jurisdiction of incorporation or organization)		(IRS Employer ID Number)


660 Engineering Drive Norcross, Georgia		30092

(Address of principal executive offices)		(Zip Code)

(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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ 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, 2004:


Class		Number of Shares

Common Stock, $.10 par Value		11,114,656

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. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)


	Quarters Ended						Six Months Ended
	July 3			June 28			July 3			June 28
	2004			2003			2004			2003
Net sales	$	64,528			66,059			128,603			121,808
Cost of sales		42,437			42,012			82,914			77,266
Selling, general and administrative expenses		15,671			14,497			31,255			27,227
Research and development expenses		4,448			4,772			10,022			9,459

Operating income		1,972			4,778			4,412			7,856
Non-operating income (expense), net		117			(255	)		983			(278	)
Foreign exchange loss		(198	)		(375	)		(95	)		(412	)
Interest expense		(585	)		(510	)		(1,223	)		(1,017	)

Earnings from continuing operations before income taxes		1,306			3,638			4,077			6,149
Income tax expense		(418	)		(1,150	)		(1,305	)		(1,975	)

Earnings from continuing operations		888			2,488			2,772			4,174
Discontinued operations (note 2):
Loss from discontinued operations		(1,194	)		(16,277	)		(776	)		(18,754	)
Income tax benefit (expense)		84			(281	)		—			532

Loss from discontinued operations		(1,110	)		(16,558	)		(776	)		(18,222	)

Net earnings (loss)	$	(222	)		(14,070	)		1,996			(14,048	)

Earnings (loss) per share (note 4):
Basic:
From continuing operations	$	0.08			0.23			0.25			0.39
From discontinued operations		(0.10	)		(1.55	)		(0.07	)		(1.71	)

Net earnings (loss)	$	(0.02	)		(1.32	)		0.18			(1.32	)

Diluted:
From continuing operations	$	0.08			0.23			0.25			0.39
From discontinued operations		(0.10	)		(1.55	)		(0.07	)		(1.71	)

Net earnings (loss)	$	(0.02	)		(1.32	)		0.18			(1.32	)

Weighted average number of shares (note 4):
Basic		11,090			10,658			11,060			10,658
Diluted		11,263			10,671			11,264			10,671

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)
(in thousands)


	July 3		Dec 31
	2004		2003
ASSETS
Current assets:
Cash and cash equivalents	$	9,376		14,180
Trade accounts receivable, net (note 6)		71,292		71,431
Inventories, net (note 7)		37,080		33,509
Deferred income taxes		2,208		2,208
Assets held for sale (note 2)		45,294		40,059

Total current assets		165,250		161,387

Property, plant and equipment:
Land		1,490		2,174
Building and leasehold improvements		15,106		15,000
Machinery and equipment		76,404		73,474
Furniture and fixtures		7,741		7,318

Total property, plant and equipment		100,741		97,966
Less accumulated depreciation and amortization		63,289		59,485

Net property, plant and equipment		37,452		38,481

Deferred income taxes – non-current		2,679		2,679
Intangible assets, net		2,599		3,121
Goodwill		13,526		13,526
Other assets		7,082		9,355

	$	228,588		228,549

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data)


	July 3		Dec 31
	2004		2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	35,492		38,056
Accounts payable		20,511		18,812
Accrued compensation costs		5,276		7,823
Accrued retirement costs		1,511		2,637
Deferred service revenue		6,470		4,730
Liabilities related to assets held for sale (note 2)		17,042		17,765
Other liabilities		3,353		3,147

Total current liabilities		89,655		92,970
Long-term debt, excluding current installments		15,412		15,537

Total liabilities		105,067		108,507

Stockholders’ equity:
Preferred stock of $1.00 par value per share. Authorized 10,000,000 shares; none issued		—		—
Common stock of $.10 par value per share. Authorized 75,000,000 shares; issued and outstanding 11,114,000 in 2004 and 10,927,000 in 2003		1,111		1,093
Additional paid-in capital		67,927		64,988
Accumulated other comprehensive income		6		1,480
Retained earnings		54,477		52,481

Total stockholders’ equity		123,521		120,042

	$	228,588		228,549

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


	Six Months Ended
	July 3			June 28
	2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	1,996			(14,048	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		4,813			4,511
Deferred income taxes		—			(95	)
Loss from discontinued operations		776			18,222
Gain on sale of assets		(969	)		—
Changes in operating assets and liabilities:
Trade accounts receivable		(917	)		5,834
Inventories		(3,970	)		(1,860	)
Accounts payable		2,139			36
Non-trade foreign government receivable		1,470			2,959
Income taxes payable		2,600			594
Accrued costs, deferred revenue and other current liabilities		(1,656	)		(1,099	)
Other		(1,545	)		(1,283	)

Net cash provided by operating activities		4,737			13,771

Cash flows from investing activities:
Purchase of property, plant and equipment		(3,743	)		(5,079	)
Payments for asset acquisitions		(133	)		—
Sales of assets		722			—

Net cash used in investing activities		(3,154	)		(5,079	)

Cash flows from financing activities:
Net (decrease) increase in revolving debt		(1,114	)		961
Repayment of term debt		(1,701	)		(820	)
Proceeds from exercise of stock options, net of withholding taxes paid		2,957			—

Net cash provided by financing activities		142			141

Operating cash used in discontinued operations		(6,024	)		(10,192	)

Net change in cash and cash equivalents		(4,299	)		(1,359	)
Effect of exchange rates on cash		(505	)		222
Cash and cash equivalents at beginning of period		14,180			12,430

Cash and cash equivalents at end of period	$	9,376			11,293

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

July 3, 2004 and June 28, 2003

1. Basis of Presentation

The consolidated financial statements include the accounts of EMS Technologies, Inc. and its wholly-owned subsidiaries LXE Inc., EMS Holdings, Inc. and EMS Technologies Canada, Ltd. (collectively, “the Company”). In the opinion of management, the accompanying 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, 2003.

In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company has classified the revenues, expenses and related assets and liabilities of its Space & Technology/Montreal division, which are currently held for sale, as discontinued operations for all periods presented in the accompanying consolidated financial statements.

— 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 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 (loss) and earnings (loss) 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
	July 3			June 28			July 3			June 28
	2004			2003			2004			2003
Net earnings (loss):
As reported	$	(222	)		(14,070	)		1,996			(14,048	)
Less: Stock-based employee compensation expense determined under the fair value method, net of tax		(445	)		(486	)		(960	)		(1,076	)

Pro forma	$	(667	)		(14,556	)		1,036			(15,124	)

Basic net earnings (loss) per share:
As reported	$	(0.02	)		(1.32	)		0.18			(1.32	)
Pro forma		(0.06	)		(1.37	)		0.09			(1.42	)
Diluted net earnings (loss) per share:
As reported	$	(0.02	)		(1.32	)		0.18			(1.32	)
Pro forma		(0.06	)		(1.36	)		0.09			(1.42	)

2. Discontinued Operations

In the third quarter of 2003, EMS announced that its Board of Directors had approved a formal plan to sell the Company’s commercial space operations located in Montreal. During the fourth quarter of 2003, the Company completed the sale of its healthcare product line. As a result, these business components are accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value upon disposal. The fair value of the Space & Technology/Montreal division upon disposal was estimated in Canadian dollars using an expected present value technique and a discount rate of 20%. A 2% change in the discount rate would cause a change in the valuation of approximately $1.5 million.

The results of these discontinued operations for the second quarters and six months ended of were as follows (in thousands):


	Quarters Ended						Six Months Ended
	July 3			June 28			July 3			June 28
	2004			2003			2004			2003
Net sales	$	13,209			(1,678	)		27,987			9,109
Costs and expenses		14,403			14,599			28,763			27,863

Loss before income taxes		(1,194	)		(16,277	)		(776	)		(18,754	)
Income tax (expense) benefit		84			(281	)		—			532

Net loss	$	(1,110	)		(16,558	)		(776	)		(18,222	)

The table below presents the components of the consolidated balance sheet accounts classified as current assets and liabilities related to assets held for sale as of July 3, 2004 and December 31, 2003 (in thousands):


	July 3		Dec 31
	2004		2003
Accounts receivable, net	$	11,627		9,646
Inventories		4,243		4,722
Investments		4,409		4,409
Property, plant and equipment, net		16,002		16,743
Accrued pension assets		3,050		3,245
Other assets		5,963		1,294

Total assets held for sale	$	45,294		40,059

Accounts payable	$	10,902		10,984
Long term debt		2,369		2,573
Post retirement obligations		3,762		3,709
Other current liabilities		9		499

Total liabilities related to assets held for sale	$	17,042		17,765

3. 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 consolidated balance sheet at fair value. Under SFAS No. 133, certain of the Company’s routine long-term contracts 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 (loss).

For continuing operations, the derivative activity as reported in the Company’s consolidated financial statements during the second quarters and six months ended was (in thousands):


	Quarters Ended						Six Months Ended
	July 3			June 28			July 3			June 28
	2004			2003			2004			2003
Beginning net asset (liability) for derivatives	$	82			109			108			(248	)
Sales:
Gain (loss) in value of embedded derivatives		(4	)		6			(6	)		7
Foreign exchange gain (loss) on derivative instruments:
Gain/(loss) in value of derivative instruments that do not qualify as hedging instruments		(47	)		514			27			669
Matured foreign exchange contracts		(60	)		(114	)		(158	)		87

Net consolidated statements of operations gain (loss) from changes in value of derivative instruments		(111	)		406			(137	)		763

Ending net (liability) asset for derivatives	$	(29	)		515			(29	)		515

For discontinued operations, the net liability for derivatives at July 3, 2004 was $84,000 compared to a net asset of $570,000 at June 28, 2003.

All of the foreign currency contracts currently in place will expire by the end of 2004.

4. Earnings (Loss) Per Share

Basic earnings (loss) per share is the per share allocation of income available to common stockholders based only on the weighted average number of common shares actually outstanding during the period. Diluted earnings (loss) per share represents the per share allocation of income (loss) 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 (loss) per share, summarized as follows (shares in thousands):


	July 3		June 28
	2004		2003
Dilutive stock options, included in earnings (loss) per share calculations:
Shares		1,218		286
Average exercise price per share	$	15.09		11.83
Anti-dilutive stock options and warrants, excluded from per share calculations:
Shares		461		1,818
Average exercise price per share	$	22.53		17.61

For each earnings (loss) per share calculation reported for the second quarters of 2004 and 2003, the numerators were the same as reported in the consolidated statements of operations. Following is a reconciliation of the denominators for basic and diluted earnings (loss) per share calculations for the second quarters and six months ended July 3, 2004 and June 28, 2003 (in thousands):


	Quarters Ended				Six Months Ended
	July 3		June 28		July 3		June 28
	2004		2003		2004		2003
Basic-weighted average common shares outstanding		11,090		10,658		11,060		10,658
Common equivalent shares from stock options		173		13		204		13

Diluted-weighted average common and common equivalent shares outstanding		11,263		10,671		11,264		10,671

5. Comprehensive Income (Loss)

Following is a summary of comprehensive income (loss) (in thousands):


	Quarters Ended						Six Months Ended
	July 3			June 28			July 3			June 28
	2004			2003			2004			2003
Net income (loss)	$	(222	)		(14,070	)		1,996			(14,048	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(640	)		3,004			(1,474	)		6,234
Change in the value of investment securities available for sale		—			155			—			—

Comprehensive income (loss)	$	(862	)		(10,911	)		522			(7,814	)

6. Trade Accounts Receivable

Trade accounts receivable include the following (in thousands):


	July 3			Dec 31
	2004			2003
Amounts billed	$	51,400			58,146
Unbilled revenues under long-term contracts		24,403			18,610
Customer advanced payments		(3,108	)		(3,788	)
Allowance for doubtful accounts		(1,403	)		(1,537	)

Trade accounts receivable, net	$	71,292

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


PART I – FINANCIAL INFORMATION			2
ITEM 1. Financial Statements			2
Consolidated Statements of Operations			2
Consolidated Balance Sheets			3
Consolidated Statements of Cash Flows			5
Notes to Consolidated Financial Statements			6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			19
ITEM 4. Controls and Procedures			20
PART II – OTHER INFORMATION			21
ITEM 1. Legal Proceedings			21
ITEM 4. Submission of Matters to a Vote of Security Holders			21
ITEM 5. Other Information			22
ITEM 6. Exhibits and Reports on Form 8-K			29
SIGNATURES			30
EMS TECHNOLOGIES, INC. 1997 STOCK INCENTIVE PLAN
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO