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 October 2, 2004

Commission file number 000-06072

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 November 5, 2004:


Class		Number of Shares

Common Stock, $.10 par Value		11,133,494

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						Nine Months Ended
	Oct 2			Sep 27			Oct 2			Sep 27
	2004			2003			2004			2003
Net sales	$	62,368			61,534			190,971			183,342
Cost of sales		40,800			39,408			123,714			116,674
Selling, general and administrative expenses		15,349			14,305			46,604			41,532
Research and development expenses		4,557			4,437			14,579			13,896

Operating income		1,662			3,384			6,074			11,240
Non-operating income (expense), net		130			(9	)		1,113			(287	)
Foreign exchange loss		(204	)		(10	)		(299	)		(422	)
Interest expense		(601	)		(534	)		(1,824	)		(1,551	)

Earnings from continuing operations before income taxes		987			2,831			5,064			8,980
Income tax expense		(316	)		(899	)		(1,621	)		(2,874	)

Earnings from continuing operations		671			1,932			3,443			6,106
Discontinued operations (note 2):
Loss from discontinued operations before income taxes		(2,317	)		(24,999	)		(3,093	)		(43,753	)
Income tax benefit (expense)		(70	)		2,476			(70	)		3,008

Loss from discontinued operations		(2,387	)		(22,523	)		(3,163	)		(40,745	)

Net earnings (loss)	$	(1,716	)		(20,591	)		280			(34,639	)

Net earnings (loss) per share (note 4):
Basic:
Earnings from continuing operations	$	0.06			0.18			0.31			0.57
Loss from discontinued operations		(0.21	)		(2.11	)		(0.28	)		(3.82	)

Net earnings (loss)	$	(0.15	)		(1.93	)		0.03			(3.25	)

Diluted:
Earnings from continuing operations	$	0.06			0.18			0.31			0.57
Loss from discontinued operations		(0.21	)		(2.09	)		(0.29	)		(3.81	)

Net earnings (loss)	$	(0.15	)		(1.91	)		0.02			(3.24	)

Weighted average number of shares (note 4):
Basic		11,114			10,668			11,076			10,662
Diluted		11,189			10,778			11,238			10,707

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Consolidated Balance Sheets (Unaudited)
(in thousands)


	Oct 2		Dec 31
	2004		2003
ASSETS
Current assets:
Cash and cash equivalents	$	10,712		14,180
Trade accounts receivable, net (note 6)		70,799		71,431
Inventories, net (note 7)		37,790		33,509
Deferred income taxes — current		2,208		2,208
Assets held for sale (note 2)		45,448		40,059

Total current assets		166,957		161,387

Property, plant and equipment:
Land		1,150		2,174
Building and leasehold improvements		15,140		15,000
Machinery and equipment		78,565		73,474
Furniture and fixtures		7,840		7,318

Total property, plant and equipment		102,695		97,966
Less accumulated depreciation and amortization		65,543		59,485

Net property, plant and equipment		37,152		38,481

Deferred income taxes – non-current		2,679		2,679
Intangible assets, net of accumulated amortization		3,637		3,121
Goodwill		13,526		13,526
Other assets		7,356		9,355

	$	231,307		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)


	Oct 2		Dec 31
	2004		2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term debt	$	39,669		38,056
Accounts payable		18,416		18,812
Accrued compensation costs		6,844		7,823
Income tax payable		807		—
Accrued retirement costs		2,079		2,637
Deferred service revenue		5,572		4,730
Liabilities related to assets held for sale (note 2)		17,184		17,765
Other current liabilities		3,148		3,147

Total current liabilities		93,719		92,970
Long-term debt, excluding current installments		14,996		15,537

Total liabilities		108,715		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 11,115,000 in 2004 and 10,927,000 in 2003		1,111		1,093
Additional paid-in capital		67,942		64,988
Accumulated other comprehensive income – foreign currency translation adjustment		778		1,480
Retained earnings		52,761		52,481

Total stockholders’ equity		122,592		120,042

	$	231,307		228,549

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

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


	Nine Months Ended
	Oct 2			Sep 27
	2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	280			(34,639	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and other intangibles amortization		7,396			6,420
Deferred income taxes		—			(95	)
Gain on sale of assets		(1,082	)		—
Loss from discontinued operations		3,163			40,745
Changes in operating assets and liabilities:
Trade accounts receivable, net		577			4,794
Inventories, net		(3,711	)		(3,161	)
Accounts payable		(284	)		(2,847	)
Non-trade foreign government receivable		373			2,337
Income taxes payable		2,971			1,193
Accrued costs, deferred revenue and other current liabilities		(563	)		(2,432	)
Other		100			(2,028	)

Net cash provided by operating activities		9,220			10,287

Cash flows from investing activities:
Purchase of property, plant and equipment		(5,954	)		(6,123	)
Payments for asset acquisitions		(1,328	)		—
Proceeds from sales of assets		1,176			—

Net cash used in investing activities		(6,106	)		(6,123	)

Cash flows from financing activities:
Net increase in revolving debt		2,478			4,138
Repayment of term debt		(2,596	)		(1,682	)
Proceeds from exercise of stock options, net of withholding taxes paid		2,972			342

Net cash provided by financing activities		2,854			2,798

Operating cash used in discontinued operations		(8,907	)		(10,321	)

Net change in cash and cash equivalents		(2,939	)		(3,359	)
Effect of exchange rates on cash		(529	)		119
Cash and cash equivalents at beginning of period		14,180			12,430

Cash and cash equivalents at end of period	$	10,712			9,190

See accompanying notes to interim consolidated financial statements.

EMS Technologies, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)
October 2, 2004 and September 27, 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. 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 (loss) per share):


	Quarters Ended						Nine Months Ended
	Oct 2			Sep 27			Oct 2			Sep 27
	2004			2003			2004			2003
Net earnings (loss):
As reported	$	(1,716	)		(20,591	)		280			(34,639	)
Less: Stock-based employee compensation expense determined under the fair value method, net of tax		(369	)		(475	)		(1,329	)		(1,753	)

Pro forma	$	(2,085	)		(21,066	)		(1,049	)		(36,392	)

Basic net earnings (loss) per share:
As reported	$	(0.15	)		(1.93	)		0.03			(3.25	)
Pro forma		(0.19	)		(1.97	)		(0.09	)		(3.41	)
Diluted net earnings (loss) per share:
As reported	$	(0.15	)		(1.91	)		0.02			(3.24	)
Pro forma		(0.18	)		(1.95	)		(0.09	)		(3.40	)

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 have been accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value, less cost to sell. Based on recent discussions with potential purchasers concerning the probable market value of the Space & Technology/Montreal division, EMS recorded an additional $1.7 million valuation allowance in the third quarter of 2004 to reflect the revised estimate of the fair value, less cost to sell, of this division. .

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


	Quarters Ended						Nine Months Ended
	Oct 2			Sep 27			Oct 2			Sep 27
	2004			2003			2004			2003
Net sales	$	10,685			7,307			38,672			16,416
Costs and expenses		11,302			13,306			40,065			41,169
Valuation allowance		1,700			19,000			1,700			19,000

Loss before income taxes		(2,317	)		(24,999	)		(3,093	)		(43,753	)
Income tax (expense) benefit		(70	)		2,476			(70	)		3,008

Net loss	$	(2,387	)		(22,523	)		(3,163	)		(40,745	)

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 October 2, 2004 and December 31, 2003 (in thousands):


	Oct 2		Dec 31
	2004		2003
Trade accounts receivable, net	$	11,142		9,646
Inventories, net		4,284		4,722
Investments		2,709		4,409
Property, plant and equipment, net		17,267		16,743
Accrued pension assets		3,155		3,245
Other assets		6,891		1,294

Total assets held for sale	$	45,448		40,059

Accounts payable and other	$	10,650		11,483
Long term debt		2,460		2,573
Post-retirement obligations		4,074		3,709

Total liabilities related to assets held for sale	$	17,184		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 net earnings (loss).

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


	Quarters Ended						Nine Months Ended
	Oct 2			Sep 27			Oct 2			Sep 27
	2004			2003			2004			2003
Beginning net asset (liability) for derivatives	$	(29	)		515			108			(248	)
Sales:
Loss in value of embedded derivatives		(1	)		(10	)		(7	)		(3	)
Foreign exchange gain (loss) on derivative instruments:
Gain in value of derivative instruments that do not qualify as hedging instruments		122			20			149			689
Matured foreign exchange contracts		(13	)		(423	)		(171	)		(336	)

Net consolidated statements of operations gain (loss) from changes in value of derivative instruments		108			(413	)		(29	)		350

Ending net asset for derivatives	$	79			102			79			102

For discontinued operations, the net asset for derivatives at October 2, 2004 was $93,000 compared to a net asset of $95,000 at September 27, 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 (loss) 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):


	Oct 2		Sep 27
	2004		2003
Dilutive stock options, included in earnings (loss) per share calculations:
Shares		794		1,135
Average exercise price per share	$	13.63		14.08
Anti-dilutive stock options and warrants, excluded from per share calculations:
Shares		900		864
Average exercise price per share	$	20.26		20.75

For each earnings (loss) per share calculation reported for the third 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 third quarters and nine months ended October 2, 2004 and September 27, 2003 (in thousands):


	Quarters Ended				Nine Months Ended
	Oct 2		Sep 27		Oct 2		Sep 27
	2004		2003		2004		2003
Basic-weighted average common shares outstanding		11,114		10,668		11,076		10,662
Common equivalent shares from stock options		75		110		162		45

Diluted-weighted average common and common equivalent shares outstanding		11,189		10,778		11,238		10,707

5. Comprehensive Income (Loss)

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


	Quarters Ended						Nine Months Ended
	Oct 2			Sep 27			Oct 2			Sep 27
	2004			2003			2004			2003
Net income (loss)	$	(1,716	)		(20,591	)		280			(34,639	)
Other comprehensive income (loss):
Foreign currency translation adjustment		772			(310	)		(702	)		5,924
Change in the value of investment securities available for sale		—			65			—			65

Comprehensive loss	$	(944	)		(20,836	)		(422	)		(28,650	)

6. Trade Accounts Receivable

Trade accounts receivable include the following (in thousands):


	Oct 2		Dec 31
	2004		2003
Amounts billed	$	49,745		58,146
Unbilled revenues under long-term contracts		25,307	<

Table of Contents

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Table of Contents

Table of Contents

Table of Contents

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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 6. Exhibits			21
SIGNATURES			22
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 AND CFO