UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
Commission file number 0-6072
EMS TECHNOLOGIES, INC.
| Georgia | 58-1035424 | |
|
|
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| (State or other jurisdiction of incorporation or organization) |
(IRS Employer ID Number) |
660 Engineering Drive
Norcross, Georgia 30092
(770) 263-9200
Registrant’s Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on August 6, 2003:
| Class | Number of Shares | |
|
|
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| Common Stock, $.10 par Value | 10,664,267 |
AVAILABLE INFORMATION
EMS Technologies, Inc. makes available free of charge, on or through its website at www.ems-t.com, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
EMS Technologies, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
| Quarters Ended | Six Months Ended | ||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net sales |
$ | 64,381 | 82,870 | 130,917 | 153,309 | ||||||||||||
Cost of sales |
54,188 | 56,106 | 98,985 | 102,054 | |||||||||||||
Selling, general and administrative
expenses |
16,721 | 14,952 | 31,490 | 29,156 | |||||||||||||
Research and development expenses |
6,710 | 7,537 | 13,044 | 14,188 | |||||||||||||
Operating (loss) income |
(13,238 | ) | 4,275 | (12,602 | ) | 7,911 | |||||||||||
Non-operating (expense) income, net |
(265 | ) | 55 | (343 | ) | (11 | ) | ||||||||||
Foreign exchange gain |
1,724 | 200 | 1,996 | 484 | |||||||||||||
Interest expense |
(860 | ) | (972 | ) | (1,656 | ) | (1,809 | ) | |||||||||
Earnings (loss) before income taxes |
(12,639 | ) | 3,558 | (12,605 | ) | 6,575 | |||||||||||
Income tax expense |
(1,431 | ) | (1,067 | ) | (1,443 | ) | (1,972 | ) | |||||||||
Net earnings (loss) |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | ||||||||||
Net earnings (loss) per share: |
|||||||||||||||||
Basic |
$ | (1.32 | ) | 0.24 | (1.32 | ) | 0.44 | ||||||||||
Diluted |
$ | (1.32 | ) | 0.23 | (1.32 | ) | 0.43 | ||||||||||
Weighted average number of shares: |
|||||||||||||||||
Basic |
10,658 | 10,527 | 10,658 | 10,486 | |||||||||||||
Diluted |
10,658 | 10,802 | 10,658 | 10,734 | |||||||||||||
See accompanying notes to interim consolidated financial statements.
2
EMS Technologies, Inc.
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 11,293 | 12,430 | |||||||
Trade accounts receivable |
84,861 | 101,828 | ||||||||
Inventories |
46,766 | 41,003 | ||||||||
Deferred income taxes |
1,693 | 1,693 | ||||||||
Total current assets |
144,613 | 156,954 | ||||||||
Property, plant and equipment: |
||||||||||
Land |
3,843 | 3,450 | ||||||||
Building and leasehold improvements |
21,593 | 20,512 | ||||||||
Machinery and equipment |
91,333 | 81,516 | ||||||||
Furniture and fixtures |
7,080 | 6,751 | ||||||||
Total property, plant and equipment |
123,849 | 112,229 | ||||||||
Less accumulated depreciation and amortization |
68,631 | 60,821 | ||||||||
Net property, plant and equipment |
55,218 | 51,408 | ||||||||
Investment in SkyBridge LLP |
17,909 | 17,909 | ||||||||
Deferred income taxes – non-current |
1,875 | 1,780 | ||||||||
Accrued pension asset |
3,019 | 2,739 | ||||||||
Intangible assets, net |
3,294 | 3,499 | ||||||||
Goodwill, net |
13,526 | 13,526 | ||||||||
Other assets |
7,195 | 8,487 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
See accompanying notes to interim consolidated financial statements.
3
EMS Technologies, Inc.
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Current installments of long-term debt |
$ | 38,946 | 33,920 | |||||||
Accounts payable |
31,796 | 35,734 | ||||||||
Accrued compensation |
6,058 | 7,297 | ||||||||
Accrued retirement costs |
1,421 | 2,511 | ||||||||
Accrued post-retirement benefits |
3,423 | 2,767 | ||||||||
Deferred service revenue |
5,191 | 4,108 | ||||||||
Other liabilities |
2,965 | 3,212 | ||||||||
Total current liabilities |
89,800 | 89,549 | ||||||||
Long-term debt, excluding current installments |
18,678 | 20,768 | ||||||||
Total liabilities |
108,478 | 110,317 | ||||||||
Stockholders’ equity: |
||||||||||
Preferred stock of $1.00 par value per share.
Authorized 10,000,000 shares; none issued |
— | — | ||||||||
Common stock of $.10 par value per share.
Authorized 75,000,000 shares;
issued and outstanding 10,658,000 in 2003
and 2002 |
1,066 | 1,066 | ||||||||
Additional paid-in capital |
60,867 | 60,867 | ||||||||
Accumulated other comprehensive income (loss) |
413 | (5,821 | ) | |||||||
Retained earnings |
75,825 | 89,873 | ||||||||
Total stockholders’ equity |
138,171 | 145,985 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
See accompanying notes to interim consolidated financial statements.
4
EMS Technologies, Inc.
| Six Months Ended | ||||||||||||
| June 28 | June 29 | |||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings (loss) |
$ | (14,048 | ) | 4,603 | ||||||||
Adjustments to reconcile net earnings to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
5,799 | 5,725 | ||||||||||
Deferred income taxes |
(95 | ) | — | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Trade accounts receivable |
23,421 | (2,254 | ) | |||||||||
Inventories |
(2,756 | ) | (4,069 | ) | ||||||||
Non-trade foreign government receivable |
3,045 | (2,398 | ) | |||||||||
Accounts payable |
(10,247 | ) | (758 | ) | ||||||||
Income taxes payable |
(199 | ) | 2,214 | |||||||||
Accrued costs, deferred revenue and other current liabilities |
(1,286 | ) | (1,071 | ) | ||||||||
Other |
414 | 349 | ||||||||||
Net cash provided by operating activities |
4,048 | 2,341 | ||||||||||
Cash flows used in investing activities: |
||||||||||||
Purchase of property, plant and equipment |
(5,455 | ) | (8,790 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from new term debt |
— | 2,446 | ||||||||||
Repayments of term debt |
(930 | ) | (1,272 | ) | ||||||||
Net increase in revolving debt |
963 | 4,317 | ||||||||||
Proceeds from exercise of stock options, net of withholding |
— | 1,097 | ||||||||||
Net cash provided by financing activities |
33 | 6,588 | ||||||||||
Net change in cash and cash equivalents |
(1,374 | ) | 139 | |||||||||
Effect of exchange rates on cash |
237 | (615 | ) | |||||||||
Cash and cash equivalents at beginning of period |
12,430 | 11,777 | ||||||||||
Cash and cash equivalents at end of period |
$ | 11,293 | 11,301 | |||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid for interest |
$ | 1,657 | 1,880 | |||||||||
Cash paid for income taxes |
453 | 117 | ||||||||||
5
Non-Cash Investing and Financing:
In April 2002, the Company acquired Ottercom Ltd., a leading provider of Inmarsat communication terminals located in Tewkesbury, UK. Ottercom Ltd. products include critical components for EMS SATCOM’s high-speed aeronautical data products. The company, now called EMS SATCOM UK, Ltd., operates as a unit of the Company’s SATCOM segment. Management believes that this acquisition will help strengthen the Company’s presence in global mobile Internet/e-mail access and communications, and will enable the Company to broaden its wireless product offerings and in-house development capability.
To accomplish this transaction, EMS issued 81,245 new shares of its common stock (valued at $1.9 million) and assumed liabilities totaling approximately $1.2 million. No goodwill was recognized in this transaction; rather, the $3.1 million total of net assets acquired was recorded as an intangible asset on the balance sheet. This intangible represents the value of Ottercom Ltd.’s satellite communications technologies, intellectual property and product designs. This intangible will be amortized over an estimated useful life of 6 years.
See accompanying notes to interim consolidated financial statements.
6
EMS Technologies, Inc.
Notes to Interim Consolidated Financial Statements (Unaudited)
| 1. | Basis of Presentation | |
| The interim consolidated financial statements include the accounts of EMS Technologies, Inc. and its wholly-owned subsidiaries LXE Inc. and EMS Technologies Canada, Ltd. (collectively, “the Company”). In the opinion of management, the interim consolidated financial statements reflect all normal and recurring adjustments necessary for a fair presentation of results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain prior period financial statement balances have been reclassified to conform to the current period’s classification. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. | ||
| — Stock Option Plans | ||
| Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which permits entities to recognize as expense, over the vesting period, the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123. | ||
| The Company has adopted SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” including the interim reporting requirements. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value method to measure stock-based compensation (in thousands, except net earnings per share): |
| Quarters Ended | Six Months Ended | ||||||||||||||||
| Jun 28 | Jun 29 | Jun 28 | Jun 29 | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net earnings (loss): |
|||||||||||||||||
As reported |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | ||||||||||
Less: Stock-based employee compensation
expense determined under the fair value method, net of tax |
(486 | ) | (676 | ) | (1,076 | ) | (1,115 | ) | |||||||||
Pro forma |
$ | (14,556 | ) | 1,815 | (15,124 | ) | 3,488 | ||||||||||
Basic net earnings (loss) per share: |
|||||||||||||||||
As reported |
$ | (1.32 | ) | 0.24 | (1.32 | ) | 0.44 | ||||||||||
Pro forma |
$ | (1.37 | ) | 0.17 | (1.42 | ) | 0.33 | ||||||||||
Diluted net earnings (loss) per share: |
|||||||||||||||||
As reported |
$ | (1.32 | ) | 0.23 | (1.32 | ) | 0.43 | ||||||||||
Pro forma |
$ | (1.37 | ) | 0.17 | (1.42 | ) | 0.32 | ||||||||||
7
| 2. | Derivative Financial Instruments | |
| The Company uses derivative financial instruments (forward exchange contracts) to hedge currency fluctuations in future cash flows denominated in foreign currencies, thereby limiting the Company’s risk that would otherwise result from changes in exchange rates. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into derivative financial instruments for trading or speculative purposes. | ||
| SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, requires the Company to recognize all derivatives on the balance sheet at fair value. Under SFAS No. 133, certain of the Company’s routine long-term contracts to deliver Space & Technology products are considered to be derivative instruments, because these contracts create long-term obligations for non-U.S. customers to pay the Company’s Canadian subsidiary in U.S. dollars. Changes in the fair values of these embedded derivatives are included in current earnings. | ||
| The derivative activity as reported in the Company’s financial statements during the second quarters and six months ended was (in thousands): |
| Quarters Ended | Six Months Ended | |||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net asset (liability) for derivatives, beginning of
period |
$ | 893 | 142 | (246 | ) | (166 | ) | |||||||||||
Sales: |
||||||||||||||||||
Gain in value of embedded derivatives |
12 | — | 100 | 159 | ||||||||||||||
Foreign exchange gain (loss) on derivative
instruments: |
||||||||||||||||||
Gain (loss) in value on derivative instruments
that do not qualify as hedging instruments |
814 | (217 | ) | 1,689 | (68 | ) | ||||||||||||
Matured foreign exchange contracts |
(634 | ) | (50 | ) | (458 | ) | (50 | ) | ||||||||||
Net statement of operations gain (loss) from
changes in value of derivative instruments |
192 | (267 | ) | 1,331 | 41 | |||||||||||||
Net asset (liability) for derivatives, end of period |
$ | 1,085 | (125 | ) | 1,085 | (125 | ) | |||||||||||
8
| All of the foreign currency contracts currently in place will expire by the end of the fourth quarter of 2003. | ||
| 3. | Earnings Per Share | |
| Basic earnings per share is the per share allocation of income available to common stock-holders based only on the weighted average number of common shares actually outstanding during the period. Diluted earnings per share represents the per share allocation of income attributable to common stockholders based on the weighted average number of common shares actually outstanding plus all dilutive potential common shares outstanding during the period. | ||
| The Company has granted stock options that are potentially dilutive to basic earnings per share, summarized as follows (shares in thousands): |
| June 28 | June 29 | ||||||||
| 2003 | 2002 | ||||||||
Dilutive stock options, included in earnings
per share calculations: |
|||||||||
Shares |
286 | 1,603 | |||||||
Average price per share |
$ | 11.83 | 15.74 | ||||||
Anti-dilutive stock options, excluded from
per share calculations: |
|||||||||
Shares |
1,818 | 395 | |||||||
Average price per share |
$ | 17.61 | 23.81 | ||||||
| For each earnings per share calculation reported for the second quarters and first six-month periods of 2003 and 2002, the numerators were the same as reported in the statement of operations. Following is a reconciliation of the denominator for basic and diluted earnings per share calculations for the second quarters and six months ended June 28, 2003 and June 29, 2002 (in thousands): |
| Quarters Ended | Six Months Ended | |||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Basic-weighted average common shares
outstanding |
10,658 | 10,527 | 10,658 | 10,486 | ||||||||||||
Common equivalent shares from stock options |
— | 275 | — | 248 | ||||||||||||
Diluted-weighted average common and common
equivalent shares outstanding |
10,658 | 10,802 | 10,658 | 10,734 | ||||||||||||
9
| 4. | Comprehensive Income (Loss) | |
| Following is a summary of comprehensive income (loss) (in thousands): |
| Quarters Ended | Six Months Ended | |||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net income (loss) |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||
Foreign currency translation adjustment |
3,004 | 1,937 | 6,234 | 2,207 | ||||||||||||||
Other than temporary impairment of
investment security available for sale |
155 | — | — | — | ||||||||||||||
Comprehensive income (loss) |
$ | (10,911 | ) | 4,428 | (7,814 | ) | 6,810 | |||||||||||
| 5. | Trade Accounts Receivable | |
| Trade accounts receivable include the following (in thousands): |
| June 28 | Dec 31 | ||||||||
| 2003 | 2002 | ||||||||
Amounts billed |
$ | 58,991 | 61,969 | ||||||
Unbilled revenues under long-term contracts |
31,765 | 47,878 | |||||||
Customer advanced payments |
(3,328 | ) | (6,912 | ) | |||||
Allowance for doubtful accounts |
(2,567 | ) | (1,107 | ) | |||||
Trade accounts receivable, net |
$ | 84,861 | 101,828 | ||||||
| 6. | Inventories | |
| Inventories include the following (in thousands): |
| June 28 | Dec 31 | ||||||||
| 2003 | 2002 | ||||||||
Parts and materials |
$ | 32,751 | 27,073 | ||||||
Work in process |
10,345 | 9,569 | |||||||
Finished goods |
3,670 | 4,361 | |||||||
Inventories, net |
$ | 46,766 | 41,003 | ||||||
10
| 7. | Interim Segment Disclosures | |
| The Company is organized into five reportable segments: Space & Technology/Atlanta, Space & Technology/Montreal, LXE, EMS Wireless and SATCOM. Each segment is separately managed and comprises a range of products and services that share distinct operating characteristics. The Company evaluates each segment primarily upon operating profit. | ||
| The Space & Technology segments manufacture custom-designed, highly engineered hardware for use in advanced communications. The Space & Technology/Atlanta segment primarily serves the defense market, while the Space & Technology/Montreal segment provides products for the commercial satellite market. Orders in both these segments typically involve development and production schedules that can extend a year or more; and most revenues are recognized under percentage-of-completion long-term contract accounting. Hardware is sold to prime contractors or systems integrators rather than to end-users. | ||
| The LXE segment manufactures wireless local area networks (“LAN”) products for use mainly in logistics. 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 EMS Wireless segment manufactures antennas and repeaters for PCS/cellular communications systems. The manufacturing cycle for each order is generally just a few days, and revenues are generally 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 SATCOM segment manufactures antennas and other hardware for satellite communications systems. The manufacturing cycle for most orders is generally just a few days, and revenues are recognized upon shipment of hardware. The SATCOM segment also has orders that involve development and production schedules that can extend a year or more, and these revenues are recognized under percentage-of-completion long-term contract accounting. Hardware is marketed to third parties that incorporate their products and services with the Company’s hardware for delivery to end-users. |
11
| Following is a summary of the Company’s interim segment data (in thousands): |
| Quarters Ended | Six Months Ended | |||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenues: |
||||||||||||||||||
Space & Technology/Atlanta |
$ | 10,945 | 11,778 | 23,089 | 23,485 | |||||||||||||
Space & Technology/Montreal |
(3,689 | ) | 20,131 | 4,427 | 35,846 | |||||||||||||
LXE |
24,250 | 21,911 | 46,349 | 41,796 | ||||||||||||||
EMS Wireless |
15,306 | 14,928 | 24,112 | 27,661 | ||||||||||||||
SATCOM |
11,207 | 8,836 | 21,789 | 15,141 | ||||||||||||||
Other |
6,362 | 5,286 | 11,151 | 9,380 | ||||||||||||||
Total |
$ | 64,381 | 82,870 | 130,917 | 153,309 | |||||||||||||
Operating income (loss): |
||||||||||||||||||
Space & Technology/Atlanta |
$ | 802 | 515 | 1,869 | 1,384 | |||||||||||||
Space & Technology/Montreal |
(18,032 | ) | 732 | (20,067 | ) | 1,501 | ||||||||||||
LXE |
1,641 | 590 | 2,981 | 1,283 | ||||||||||||||
EMS Wireless |
1,547 | 1,749 | 1,677 | 2,683 | ||||||||||||||
SATCOM |
820 | 881 | 2,354 | 1,721 | ||||||||||||||
Other |
(16 | ) | (192 | ) | (1,416 | ) | (661 | ) | ||||||||||
Total |
$ | (13,238 | ) | 4,275 | (12,602 | ) | 7,911 | |||||||||||
Net earnings (loss): |
||||||||||||||||||
Space & Technology/Atlanta |
$ | 434 | 215 | 1,003 | 638 | |||||||||||||
Space & Technology/Montreal |
(16,637 | ) | 518 | (18,509 | ) | 746 | ||||||||||||
LXE |
922 | 709 | 1,722 | 973 | ||||||||||||||
EMS Wireless |
880 | 1,044 | 955 | 1,555 | ||||||||||||||
SATCOM |
552 | 415 | 1,812 | 1,113 | ||||||||||||||
Other |
(169 | ) | (145 | ) | (1,337 | ) | (586 | ) | ||||||||||
Corporate |
(52 | ) | (265 | ) | 306 | 164 | ||||||||||||
Total |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | |||||||||||
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
Assets: |
||||||||||
Space & Technology/Atlanta |
$ | 40,291 | 52,009 | |||||||
Space & Technology/Montreal |
77,370 | 86,906 | ||||||||
LXE |
63,127 | 67,152 | ||||||||
EMS Wireless |
25,624 | 21,277 | ||||||||
SATCOM |
27,508 | 23,261 | ||||||||
Other |
6,364 | 5,185 | ||||||||
Corporate |
6,365 | 512 | ||||||||
Total |
$ | 246,649 | 256,302 | |||||||
Goodwill: |
||||||||||
LXE |
$ | 9,982 | 9,982 | |||||||
EMS Wireless |
3,544 | 3,544 | ||||||||
Total |
$ | 13,526 | 13,526 | |||||||
12
| 8. | Acquisition | |
| In April 2002, the Company acquired Ottercom Ltd., a leading provider of Inmarsat communication terminals located in Tewkesbury, UK. Ottercom Ltd. products include critical components for EMS SATCOM’s high-speed aeronautical data products. The company, now called EMS SATCOM UK, Ltd., operates as a unit of the Company’s SATCOM segment. Management believes that this acquisition will help strengthen the Company’s presence in global mobile Internet/e-mail access and communications, and will enable the Company to broaden its wireless product offerings and in-house development capability. | ||
| To accomplish this transaction, EMS issued 81,245 new shares of its common stock (valued at $1.9 million) and assumed liabilities totaling approximately $1.2 million. No goodwill was recognized in this transaction; rather, the $3.1 million total of net assets acquired was recorded as an intangible asset on the balance sheet. This intangible represents the value of Ottercom Ltd.’s satellite communications technologies, intellectual property and product designs. This intangible will be amortized over an estimated useful life of 6 years. | ||
| 9. | Warranty Liability | |
| The Company provides a limited warranty for each of its products. The basic warranty periods vary from one to five years, depending upon the type of product. For certain products, customers can purchase warranty coverage for specified additional periods. | ||
| The Company records a liability for the estimated costs to be incurred under warranties. The amount of this liability is based upon historical, as well as expected, rates of warranty claims. The warranty liability is periodically reviewed for adequacy and adjusted as necessary. Following is a reconciliation of the aggregate product warranty liability for the quarter and six months ended June 28, 2003 (in thousands): |
| Quarter Ended | ||||
| June 28 2003 | ||||
Balance at March 29, 2003 |
$ | 1,437 | ||
Accruals for warranties issued during the period |
243 | |||
Settlements made during the period |
(70 | ) | ||
Balance at June 28, 2003 |
$ | 1,610 | ||
| Six Months Ended | ||||
| June 28 2003 |
||||
Balance at December 31, 2002 |
$ | 1,418 | ||
Accruals for warranties issued during the period |
500 | |||
Settlements made during the period |
(308 | ) | ||
Balance at June 28, 2003 |
$ | 1,610 | ||
13
| 10. | Pro-Forma Consolidated Financial Statements for Discontinued Operations |
EMS Technologies, Inc.
Pro-Forma Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
The following summary comparative results are presented on a pro forma basis to reflect the effect of discontinued operations treatment, which will be adopted in the third quarter of 2003 subsequent to the Company’s recent adoption of a plan to sell its Space & Technology/Montreal commercial space division.
| Quarters Ended | Six Months Ended | |||||||||||||||||
| June 28 | June 29 | June 28 | June 29 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net sales |
$ | 68,070 | 62,739 | 126,490 | 117,622 | |||||||||||||
Operating income |
4,794 | 3,543 | 7,465 | 6,410 | ||||||||||||||
Earnings before income taxes |
3,535 | 2,772 | 5,672 | 5,460 | ||||||||||||||
Earnings from continuing operations |
2,567 | 1,973 | 4,461 | 3,857 | ||||||||||||||
Earnings (loss) from discontinued
operations |
(16,637 | ) | 518 | (18,509 | ) | 746 | ||||||||||||
Net earnings (loss) |
$ | (14,070 | ) | 2,491 | (14,048 | ) | 4,603 | |||||||||||
Net earnings (loss) per share: |
||||||||||||||||||
Diluted from continuing operations |
$ | 0.23 | 0.17 | 0.40 | 0.33 | |||||||||||||
Diluted from discontinued operations |
(1.55 | ) | 0.06 | (1.72 | ) | 0.10 | ||||||||||||
Diluted earnings (loss) per share |
$ | (1.32 | ) | 0.23 | (1.32 | ) | 0.43 | |||||||||||
14
| 10. | Pro-Forma Consolidated Financial Statements for Discontinued Operations, continued |
EMS Technologies, Inc.
Pro-Forma Consolidated Balance Sheets (Unaudited)
(in thousands)
The Company’s following summary comparative balance sheets are presented on a pro forma basis to reflect the effect of discontinued operations treatment, which will be adopted in the third quarter of 2003 subsequent to the Company’s recent adoption of a plan to sell its Space & Technology/ Montreal commercial space division.
| June 28 | Dec 31 | |||||||||
| 2003 | 2002 | |||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 11,293 | 12,430 | |||||||
Trade accounts receivable |
69,545 | 72,139 | ||||||||
Inventories |
37,478 | 32,994 | ||||||||
Deferred income taxes |
1,693 | 1,693 | ||||||||
Total current assets |
120,009 | 119,256 | ||||||||
Net property, plant and equipment |
38,036 | 35,967 | ||||||||
Goodwill, net |
13,526 | 13,526 | ||||||||
Assets of discontinued operations |
63,393 | 75,825 | ||||||||
Other assets |
11,685 | 11,728 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Current installments of long-term debt |
$ | 38,946 | 33,920 | |||||||
Liabilities of continuing operations |
38,386 | 38,049 | ||||||||
Liabilities of discontinued operations |
12,468 | 17,580 | ||||||||
Total current liabilities |
89,800 | 89,549 | ||||||||
Long-term debt, excluding current installments |
18,678 | 20,768 | ||||||||
Total liabilities |
108,478 | 110,317 | ||||||||
Total stockholders’ equity |
138,171 | 145,985 | ||||||||
| $ | 246,649 | 256,302 | ||||||||
15
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and related notes included in Item 1 of Part 1 of this quarterly report and the audited consolidated financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2002.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which often require the judgment of management in the selection and application of certain accounting principles and methods. We consider the following to be critical to an understanding of our financial statements because their application requires significant judgment, and because differences, between actual future events and the expectations on which these judgments were based, can have significant effects on our financial results reported for future periods.
Revenue recognition on long-term contracts
Revenue recognition for fixed-price, long-term contracts in the two Space & Technology segments, and in the SATCOM segment, is a critical accounting policy involving significant management estimates. These segments’ long-term contracts use the ratio of cost-incurred to total-estimated-cost, as the measure of performance that determines how much revenue should be recognized. The calculation of total-estimated-cost relies on engineering estimates of the cost to complete the contract, with allowances for identifiable risks and uncertainties. These engineering estimates are frequently reviewed and updated. However, unforeseen problems can occur to substantially reduce the rate of future revenue recognition in relation to costs incurred.
Most of the Space & Technology segments’ contracts involve development of new or unproven applications of technology. Due to technological uncertainties, 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 estimate the future expected levels of scope of work and likely contract value changes to determine the appropriate level of current revenue associated with current costs incurred. Actual future changes may vary from expected changes, resulting in a reduction (or increase) in revenues recognized in future periods.
Accounting for government research incentives
Our accrual of research incentives from the Canadian government is a critical accounting policy involving management estimates for our Space & Technology/Montreal segment. These incentives are in the form of a cash reimbursement for a portion of certain qualified research expenditures. Incentives are recorded as a reduction of cost of sales, because the underlying research efforts primarily apply to development of technological capabilities for specific business opportunities. For the six months ended June 28, 2003, total incentives earned were approximately $1.3 million, compared with $2.2 million for the six months
16
ended June 29, 2002. We have established procedures to identify qualified costs and to submit appropriate claims for reimbursement; all of these claims are subject to financial and scientific audits by the Canadian government concerning whether certain expenses qualified for incentive programs. Although there have historically been no significant disallowances of previously accrued incentives that resulted from these audits, such disallowances in the future would have an unfavorable effect on our statement of operations.
Evaluation of long-lived assets for impairment
All long-lived assets on the balance sheet are periodically reviewed for impairment. To test recoverability, we estimate the cash flows expected to be recognized by long-lived assets under several different scenarios, including the potential sale of assets, as well as continuing to hold the assets under several different kinds of business conditions. No long-lived assets were determined to be impaired as of June 28, 2003.
Just after the close of the second quarter of 2003, the Company adopted a plan to sell its Space & Technology/Montreal commercial space division. The group of long-lived assets expected to be sold included plant and equipment, long-term inventory, and the Company’s interest in SkyBridge LLP, which was among the assets originally acquired with this division in 1999 and which will enable this division to participate in the proposed development and implementation of a satellite network to provide high-data-rate wireless services. Based on our assessment of market conditions, and in consultation with our investment advisors, we expect to recognize a charge to continued operations in the third quarter equal to the anticipated loss upon the sale of the Space & Technology/Montreal division. We have preliminarily estimated that this charge could approach $20 million, although the actual charge to be recognized may vary depending upon market conditions and further analysis.
Establishment of reserves for deferred income tax assets
It has been management’s expectation that in the future our Canadian operations would earn more than enough research-related tax benefits each year to offset any Canadian federal tax liability for any given year. As a result, we have reserved substantially all the net deferred tax assets associated with these research-related tax benefits (totaling approximately $17 million at June 28, 2003), because they are unlikely to be realized. These net deferred tax assets are expected to be sold as part of the assets of the Company’s Space & Technology/Montreal division.
17
Results of Operations
Net Sales
Consolidated net sales decreased to $64.4 million in the second quarter of 2003, compared with $82.9 million in the second quarter of 2002. For the first six months, sales decreased to $130.9 million in 2003, compared with $153.3 million for the comparable period in 2002. The most significant decrease affecting both the second quarter and the first six months was in our Space & Technology/Montreal (“S&T/Montreal”) segment. S&T/Montreal mainly serves the commercial space markets, which have been experiencing very difficult conditions. This segment’s revenues decreased $23.8 million from the same quarter in the prior year. This decrease includes a $14.0 million reduction in revenue for the estimated financial effects of key-supplier delays and related technical problems on a commercial satellite program, after consideration of the status of negotiations for additional funding with the customer and appropriate government agency.
Net Sales and Operating Income (Loss) by Segment
Our segment net sales and operating income (loss) were as follows (in thousands):
| Quarters Ended | ||||||||||
| June 29 | June 29 | |||||||||
| 2003 | 2002 | |||||||||
Net sales: |
||||||||||
Space & Technology/Atlanta |
$ | 10,945 | 11,778 | |||||||
Space & Technology/Montreal |
(3,689 | ) | 20,131 | |||||||
LXE |
24,250 | 21,911 | ||||||||
EMS Wireless |
15,306 | 14,928 | ||||||||
SATCOM |
11,207 | 8,836 | ||||||||
Other |
6,362 | 5,286 | ||||||||
Total |
$ | 64,381 | 82,870 | |||||||
Operating income (loss): |
||||||||||
Space & Technology/Atlanta |
$ | 802 | 515 | |||||||
Space & Technology/Montreal |
(18,032 | ) | 732 | |||||||
LXE |
1,641 | 590 | ||||||||
EMS Wireless |
1,547 | 1,749 | ||||||||
SATCOM |
820 | 881 | ||||||||
Other |
(16 | ) | (192 | ) | ||||||
Total |
$ | (13,238 | ) | 4,275 | ||||||
18
Our segment net sales and operating income (loss) were as follows (in thousands):
| Six Months Ended | ||||||||||
| June 29 | June 29 | |||||||||
| 2003 | 2002 | |||||||||
Net sales: |
||||||||||
Space & Technology/Atlanta |
$ | 23,089 | 23,485 | |||||||
Space & Technology/Montreal |
4,427 | 35,846 | ||||||||
LXE |
46,349 | 41,796 | ||||||||
EMS Wireless |
24,112 | 27,661 | ||||||||
SATCOM |
21,789 | 15,141 | ||||||||
Other |
11,151 | 9,380 | ||||||||
Total |
$ | 130,917 | 153,309 | |||||||
Operating income (loss): |
||||||||||
Space & Technology/Atlanta |
$ | 1,869 | 1,384 | |||||||
Space & Technology/Montreal |
(20,067 | ) | 1,501 | |||||||
LXE |
2,981 | 1,283 | ||||||||
EMS Wireless |
1,677 | 2,683 | ||||||||
SATCOM |
2,354 | 1,721 | ||||||||
Other |
(1,416 | ) | (661 | ) | ||||||
Total |
$ | (12,602 | ) | 7,911 | ||||||
Space & Technology/Atlanta: The Space & Technology/Atlanta (“S&T/Atlanta”) segment primarily serves defense markets. S&T/Atlanta sales for the second quarter and first six months of 2003 decreased compared with the same periods in 2002 due to the timing of anticipated orders.
Space & Technology/Montreal: The S&T/Montreal segment primarily serves commercial space markets. S&T/Montreal sales for the second quarter and first six months decreased substantially in comparison with the same periods in 2002. This unfavorable comparison was broadly related to continuing difficult conditions in commercial space communications markets, and specifically to a $14.0 million reduction in revenue for the estimated financial effect of delays by a key supplier and related technical problems on a commercial satellite program. This reduction was based on management’s assessment of the situation at June 28, 2003, but due to reliance on a key supplier and the technical, schedule and contractual challenges of this program, it is uncertain whether additional reductions may be required in the remainder of 2003 or beyond. We expect that difficult market conditions in commercial space will persist in 2003.
19
LXE: LXE net sales increased for the second quarter and first six months of 2003 compared with the same periods in 2002 due to higher international revenues, particularly from increased hardware and service revenues in our European markets and from the effects of a stronger euro.
EMS Wireless: Net sales in our EMS Wireless segment increased in the second quarter of 2003 compared with 2002, with an important factor being the timing of major system build-outs in 2003 by certain U.S. customers. Net sales in this segment for the first six months of 2003 decreased compared with the same period in 2002, due to a broad slowdown in capital spending in telecommunications markets that particularly affected the first quarter of 2003.
We are uncertain whether the market for base station antennas will continue to improve during the remainder of 2003, but we are seeking to generate additional revenues through introduction of new products, broader market acceptance of our repeater products and increased sales in Latin America and Eastern Europe.
SATCOM: Net sales in our SATCOM segment increased for both the second quarter and first six months of 2003 compared with the same periods in 2002. These increases are primarily the result of sales to defense customers – especially the U.S. military – which continued to augment their capabilities in the second quarter with high-speed terminals and aeronautical antennas.
Cost of Sales
Cost of sales, as a percentage of consolidated net sales, was 84% in the second quarter of 2003 compared with 68% in the second quarter of 2002. Cost of sales, as a percentage of consolidated net sales, was 76% in the first six months of 2003 compared with 67% in the first six months of 2002. The increase in the cost of sales percentage was mainly related to a $14.0 million reduction of revenues at the Space & Technology/Montreal segment to reflect the estimated financial effect of key-supplier delays and related technical problems on a commercial satellite program. In addition, the SATCOM segment’s cost of sales percentage was unfavorably affected by the strengthening of the Canadian dollar against the U.S. dollar, which made the segment’s cost of sales (in Canadian dollars) higher relative to sales (predominantly in U.S. dollars).
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) increased for both the second quarter and first six months of 2003 compared with the same periods in 2002. These increases included SATCOM segment expenses from the introduction of new products, as well as the unfavorable effect of a strong Canadian dollar vs. the U.S. dollar on SG&A expenses from our Canadian operations. For the first six months, the effect of these increases was partially offset by decreases of SG&A expenses in the S&T/Atlanta and EMS Wireless segments related to cost-control measures.
20
Research and Development Expenses
Research and development expenses (“R&D”) represent the cost of our internally funded efforts. Significant R&D efforts also occur under specific customer orders in the Space & Technology segments and, accordingly, are reflected in cost of sales. Consolidated R&D decreased in 2003 compared with 2002, due to reductions in internally funded R&D, as development was completed on a high-speed aeronautical terminal for SATCOM, and certain repeater products for EMS Wireless.
Foreign Exchange Gain (Loss)
We recognize foreign exchange gains and losses related to an asset or liability denominated in a foreign currency, and if applicable, any embedded derivatives. We use foreign currency forward contracts to hedge our exposure to fluctuations in the foreign currency exchange rates.
Because of U.S. dollar-denominated contracts from customers of our Canadian subsidiary, a stronger U.S. dollar against the Canadian dollar usually results in foreign exchange gains. Due to our Canadian subsidiary’s operations in the United Kingdom, a stronger Canadian dollar against the British pound usually results in foreign exchange gains. We also recognize net gains and losses from translation of the LXE European subsidiaries’ short-term intercompany liabilities (payable in U.S. dollars). These liabilities arise when the subsidiaries buy LXE products from the parent for resale in Europe. A weaker U.S. dollar against the euro usually results in foreign exchange gains.
The net foreign currency gains of $1,724,000 and $1,996,000 in the second quarter and first six months of 2003, respectively, were the result of the weaker U.S. dollar against the euro and the stronger Canadian dollar against the British pound. The net foreign currency gains of $200,000 and $484,000 for the second quarter and the first six months of 2002, respectively, were a result of the stronger euro against the U.S. dollar.
Interest Expense
Interest expense decreased for the second quarter and first six months of 2003 compared with the same periods in 2002, due to decreased average debt levels that resulted from positive cash flow and to slightly lower interest rates.
Income Tax Expense
The Company recognized an income tax expense of $1.4 million for the quarter and first six months of 2003 related to the consolidated pre-tax loss for both periods of $12.6 million. The interim effective income tax rate is based upon management’s expectations for the full year. This rate reflects an approximately 37% effective income tax rate on profits for U.S. and European operations. With the size of the second quarter loss, the Company expects to report a taxable loss for the full year 2003 for its Canadian operations; however, the Company will not recognize a significant tax benefit from this loss, because these operations are already subject to very low tax rates due to cumulative research-related credits.
21
New Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that statement, SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” This statement also amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. In addition, this statement amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for the Company’s fiscal year beginning in 2003 with earlier application encouraged. Adoption did not have a material impact on the consolidated financial statements of the Company.
In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which requires the guarantor to: (1) recognize a liability for the fair value of the “obligation to stand ready to perform” under a guarantee, and (2) provide disclosure information concerning specified other guarantees, such as product warranties. The recognition and measurement provisions of Interpretation No. 45 apply to guarantees entered into or modified after December 31, 2002, and the implementation of these provisions did not have a material impact on the Company’s consolidated financial statements. The Company has adopted the disclosure requirements of Interpretation No. 45 for specified guarantees, including product warranties, contingent consideration from a business combination, and a parent’s guarantee of a portion of a subsidiary’s debt to a third party.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The disclosures required by SFAS No. 148 are included above in Note 1 of the Notes to Interim Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” The interpretation provides guidance on consolidating variable interest entities and applies immediately to variable interests created after January 31, 2003. The interpretation requires variable interest entities to be consolidated if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties, or if
22
the equity investors lack certain specified characteristics. Adoption of Interpretation No. 46 did not have a material impact on the Company’s consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to address decisions reached by the Derivatives Implementation Group, developments in other Board projects that address financial instruments, and implementation issues related to the definition of a derivative. The Company is currently evaluating the impact that SFAS No. 149 will have on the Company’s consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect that this standard will have a significant effect on its consolidated financial statements.
Liquidity and Capital Resources
Net cash provided by operating activities was $4.0 million in the first six months of 2003, compared with net cash provided by operating activities of $2.3 million in the first six months of 2002. The main source of cash in the first six months of 2003 was the reduction in accounts receivable which includes cash receipts from large contracts in S&T/Atlanta. This was partially offset by the use of cash to decrease accounts payable and to increase inventories.
During 2003, the net increase in long-term debt was $32,000. This change included a $963,000 net increase in the balances due under revolving credit arrangements and net repayments of term debt of approximately $930,000.
At June 28, 2003, the Company had $6.3 million available for borrowing under its U.S. revolving credit agreement and $4.4 million available for borrowing under its Canadian revolving credit agreement. At June 28, 2003, the Company was either in compliance with or had received a bank waiver of compliance relating to all covenants. These credit agreements mature in 2003, and the Company expects to renew these agreements on terms that are comparable with the existing terms.
The Company has adopted a plan to sell its Space & Technology/Montreal division, and this sale is expected to be completed within twelve months. Although the terms of a potential sale are uncertain, we expect that the net proceeds of the sale will be used to reduce the Company’s debt.
The Company expects that capital expenditures in 2003 will range from $10 million to $15 million. These expenditures will be used primarily to purchase equipment that enhances capacity and productivity.
The Company’s material contractual cash commitments and material other commercial commitments have not changed significantly from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2002.
23
Management believes that cash flows from operations and borrowings available under its credit agreements will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next twelve months. To fund long-term growth, the Company may consider such measures as offerings of common stock or convertible securities, or revised long-term credit arrangements.
Risk Factors and Forward-Looking Statements
The Company has included forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding the potential for various businesses and products, and potential proceeds from the sale of the Space & Technology/ Montreal division. Actual results could differ from those statements as a result of a wide variety of factors. Such factors include, but are not limited to...
| • | uncertainties related to identifying a purchaser of the Space & Technology/Montreal division, as well as external market conditions and internal priorities and constraints that could affect a purchaser’s willingness and ability to complete the transaction on the terms and timing expected by the Company; | |
| • | economic conditions in the U.S. and abroad and their effect on capital spending in the Company’s principal markets, particularly including the markets for satellite hardware, which have declined substantially during the past two years, and markets for the Company’s PCS/cellular base station antennas and repeater products, which are difficult to predict in current circumstances; | |
| • | volatility of foreign exchange rates relative to the U.S. dollar and their effect on purchasing power by international customers, as well as the potential for realizing foreign exchange gains or losses associated with net foreign assets held by the Company; | |
| • | successful resolution of technical problems, proposed scope changes, or proposed funding changes that may be encountered on contracts; | |
| • | changes in the Company’s consolidated effective income tax rate caused by the extent to which actual levels and mix of taxable earnings among the U.S., Canada and other taxing jurisdictions may vary from our current expectations; | |
| • | successful completion of technological development programs by the Company and the effects of technology that may be developed by competitors; | |
| • | successful transition of products from development stages to an efficient manufacturing environment; | |
| • | customer response to new products and services, and general conditions in our target markets (such as logistics, PCS/cellular telephony and space-based communications); | |
| • | the availability of financing for satellite data communications systems and for expansion of terrestrial PCS/cellular phone systems; | |
| • | the extent to which terrestrial systems reduce market opportunities for space-based |
24
| broadband communications systems by providing extensive broadband Internet access on a dependable and economical basis; | ||
| • | the growth rate of demand for various mobile and high-speed data communications services; | |
| • | development of successful working relationships with local business and government personnel in connection with distribution and manufacture of products in foreign countries; | |
| • | the Company’s ability to attract and retain qualified personnel, particularly those with key technical skills; and | |
| • | the availability of sufficient additional credit or other financing, on acceptable terms, to support the Company’s expected growth. |
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
As of June 28, 2003, the Company had the following market risk sensitive instruments (in thousands):
| June 28 | |||||
| 2003 | |||||
Revolving credit loan with a U.S. bank, $10.0 million maturing in November
2003, the remainder payable on demand, variable-rate interest payable
quarterly (average rate of 3.29% at the end of the quarter) |
$ | 19,700 | |||
Revolving credit loan with a bank in Canada, no specific maturity but subject
to review at least annually, variable rate interest payable monthly (6.25% at
the end of the quarter) |
13,431 | ||||
Term installment loan with a bank in Canada, maturing in December 2005,
principal and variable-rate interest payable quarterly (6.50% at the end of
the quarter) |
2,854 | ||||
Revolving credit loan with a bank in the United Kingdom, maturing in April
2004, variable-rate interest payable monthly (5.25% at the end of the quarter) |
1,325 | ||||
Total market-sensitive debt |
$ | 37,310 | |||
25
As of June 28, 2003, the Company also had intercompany accounts that eliminate in consolidation but that are considered market risk sensitive instruments. Short-term due to (due from) Parent, payable by European and Australian subsidiaries and arising from purchase of the Parent’s products for sale, were as follows:
| Exchange Rate | |||||||||
| ($U.S. per unit of | $U.S. in thousands | ||||||||
| local currency) | (Reporting Currency) | ||||||||
Australia |
0.6663/Dollar | $ | 988 | ||||||
Belgium |
1.1430/Euro | 685 | |||||||
Italy |
1.1430/Euro | 448 | |||||||
France |
1.1430/Euro | 424 | |||||||
Sweden |
0.1245/Krona | 150 | |||||||
Germany |
1.1430/Euro | 102 | |||||||
Netherlands |
1.1430/Euro | (236 | ) | ||||||
United Kingdom |
1.6491/Pound | (1,012 | ) | ||||||
Total short-term due to parent |
$ | 1,549 | |||||||
The Company has foreign currency risks associated with forward contracts as follows (in thousands, except average contract rate):
| ($U.S.) | ||||||||||||
| Notional | Average Contract | Fair | ||||||||||
| Amount | Rate | Value | ||||||||||
Foreign currency forward exchange
contracts: |
||||||||||||
Euros (sell for U.S. dollars) |
1,500 | Euros | 1.0824 | (91 | ) | |||||||
Euros (sell for Canadian dollars) |
1,000 | Euros | 1.5950 | 42 | ||||||||
U.S. dollars (sell for Canadian dollars) |
10,500 | USD | 1.5078 | 966 | ||||||||
The Company enters into foreign currency forward contracts in order to mitigate the risks associated with currency fluctuations on future cash flows.
ITEM 4. Controls and Procedures
The Company has established and maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14). The objective of these controls and procedures is to ensure that information relating to the Company, including its consolidated subsidiaries, and required to be filed by it in reports under the Securities Exchange Act, as amended, is effectively communicated to the Company’s CEO and CFO, and is recorded, processed, summarized and reported on a timely basis.
26
The CEO and CFO have evaluated the Company’s disclosure controls and procedures within 45 days prior to the filing date of this quarterly report. Based upon this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are adequate to accomplish their objective and are functioning effectively.
Subsequent to the most recent evaluations by the CEO and CFO, there have been no significant changes in the Company’s internal controls (including corrective actions for significant deficiencies or material weaknesses) or other factors that could significantly affect these internal controls.
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Registrant’s Annual Meeting of Shareholders was held on April 25, 2003. At the Meeting, each of the following individuals was elected to serve as a member of the Board of Directors during the forthcoming year, by the vote indicated:
| Abstain or | ||||||||||||
| For | Withheld | Broker Non-Votes | ||||||||||
Hermann Buerger |
9,140,649 | 5,400 | 34,719 | |||||||||
Robert P. Crozer |
8,935,549 | 210,500 | 34,719 | |||||||||
John P. Frazee, Jr. |
7,483,597 | 1,662,452 | 34,719 | |||||||||
Alfred G. Hansen |
7,679,659 | 1,466,390 | 34,719 | |||||||||
John R. Kreick |
8,941,949 | 204,100 | 34,719 | |||||||||
Jerry H. Lassiter |
7,686,399 | 1,459,650 | 34,719 | |||||||||
John B. Mowell |
7,680,459 | 1,465,590 | 34,719 | |||||||||
Norman E. Thagard |
7,687,597 | 1,458,452 | 34,719 | |||||||||
John L. Woodward, Jr. |
9,140,649 | 5,400 | 34,719 | |||||||||
ITEM 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits — The following exhibits are filed as part of this report: |
| 3.1 | Second Amended and Restated Articles of Incorporation of EMS Technologies, Inc. effective March 22, 1999 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). |
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| 3.2 | Bylaws of EMS Technologies, Inc., as amended through March 15, 1999 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998). | |
| 31.1 | Certification of the Registrant’s Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Registrant’s Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certifications of the Registrant’s Chief Executive and Chief Financial Officers, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| (b) | Reports on Form 8-K. | ||
| On April 10, 2003, the Registrant filed a Report on Form 8K, reporting with respect to Item 9, Regulation FD Disclosure. | |||
| On April 11, 2003, the Registrant filed a Report on Form 8K, reporting with respect to Item 5, Other Events and Required FD Disclosure. | |||
| On April 24, 2003, the Registrant filed a Report on Form 8K, reporting with respect to Item 12, Results of Operations and Financial Condition. | |||
| On April 24, 2003, the Registrant filed a Report on Form 8K, reporting with respect to Item 5, Other Events and Required FD Disclosure. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EMS TECHNOLOGIES, INC | ||||||
| By: | /s/ Alfred G. Hansen | Date: | August 12, 2003 | |||
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Alfred G. Hansen President, Chief Executive Officer and Director (Principal Executive Officer) |
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| By: | /s/ Don T. Scartz | Date: | August 12, 2003 | |||
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Don T. Scartz Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
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