EMS TECHNOLOGIES INC - 10-Q Quarterly Report

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

660 Engineering Drive
Norcross, Georgia 30092
(Address of principal executive offices) (Zip 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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

The number of shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 5, 2003:

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.

EMS Technologies, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)


			Quarters Ended						Nine Months Ended

			Sep 27			Sep 28			Sep 27			Sep 28
			2003			2002			2003			2002

Net sales			$	61,536			56,521			183,343			171,038
Cost of sales				39,409			35,711			116,674			107,498
Selling, general and administrative expenses				14,304			12,551			41,531			39,053
Research and development expenses				4,438			4,725			13,896			15,202

		Operating income		3,385			3,534			11,242			9,285
Non-operating (expense) income, net				(9	)		271			(287	)		266
Foreign exchange (loss) gain				(10	)		677			(422	)		701
Interest expense				(518	)		(600	)		(1,551	)		(1,672	)

		Earnings from continuing operations before income taxes		2,848			3,882			8,982			8,580
Income tax expense				(899	)		(1,122	)		(2,874	)		(3,015	)

		Earnings from continuing operations		1,949			2,760			6,108			5,565
Discontinued operations (note 2):
	Gain (loss) from discontinued operations			(25,016	)		(1,074	)		(43,755	)		803
	Income tax benefit			2,476			280			3,008			201

		Net earnings (loss)	$	(20,591	)		1,966			(34,639	)		6,569

Earnings (loss) per share:
Basic:
	From continuing operations		$	0.18			0.25			0.57			0.53
	From discontinued operations			(2.11	)		(0.07	)		(3.82	)		0.09

		Net earnings (loss)		(1.93	)		0.18			(3.25	)		0.62

Diluted:
	From continuing operations		$	0.18			0.25			0.57			0.52
	From discontinued operations			(2.09	)		(0.07	)		(3.81	)		0.09

		Net earnings (loss)		(1.91	)		0.18			(3.24	)		0.61

Weighted average number of shares:
	Basic			10,668			10,636			10,662			10,532
	Diluted			10,778			10,806			10,707			10,754


			Sep 27		Dec 31
			2003		2002

ASSETS
Current assets:
	Cash and cash equivalents		$	9,190		12,430
	Trade accounts receivable			69,354		71,719
	Inventories			35,065		30,051
	Deferred income taxes			1,693		1,693
	Assets held for sale			44,257		77,128

		Total current assets		159,559		193,021

Property, plant and equipment:
	Land			2,126		1,988
	Building and leasehold improvements			15,012		14,835
	Machinery and equipment			73,518		65,586
	Furniture and fixtures			7,125		6,554

		Total property, plant and equipment		97,781		88,963
	Less accumulated depreciation and amortization			59,294		52,226

		Net property, plant and equipment		38,487		36,737

Deferred income taxes — non-current				1,740		1,780
Accrued pension asset				495		425
Intangible assets, net				3,114		3,499
Goodwill, net				13,526		13,526
Prepaid income taxes				3,015		—
Other assets				4,489		7,315

			$	224,425		256,303

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


			Sep 27		Dec 31
			2003		2002

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Current installments of long-term debt		$	41,749		33,783
	Accounts payable			18,634		21,038
	Accrued compensation			5,584		7,236
	Accrued retirement costs			2,108		2,511
	Accrued post-retirement benefits			560		443
	Deferred service revenue			4,926		4,108
	Liabilities related to assets held for sale			14,903		19,816
	Other liabilities			2,404		2,624

		Total current liabilities		90,868		91,559
Long-term debt, excluding current installments				15,880		18,759

		Total liabilities		106,748		110,318

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 10,691,000 in 2003 and 10,658,000 in 2002			1,069		1,066
Additional paid-in capital				61,206		60,867
Accumulated other comprehensive income (loss)				168		(5,821	)
Retained earnings				55,234		89,873

		Total stockholders’ equity		117,677		145,985

			$	224,425		256,303

EMS Technologies, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)


					Nine Months Ended

					Sep 27			Sep 28
					2003			2002

Cash flows from operating activities:
	Net earnings (loss)				$	(34,639	)		6,569
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Depreciation and amortization				6,620			5,636
		Deferred income taxes				40			1,274
		Loss (income) from discontinued operations				40,747			(1,004	)
		Changes in operating assets and liabilities:
				Trade accounts receivable		4,732			(317	)
				Inventories		(3,182	)		1,166
				Accounts payable		(2,952	)		(773	)
				Income taxes payable		972			2,832
				Accrued costs, deferred revenue and other current liabilities		(1,912	)		(1,759	)
				Other		247			(3,466	)

				Net cash provided by operating activities		10,673			10,158

Cash flows used in investing activities:
	Purchase of property, plant and equipment					(6,626	)		(6,590	)

Cash flows from financing activities:
	Repayments of term debt					(1,495	)		(1,663	)
	Net increase in revolving debt					4,138			1,974
	Proceeds from exercise of stock options, net of withholding					654			1,533

				Net cash provided by financing activities		3,297			1,844

Cash used by discontinued operations						(10,779	)		(7,266	)

				Net change in cash and cash equivalents		(3,435	)		(1,854	)
Effect of exchange rates on cash						195			(597	)
Cash and cash equivalents at beginning of period						12,430			11,777

Cash and cash equivalents at end of period					$	9,190			9,326

Supplemental disclosures of cash flow information:
			Cash paid for interest		$	2,587			2,840
			Cash paid for income taxes			2,282			149

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 has helped strengthen the Company’s presence in global mobile Internet/e-mail access and communications, and will enable the Company to continue 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.

EMS Technologies, Inc.
Notes to Interim Consolidated Financial Statements (Unaudited)

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.

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 Montreal space operations and its wireless networks healthcare operations, which are currently held for sale, as discontinued operations for all periods presented in the accompanying consolidated financial statements.

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						Nine Months Ended

		Sep 27			Sep 28			Sep 27			Sep 28
		2003			2002			2003			2002

Net earnings (loss):
	As reported	$	(20,591	)		1,966			(34,639	)		6,569
	Less: Stock-based employee compensation expense determined under the fair value method, net of tax		(475	)		(856	)		(1,753	)		(1,971	)

	Pro forma	$	(21,066	)		1,110			(36,392	)		4,598

Basic net earnings (loss) per share:
	As reported	$	(1.93	)		0.18			(3.25	)		0.62
	Pro forma		(1.97	)		0.10			(3.41	)		0.44
Diluted net earnings (loss) per share:
	As reported	$	(1.91	)		0.18			(3.24	)		0.61
	Pro forma		(1.95	)		0.10			(3.40	)		0.43

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 division based in Montreal. Also during the third quarter of 2003, EMS’s board of directors approved plans to dispose of the Company’s Atlanta-based healthcare product line. As a result, these business components were accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value upon disposal. The combined fair value adjustment was a $19 million pre-tax charge (comprising write-downs of $17 million related to assets associated with the Space & Technology/Montreal division and $2 million for the healthcare product line), with a related U.S. income tax benefit of approximately $2.9 million. The fair values upon disposal were estimated using discounted present value models.

The results of these discontinued operations for the third quarter and first nine months of 2003 and 2002 were as follows (in thousands):


		Quarters Ended						Nine Months Ended

		Sep 27			Sep 28			Sep 27			Sep 28
		2003			2002			2003			2002

Net sales		$	7,305			18,540			16,415			57,332
Expense			13,321			19,614			41,170			56,529
Valuation allowance			19,000			—			19,000			—

Earnings (loss) before income taxes			(25,016	)		(1,074	)		(43,755	)		803
Income tax benefit			2,476			280			3,008			201

	Net earnings (loss)	$	(22,540	)		(794	)		(40,747	)		1,004

The table below presents the components of the balance sheet accounts classified as current assets and liabilities related to assets held for sale as of September 27, 2003 and December 31, 2002 (in thousands):


		Sep 27		Dec 31
		2003		2002

Accounts receivable		$	12,919		30,257
Inventories			11,059		10,953
Investments			909		17,909
Property, plant and equipment			15,807		14,670
Other assets			3,563		3,339

	Total assets held for sale	$	44,257		77,128

Accounts payable		$	9,403		14,697
Long term debt			2,399		2,009
Other current liabilities			3,101		3,110

	Total liabilities related to assets held for sale	$	14,903		19,816

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 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.

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


			Quarters Ended						Nine Months Ended

			Sep 27			Sep 28			Sep 27			Sep 28
			2003			2002			2003			2002

Beginning net asset (liability) for derivatives			$	515			(247	)		(248	)		(18	)

Sales:
	Gain (loss) in value of embedded derivatives			(10	)		7			(3	)		18
Foreign exchange gain (loss) on derivative instruments:
	Gain (loss) in value on derivative instruments that do not qualify as hedging instruments			20			—			689			(240	)
	Matured foreign exchange contracts			(423	)		180			(336	)		180

		Net statement of operations gain (loss) from changes in value of derivative instruments		(413	)		187			350			(42	)

Ending net asset (liability) for derivatives			$	102			(60	)		102			(60	)

For discontinued operations, the net asset for derivatives at September 27, 2003 was $95,000.

All of the foreign currency contracts currently in place will expire by the end of the fourth quarter of 2003.

Basic earnings 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 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):


		Sep 27		Sep 28
		2003		2002

Dilutive stock options, included in earnings per share calculations:
	Shares		1,135		1,342
	Average exercise price per share	$	14.08		15.29
Anti-dilutive stock options, excluded from per share calculations:
	Shares		864		517
	Average exercise price per share	$	20.75		23.04

For each earnings per share calculation reported for the third quarters and first nine-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 third quarters and nine months ended September 27, 2003 and September 28, 2002 (in thousands):


	Quarters Ended				Nine Months Ended

	Sep 27		Sep 28		Sep 27		Sep 28
	2003		2002		2003		2002

Basic-weighted average common shares outstanding		10,668		10,636		10,662		10,532
Common equivalent shares from stock options		110		170		45		222

Diluted-weighted average common and common equivalent shares outstanding		10,778		10,806		10,707		10,754


			Quarters Ended						Nine Months Ended

			Sep 27			Sep 28			Sep 27			Sep 28
			2003			2002			2003			2002

Net income (loss)			$	(20,591	)		1,966			(34,639	)		6,569
Other comprehensive income (loss):
	Foreign currency translation adjustment			(310	)		(2,082	)		5,924			125
	Increase in the value of investment securities available for sale			65			—			65			—

		Comprehensive income (loss)	$	(20,836	)		(116	)		(28,650	)		6,694

As a result of the planned sale of the Space & Technology/Montreal operations, which is now reported in discontinued operations, the Company has four remaining reportable segments: Space & Technology/Atlanta, 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/Atlanta segment manufactures custom-designed, highly engineered hardware for use in advanced communications, primarily for the defense market. Orders in this segment 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 rugged mobile computers and wireless local area network (“WLAN”) products for use throughout the supply chain. 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 combine 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 combine their products and services with the Company’s hardware for delivery to end-users.


			Quarters Ended						Nine Months Ended

			Sep 27			Sep 28			Sep 27			Sep 28
			2003			2002			2003			2002

Net sales:
	Space & Technology/Atlanta		$	11,690			13,572			34,779			37,057
	LXE			25,555			21,065			71,904			62,861
	EMS Wireless			12,060			10,306			36,172			37,967
	SATCOM			10,941			8,052			32,730			23,193
	Other			1,290			3,526			7,758			9,960

		Total	$	61,536			56,521			183,343			171,038

Operating income (loss):
	Space & Technology/Atlanta		$	1,214			1,879			3,131			3,427
	LXE			1,922			1,197			4,985			2,754
	EMS Wireless			242			(97	)		1,967			2,734
	SATCOM			1,565			897			4,206			2,802
	Other			(1,558	)		(342	)		(3,047	)		(2,432	)

		Total	$	3,385			3,534			11,242			9,285

Net earnings (loss):
	Space & Technology/Atlanta		$	695			1,050			1,734			1,803
	LXE			1,186			583			2,969			1,748
	EMS Wireless			123			180			1,114			1,839
	SATCOM			1,279			1,184			3,306			2,426
	Other			(1,399	)		(777	)		(2,387	)		(1,802	)
	Corporate			65			540			(628	)		(449	)
	Discontinued Operations			(22,540	)		(794	)		(40,747	)		1,004

		Total	$	(20,591	)		1,966			(34,639	)		6,569


			Sep 27		Dec 31
			2003		2002

Assets:
	Space & Technology/Atlanta		$	38,219		48,304
	LXE			65,055		67,152
	EMS Wireless			24,808		21,277
	SATCOM			26,961		23,049
	Other			25,125		19,393
	Assets held for sale			44,257		77,128

		Total	$	224,425		256,303

Goodwill:
	LXE		$	9,982		9,982
	EMS Wireless			3,544		3,544

		Total	$	13,526		13,526

Company’s presence in global mobile Internet/e-mail access and communications, and will enable the Company to continue 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 is being amortized over an estimated useful life of 6 years.

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 nine months ended September 27, 2003 (in thousands):

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.

As discussed in Note 2, EMS’s Montreal commercial space operations and its healthcare product line have been classified as discontinued operations, and the net assets held for sale were written down to their estimated fair value upon disposal. The combined fair value adjustment was a $19 million pre-tax charge (comprising write-downs of $17 million related to assets associated with the Space & Technology/Montreal division and $2 million for the healthcare product line), partially offset by a related U.S. income tax benefit of approximately $2.9 million that was identified after completing further tax analysis following the Company’s initial public release of its third quarter financial results. The fair values upon disposal were estimated using discounted present value models.

In addition to the fair value adjustment, the 2003 results from discontinued operations included $6 million of losses for the third quarter and $24 million of losses for the first nine months. Essentially all of these losses were related to the Space & Technology/Montreal operations, which has experienced declining revenues due to very difficult conditions in commercial space markets. In the first nine months of 2003, Space & Technology/Montreal incurred losses of approximately $19 million on two long-term commercial space contracts, as a result of key supplier delays and unanticipated technical problems. No significant income tax benefits were accrued for these interim losses, because the Company has reserved substantially all of the various Canadian tax benefit carryforwards related to Space & Technology/Montreal until the timing of their future realization becomes more certain. The Company believes that it has recorded adequate reserves for known risks associated with its contracts, which combined with the benefits of an improved rate of new orders in the third quarter of 2003, should result in a substantially lower loss for the fourth quarter of 2003 as compared with the third quarter of 2003. However, the Space & Technology/Montreal operations could still incur further losses from unanticipated technical problems or delays.

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 for fixed-price, long-term contracts in the Company’s Space & Technology/Atlanta and SATCOM segments, as well as the Space & Technology/Montreal operations currently held for sale, 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/Atlanta and Space & Technology/Montreal 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.

Our accrual of research incentives from the Canadian government is a critical accounting policy involving management estimates for our Montreal-based operations, including the Space & Technology/Montreal operations currently held for sale. 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 nine months ended September 27, 2003, total incentives earned were approximately $1.1 million, compared with $3.9 million for the nine months ended September 28, 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.

All long-lived assets on the balance sheet are periodically reviewed for impairment. To test recoverability, we estimate the cash flows expected to result from the 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 classified as held and used were determined to be impaired as of September 27, 2003.

In the third quarter of 2003, the assets of the Space & Technology/Montreal and the healthcare product line were reclassified from “assets held and used” to “assets held for sale.” As a result, these business components were accounted for as discontinued operations, and the net assets held for sale were written down to their estimated fair value upon disposal. The combined fair value adjustment was a $19 million pre-tax charge, comprising write-downs of $17 million related to the Space & Technology/Montreal division and $2 million for the healthcare product line. The fair values upon disposal were estimated using discounted present value models.

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 September 27, 2003), because they are unlikely to be realized. These net deferred tax assets may be sold as part of the assets of the Company’s Space & Technology/Montreal division.

Consolidated net sales increased to $61.5 million in the third quarter of 2003, compared with $56.5 million in the third quarter of 2002. For the first nine months, sales increased to $183.3 million in 2003, compared with $171.0 million for the comparable period in 2002.

Our segment net sales and operating income (loss) were as follows (in thousands):


			Quarters Ended						Nine Months Ended

			Sep 27			Sep 28			Sep 27			Sep 28
			2003			2002			2003			2002

Net sales:
	Space & Technology/Atlanta		$	11,690			13,572			34,779			37,057
	LXE			25,555			21,065			71,904			62,861
	EMS Wireless			12,060			10,306			36,172			37,967
	SATCOM			10,941			8,052			32,730			23,193
	Other			1,290			3,526			7,758			9,960

		Total	$	61,536			56,521			183,343			171,038

Operating income (loss):
	Space & Technology/Atlanta		$	1,214			1,879			3,131			3,427
	LXE			1,922			1,197			4,985			2,754
	EMS Wireless			242			(97	)		1,967			2,734
	SATCOM			1,565			897			4,206			2,802
	Other			(1,558	)		(342	)		(3,047	)		(2,432	)

		Total	$	3,385			3,534			11,242			9,285

Space & Technology/Atlanta: The Space & Technology/Atlanta (“S&T/Atlanta”) segment primarily serves defense markets. For the third quarter, S&T/Atlanta net sales decreased in 2003 because the comparable 2002 period included particularly strong progress on certain defense orders. For the nine months, revenues decreased due to lower non-defense orders in 2003 compared with 2002.

LXE: For the third quarter and first nine months, LXE’s net sales in 2003 were higher than in 2002 due to stronger international revenues, particularly from increased hardware unit sales and service revenues in our European markets and from the effects of a stronger euro. In addition, 2003 domestic revenues for the third quarter and first nine months were also higher than for the same periods in 2002.

EMS Wireless: For the third quarter, EMS Wireless’ net sales increased in 2003 compared with 2002 primarily from higher sales of repeater products. For the nine months, sales decreased in 2003 compared with 2002 due to a broad slowdown in capital spending in telecommunications markets, particularly in the first quarter of 2003.

SATCOM: For the third quarter and first nine months, net sales in our SATCOM segment increased in 2003 compared with 2002 due to higher unit sales in several key product lines, including HSD aeronautical terminals and land mobile and portable terminals, as well as maritime terminals for voice and high speed data. Sales of aeronautical terminals, especially in the earlier part of 2003, benefited by demand for enhanced mobile communications capabilities for senior U.S. military commanders.

The Company’s consolidated operating income (loss) included increases in the Canada-based SATCOM segment’s costs (both in cost of sales and selling, general and administrative expenses), which were significantly higher due to the cost of introducing new products and to the foreign currency translation effect of a strengthening Canadian dollar against the U.S. dollar.

Cost of sales, as a percentage of consolidated net sales, was 64% for the interim periods of 2003, compared with 63% for the same periods in 2002. This slight increase on a consolidated basis related primarily to the effect of a stronger Canadian dollar on the costs associated with the Canada-based SATCOM segment.

Selling, general and administrative expenses (“SG&A”), as a percentage of net sales, did not change significantly for the interim periods in 2003 as compared with 2002. The increase in total expenditures for the interim periods in 2003 as compared with 2002 related to the introduction of new products from our SATCOM segment and a new product line for broadband satellite communications, as well as to the foreign currency translation effect of a stronger Canadian dollar and euro on otherwise comparable SG&A for the Company’s non-U.S. operations.

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 S&T/Atlanta segment 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.

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.

Most of our Canadian operations’ contracts are in U.S. dollars, and foreign exchange gains result from a stronger U.S. dollar against the Canadian dollar. Our Canadian operations also do a significant amount of business in the United Kingdom, and foreign exchange gains result from a stronger Canadian dollar against the British pound.

We also recognize net gains and losses from translation of the LXE European subsidiaries’ short-term intercompany liabilities, payable in U.S. dollars, from the purchase of hardware for resale in Europe. A weaker U.S. dollar against the euro usually results in foreign exchange gains for LXE.

In 2003, the net foreign currency losses of $10,000 and $422,000 in the third quarter and first nine months, respectively, were mainly the result of a weaker U.S. dollar against the Canadian dollar. In 2002, there were net foreign currency gains of $677,000 and $701,000 primarily resulting from a stronger U.S. dollar against the Canadian dollar.

Interest expense decreased for the third quarter and first nine 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.

The Company recognized an income tax expense of $899,000 for the quarter and $2.9 million for the first nine months of 2003 related to consolidated pre-tax income from continuing operations of $2.8 million and $9.0 million, respectively. The 32% interim effective income tax rate is based upon management’s expectations for the full year. This consolidated effective rate includes an approximated 37% effective income tax rate on profits for U.S. and European operations, and a considerably lower tax rate on profits from Canadian operations due to research-related tax benefits.

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 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. This statement is effective for contracts entered into or modified after June 30, 2003 except for specific hedging relationships designated after June 30, 2003. This standard has not had a significant effect on the consolidated financial statements for the Company.

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. This standard has not had a significant effect on the consolidated financial statements of the Company.

Net cash provided by operating activities was $10.7 million in the first nine months of 2003, compared with $10.2 million in the first nine months of 2002. The main source of cash in the first nine months of 2003 related to collection of certain significant accounts receivable at the S&T/Atlanta division.

During 2003, the net balance sheet increase in long-term debt was approximately $5.1 million, but only $2.6 million of this increase related to additional financing. The remaining increase of $2.5 million resulted from a foreign exchange translation adjustment.

At September 27, 2003, the Company had $6.4 million available for borrowing under its U.S. revolving credit agreement and $0.6 million available for borrowing under its Canadian revolving credit agreement. At September 27, 2003, the Company was either in compliance with or had received a bank waiver of compliance relating to all covenants. Subsequent to the end of the quarter, the Company amended its U.S. credit agreement to extend the term to August 2004 and give the lender a security interest in certain of U.S.-based assets. The Canadian credit agreement matures in 2003, and the Company expects to extend this agreement on terms that are comparable with the existing terms.

The Company has adopted plans to sell its Space & Technology/Montreal division and its healthcare product line, and these sales are expected to be completed within twelve months. Although the terms of potential sales are uncertain, we expect that a substantial portion of the net proceeds of the sales will be used to reduce the Company’s debt.

The Company expects that capital expenditures for continuing operations in 2003 will range from $9 million to $10 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.

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.

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 or healthcare product line, 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 both held and used and held for sale;

•

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 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.

As of September 27, 2003, the Company had the following market risk sensitive instruments (in thousands):


		Sep 27
		2003

Revolving credit loan with a U.S. bank, $10.0 million maturing in August 2004, the remainder payable on demand, variable-rate interest payable quarterly (average rate of 3.2% at the end of the quarter)		$	19,232
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)			17,076
Term installment loan with a bank in Canada, maturing in December 2005, principal and variable-rate interest payable quarterly (6.0% at the end of the quarter)			2,584
Revolving credit loan with a bank in the United Kingdom, maturing in April 2004, variable-rate interest payable monthly (4.5% at the end of the quarter)			1,442

	Total market-sensitive debt	$	40,334

As of September 27, 2003, the Company also had intercompany accounts that eliminate in consolidation but that are considered market risk sensitive instruments. Short-term due to the 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		0.6745	/	Aus Dollar	$	1,045
Belgium		1.1478	/	Euro		434
Italy		1.1478	/	Euro		625
France		1.1478	/	Euro		137
Sweden		0.1281	/	Krona		105
Germany		1.1478	/	Euro		206
Netherlands		1.1478	/	Euro		219

	Total short-term due to parent				$	2,771

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)	1,300	Euros		1.1407		(9	)
U.S. dollars (sell for Canadian dollars)	6,000	USD		1.3996		108
British Pounds (sell for U.S. dollars)	250	Pounds		1.6505		(2	)

The Company enters into foreign currency forward contracts in order to mitigate the risks associated with currency fluctuations on future cash flows.

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.

The CEO and CFO have evaluated the Company’s disclosure controls and procedures as of the end of the period covered in this 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.


			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)

			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 July 15, 2003, the Registrant filed a Report on Form 8-K, reporting with respect to Item 5, Other Events and Required FD Disclosure.

		On July 29, 2003, the Registrant filed a Report on Form 8-K, reporting with respect to Item 12, Results of Operations and Financial Condition.

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:	November 11, 2003

	Alfred G. Hansen
	President, Chief Executive Officer and Director (Principal Executive Officer)

By:	/s/ Don T. Scartz	Date:	November 11, 2003

	Don T. Scartz
	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


Georgia		58-1035424
(State or other jurisdiction of incorporation or organization)		(IRS Employer ID Number)


Class		Number of Shares
Common Stock, $.10 par Value		10,691,219


PART I FINANCIAL INFORMATION
PART II OTHER INFORMATION
SIGNATURES
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


		Sep 27			Dec 31
		2003			2002

Amounts billed		$	52,376			51,725
Unbilled revenues under long-term contracts			20,690			23,477
Customer advanced payments			(2,204	)		(2,376	)
Allowance for doubtful accounts			(1,508	)		(1,107	)

	Trade accounts receivable, net	$	69,354			71,719


		Sep 27		Dec 31
		2003		2002

Parts and materials		$	25,073		21,351
Work in process			5,336		4,472
Finished goods			4,656		4,228

	Inventories, net	$	35,065		30,051

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	Quarter Ended

Balance at June 28, 2003	$	1,486
Accruals for warranties issued during the period		410
Settlements made during the period		(259	)

Balance at September 27, 2003	$	1,637


	First
	Nine Months

Balance at December 31, 2002	$	1,360
Accruals for warranties issued during the period		844
Settlements made during the period		(567	)

Balance at September 27, 2003	$	1,637


(a)		Exhibits — The following exhibits are filed as part of this report: