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UNITED STATES  Washington, D.C. 20549
 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended April 3, 2004 Commission file number 0-6072 EMS TECHNOLOGIES, INC. 
  Georgia
    
    58-1035424(State or other jurisdiction of
    
    (IRS Employer ID Number)incorporation or organization)
 660 Engineering DriveNorcross, Georgia
    
    30092(Address of principal executive offices)
    
    (Zip Code)(770) 263-9200Registrant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 [  ] 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 May 7, 2004: Class
    
    Number of SharesCommon Stock, $.10 par Value
    
    
    11,078,941
 AVAILABLE INFORMATION EMS Technologies, Inc. makes available free of charge, on or through its
website at www.ems-t.com, its annual, quarterly and current reports, and any
amendments to those reports, as soon as reasonably practicable after
electronically filing such reports with the Securities and Exchange Commission.
Information contained on the Companys website is not part of this report.




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TABLE OF CONTENTS  PART IITEM 1. Financial StatementsConsolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of Cash FlowsNotes to Consolidated Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosures about Market RiskITEM 4. Controls and ProceduresPART IIITEM 6. Exhibits and Reports on Form 8-KSIGNATURESEX-3.1 2ND AMENDED & RESTATED ARTICLES OF INCORPEX-3.2 BYLAWS OF EMS TECHNOLOGIES, INC.EX-10.1 CREDIT AMENDING AGREEMENT DATED 2/1/04EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO/CFO    Table of Contents  
 PART I FINANCIAL INFORMATION 
 ITEM 1. Financial Statements 
 EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data) Quarters EndedApr 3
    
    Mar 292004
    
    2003Net sales
    
    $
    64,075
    
    
    
    55,749Cost of sales
    
    
    40,477
    
    
    
    35,254Selling, general and administrative expenses
    
    
    15,584
    
    
    
    12,730Research and development expenses
    
    
    5,574
    
    
    
    4,687Operating income
    
    
    2,440
    
    
    
    3,078Non-operating income (expense), net
    
    
    866
    
    
    
    (23
    )Foreign exchange gain (loss)
    
    
    103
    
    
    
    (37
    )Interest expense
    
    
    (638
    )
    
    
    (507
    )Earnings from continuing operations
before income taxes
    
    
    2,771
    
    
    
    2,511Income tax expense
    
    
    (887
    )
    
    
    (825
    )Earnings from continuing operations
    
    
    1,884
    
    
    
    1,686Discontinued operations (note 2):Gain (loss) from discontinued operations
    
    
    418
    
    
    
    (2,477
    )Income tax (expense) benefit
    
    
    (84
    )
    
    
    813Earnings (loss) from discontinued operations
    
    
    334
    
    
    
    (1,664
    )Net earnings
    
    $
    2,218
    
    
    
    22Earnings (loss) per share (note 4):Basic:From continuing operations
    
    $
    0.17
    
    
    
    0.16From discontinued operations
    
    
    0.03
    
    
    
    (0.16
    )Net earnings
    
    $
    0.20
    
    
    
    Diluted:From continuing operations
    
    $
    0.17
    
    
    
    0.16From discontinued operations
    
    
    0.03
    
    
    
    (0.16
    )Net earnings
    
    $
    0.20
    
    
    
    Weighted average number of shares (note 4):Basic
    
    
    11,032
    
    
    
    10,658Diluted
    
    
    11,269
    
    
    
    10,671
 See accompanying notes to interim consolidated financial statements. 2




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EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands) Apr 3
    
    Dec 312004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    12,113
    
    
    
    14,180Trade accounts receivable (note 6)
    
    
    66,203
    
    
    
    71,431Inventories (note 7)
    
    
    36,698
    
    
    
    33,509Deferred income taxes
    
    
    2,208
    
    
    
    2,208Assets held for sale (note 2)
    
    
    43,167
    
    
    
    40,059Total current assets
    
    
    160,389
    
    
    
    161,387Property, plant and equipment:Land
    
    
    1,150
    
    
    
    2,174Building and leasehold improvements
    
    
    15,083
    
    
    
    15,000Machinery and equipment
    
    
    74,115
    
    
    
    73,474Furniture and fixtures
    
    
    7,568
    
    
    
    7,318Total property, plant and equipment
    
    
    97,916
    
    
    
    97,966Less accumulated depreciation and amortization
    
    
    61,330
    
    
    
    59,485Net property, plant and equipment
    
    
    36,586
    
    
    
    38,481Deferred income taxes  non-current
    
    
    2,679
    
    
    
    2,679Intangible assets, net
    
    
    2,838
    
    
    
    3,121Goodwill
    
    
    13,526
    
    
    
    13,526Other assets
    
    
    12,475
    
    
    
    9,355$
    228,493
    
    
    
    228,549
 See accompanying notes to interim consolidated financial statements. 3




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EMS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited), continued
(in thousands, except share data) Apr 3
    
    Dec 312004
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    32,643
    
    
    
    38,056Accounts payable
    
    
    18,198
    
    
    
    18,812Accrued compensation costs
    
    
    6,539
    
    
    
    7,823Accrued retirement costs
    
    
    3,278
    
    
    
    2,637Deferred service revenue
    
    
    7,308
    
    
    
    4,730Liabilities related to assets held for sale (note 2)
    
    
    17,975
    
    
    
    17,765Other liabilities
    
    
    3,304
    
    
    
    3,147Total current liabilities
    
    
    89,245
    
    
    
    92,970Long-term debt, excluding current installments
    
    
    15,307
    
    
    
    15,537Total liabilities
    
    
    104,552
    
    
    
    108,507Stockholders equity:Preferred stock of $1.00 par value per share.Authorized 10,000,000 shares; none issued
    
    
    
    
    
    
    Common stock of $.10 par value per share.Authorized 75,000,000 shares;
issued and outstanding 11,074,000 in 2004
and 10,926,000 in 2003
    
    
    1,107
    
    
    
    1,093Additional paid-in capital
    
    
    67,489
    
    
    
    64,988Accumulated other comprehensive income
    
    
    646
    
    
    
    1,480Retained earnings
    
    
    54,699
    
    
    
    52,481Total stockholders equity
    
    
    123,941
    
    
    
    120,042$
    228,493
    
    
    
    228,549
 See accompanying notes to interim consolidated financial statements. 4




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EMS Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Three Months EndedApr 3
    
    Mar 292004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    2,218
    
    
    
    22Adjustments to reconcile net earnings to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,298
    
    
    
    2,367Deferred income taxes
    
    
    
    
    
    
    (95
    )Loss (income) from discontinued operations
    
    
    (334
    )
    
    
    1,664Gain on sale of assets
    
    
    (938
    )
    
    
    Changes in operating assets and liabilities:Trade accounts receivable
    
    
    3,658
    
    
    
    7,403Inventories
    
    
    (3,393
    )
    
    
    (1,018
    )Accounts payable
    
    
    (164
    )
    
    
    (2,212
    )Income taxes payable
    
    
    179
    
    
    
    (27
    )Accrued costs, deferred revenue and other current liabilities
    
    
    1,970
    
    
    
    (854
    )Other
    
    
    596
    
    
    
    1,640Net cash provided by operating activities
    
    
    6,090
    
    
    
    8,890Cash flows used in investing activities:Purchase of property, plant and equipment
    
    
    (1,447
    )
    
    
    (2,657
    )Cash flows from financing activities:Net decrease in revolving debt
    
    
    (4,795
    )
    
    
    (121
    )Repayment of term debt
    
    
    (565
    )
    
    
    (384
    )Proceeds from exercise of stock options, net of withholding taxes
paid
    
    
    2,515
    
    
    
    Net cash used in financing activities
    
    
    (2,845
    )
    
    
    (505
    )Operating cash used in discontinued operations
    
    
    (3,222
    )
    
    
    (8,998
    )Net change in cash and cash equivalents
    
    
    (1,424
    )
    
    
    (3,270
    )Effect of exchange rates on cash
    
    
    (643
    )
    
    
    436Cash and cash equivalents at beginning of period
    
    
    14,180
    
    
    
    12,430Cash and cash equivalents at end of period
    
    $
    12,113
    
    
    
    9,596Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    927
    
    
    
    978Cash paid for income taxes
    
    
    128
    
    
    
    156
 5




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EMS Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
April 3, 2004 and March 29, 2003 1. Basis of Presentation The consolidated financial statements include the accounts of EMS
Technologies, Inc. and its wholly-owned subsidiaries LXE Inc., EMS Holdings,
Inc. and EMS Technologies Canada, Ltd. (collectively, the Company). In the
opinion of management, the accompanying consolidated financial statements
reflect all normal and recurring adjustments necessary for a fair
presentation of results for such periods. The results of operations for any
interim period are not necessarily indicative of results for the full year.
Certain prior period financial statement balances have been reclassified to
conform to the current periods classification. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003. In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has classified the revenues, expenses and
related assets and liabilities of its Space & Technology/Montreal division,
which are currently held for sale, as discontinued operations for all
periods presented in the accompanying consolidated financial statements.  Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to
recognize as expense, over the vesting period, the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure required by SFAS No. 123. 6




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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 EndedApr 3
    
    Mar 292004
    
    2003Net earnings (loss):As reported
    
    $
    2,218
    
    
    
    22Less: Stock-based employee compensation
expense determined under the fair value
method, net of tax
    
    
    (520
    )
    
    
    (612
    )Pro forma
    
    $
    1,698
    
    
    
    (590
    )Basic net earnings (loss) per share:As reported
    
    $
    0.20
    
    
    
    Pro forma
    
    
    0.15
    
    
    
    (0.06
    )Diluted net earnings (loss) per share:As reported
    
    $
    0.20
    
    
    
    Pro forma
    
    
    0.15
    
    
    
    (0.06
    )
 2. Discontinued Operations In the third quarter of 2003, EMS announced that its Board of Directors had
approved a formal plan to sell the Companys commercial space operations
located in Montreal. During the fourth quarter of 2003, the Company completed
the sale of its healthcare product line. As a result, these business components
are accounted for as discontinued operations, and the net assets held for sale
were written down to their estimated fair value upon disposal. The fair value
of the Space & Technology/Montreal division upon disposal was estimated in
Canadian dollars using an expected present value technique and a discount rate
of 20%. A 2% change in the discount rate would cause a change in the valuation
of approximately $1.5 million. 7




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The results of these discontinued operations for the first quarter of 2004
and 2003 were as follows (in thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Net sales
    
    $
    14,778
    
    
    
    10,787Costs and expenses
    
    
    14,360
    
    
    
    13,264Earnings (loss) before income taxes
    
    
    418
    
    
    
    (2,477
    )Income tax (expense) benefit
    
    
    (84
    )
    
    
    813Net earnings (loss)
    
    $
    334
    
    
    
    (1,664
    )
 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 April 3, 2004 and December 31, 2003 (in thousands): Apr 3
    
    Dec 312004
    
    2003Accounts
receivable, net
    
    $
    11,137
    
    
    
    9,646Inventories
    
    
    4,559
    
    
    
    4,722Investments
    
    
    4,409
    
    
    
    4,409Property, plant and equipment, net
    
    
    16,483
    
    
    
    16,743Accrued pension assets
    
    
    3,135
    
    
    
    3,245Other assets
    
    
    3,444
    
    
    
    1,294Total assets held for sale
    
    $
    43,167
    
    
    
    40,059Accounts payable
    
    $
    11,723
    
    
    
    10,984Long term debt
    
    
    2,441
    
    
    
    2,573Post retirement obligations
    
    
    3,734
    
    
    
    3,709Other current liabilities
    
    
    77
    
    
    
    499Total liabilities related
to assets held for sale
    
    $
    17,975
    
    
    
    17,765
 3. Derivative Financial Instruments The Company uses derivative financial instruments (forward exchange
contracts) to hedge currency fluctuations in future cash flows denominated
in foreign currencies, thereby limiting the Companys risk that would
otherwise result from changes in exchange rates. The Company has established
policies and procedures for risk assessment and the approval, 8




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reporting and monitoring of derivative financial instrument activities. The
Company does not enter into derivative financial instruments for trading or
speculative purposes. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, requires the Company to recognize all derivatives on the
consolidated balance sheet at fair value. Under SFAS No. 133, certain of
the Companys routine long-term contracts are considered to be derivative
instruments, because these contracts create long-term obligations for
non-U.S. customers to pay the Companys Canadian subsidiary in U.S. dollars.
Changes in the fair values of these embedded derivatives are included in
current earnings. For continuing operations, the derivative activity as reported in the
Companys consolidated financial statements during the first quarters ended
2004 and 2003 was (in thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Beginning net asset (liability) for derivatives
    
    $
    108
    
    
    
    (248
    )Sales:Gain (loss) in value of embedded derivatives
    
    
    (2
    )
    
    
    1Foreign exchange gain (loss) on derivative
instruments:Gain in value of derivative instruments
that do not qualify as hedging instruments
    
    
    74
    
    
    
    155Matured foreign exchange contracts
    
    
    (98
    )
    
    
    201Net consolidated statements of
operations gain (loss) from changes in
value of derivative instruments
    
    
    (26
    )
    
    
    357Ending net asset for derivatives
    
    $
    82
    
    
    
    109
 For discontinued operations, the net liability for derivatives at April 3,
2004 was $25,000 compared to a net asset of $784,000 at March 29, 2003. All of the foreign currency contracts currently in place will expire by the
end of 2004. 4. Earnings Per Share 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. 9




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The Company has granted stock options that are potentially dilutive to basic
earnings per share, summarized as follows (shares in thousands): Apr 3
    
    Mar 292004
    
    2003Dilutive stock options, included in earnings
per share calculations:Shares
    
    
    1,320
    
    
    
    531Average exercise price per share
    
    $
    15.42
    
    
    
    13.74Anti-dilutive stock options, excluded from
per share calculations:Shares
    
    
    422
    
    
    
    1,363Average exercise price per share
    
    $
    23.31
    
    
    
    18.60
  For each earnings per share calculation reported for the first quarters of
2004 and 2003, the numerators were the same as reported in the consolidated
statements of operations. Following is a reconciliation of the denominators
for basic and diluted earnings per share calculations for the first quarters
ended April 3, 2004 and March 29, 2003 (in thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Basic-weighted average common shares outstanding
    
    
    11,032
    
    
    
    10,658Common equivalent shares from stock options
    
    
    237
    
    
    
    13Diluted-weighted average common and common
equivalent shares outstanding
    
    
    11,269
    
    
    
    10,671
 5. Comprehensive Income Following is a summary of comprehensive income (in thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Net income
    
    $
    2,218
    
    
    
    22Other
comprehensive income (loss):Foreign currency translation adjustment
    
    
    (834
    )
    
    
    3,230Change in the value of investment
securities available for sale
    
    
    
    
    
    
    (155
    )Comprehensive income
    
    $
    1,384
    
    
    
    3,097
 10




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6. Trade Accounts Receivable Trade accounts receivable include the following (in thousands): Apr 3
    
    Dec 312004
    
    2003Amounts billed
    
    $
    46,819
    
    
    
    58,146Unbilled revenues under long-term
contracts
    
    
    24,231
    
    
    
    18,610Customer advanced payments
    
    
    (3,397
    )
    
    
    (3,788
    )Allowance for doubtful accounts
    
    
    (1,450
    )
    
    
    (1,537
    )Trade accounts receivable, net
    
    $
    66,203
    
    
    
    71,431
 7. Inventories Inventories include the following (in thousands): Apr 3
    
    Dec 312004
    
    2003Parts and materials
    
    $
    23,210
    
    
    
    22,139Work in process
    
    
    6,629
    
    
    
    5,306Finished goods
    
    
    6,859
    
    
    
    6,064Inventories, net
    
    $
    36,698
    
    
    
    33,509
 8. Interim Segment Disclosures The Company has five reportable segments: Space & Technology, LXE, EMS
Wireless, SATCOM and SatNet. Each segment is separately managed and
comprises a range of products and services that share distinct operating
characteristics. The Company evaluates each segment primarily upon operating
income. The Space & Technology 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. As a result of the planned sale of the Space &
Technology/Montreal division, the results of operations and all other
financial information related to the Space & Technology/Montreal division is
reported in discontinued operations. The Space & Technology segment reflects
the results of operations and all other financial information related to the
Space & Technology/Atlanta business. 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. 11




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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. The SatNet segment manufactures ground segment equipment for the satellite
broadband communications market. The manufacturing cycle for a hub is
generally several weeks and terminals are manufactured on a shorter cycle.
Revenues are recognized upon shipment of hardware. Hardware is marketed to
operators of high-speed, two-way, multimedia access networks. Following is a summary of the Companys interim segment data (in thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Net sales:Space & Technology
    
    $
    12,984
    
    
    
    12,498Less sales to discontinued operations
    
    
    (183
    )
    
    
    (410
    )Space & Technology external sales
    
    
    12,801
    
    
    
    12,088LXE
    
    
    24,900
    
    
    
    22,099EMS Wireless
    
    
    12,210
    
    
    
    8,806SATCOM
    
    
    10,115
    
    
    
    10,582SatNet
    
    
    4,049
    
    
    
    2,220Other
    
    
    
    
    
    
    (46
    )Total
    
    $
    64,075
    
    
    
    55,749Operating income (loss):Space & Technology
    
    $
    832
    
    
    
    980LXE
    
    
    1,129
    
    
    
    1,287EMS Wireless
    
    
    115
    
    
    
    99SATCOM
    
    
    233
    
    
    
    1,511SatNet
    
    
    (70
    )
    
    
    (889
    )Other
    
    
    201
    
    
    
    90Total
    
    $
    2,440
    
    
    
    3,078
 12




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Quarters EndedApr 3
    
    Mar 292004
    
    2003Earnings (loss) from continuing
operations:Space & Technology
    
    $
    451
    
    
    
    513LXE
    
    
    668
    
    
    
    769EMS Wireless
    
    
    (29
    )
    
    
    57SATCOM
    
    
    212
    
    
    
    1,264SatNet
    
    
    (229
    )
    
    
    (821
    )Other
    
    
    (34
    )
    
    
    (51
    )Corporate
    
    
    845
    
    
    
    (45
    )Total
    
    $
    1,884
    
    
    
    1,686
  Apr 3
    
    Dec 312004
    
    2003Assets:Space & Technology
    
    $
    40,369
    
    
    
    40,157LXE
    
    
    63,678
    
    
    
    66,081EMS Wireless
    
    
    24,351
    
    
    
    25,353SATCOM
    
    
    27,833
    
    
    
    26,543SatNet
    
    
    15,966
    
    
    
    14,827Other
    
    
    1,299
    
    
    
    1,164Assets held for sale
    
    
    43,167
    
    
    
    40,059Corporate
    
    
    11,830
    
    
    
    14,365Total
    
    $
    228,493
    
    
    
    228,549Goodwill:LXE
    
    $
    9,982
    
    
    
    9,982EMS Wireless
    
    
    3,544
    
    
    
    3,544Total
    
    $
    13,526
    
    
    
    13,526
 13




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##### Table of Contents



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
quarters ended (in thousands): Apr 3
    
    Mar 292004
    
    2003Balance at beginning of quarter
    
    $
    1,977
    
    
    
    1,366Accruals for warranties issued during
the period
    
    
    166
    
    
    
    233Settlements made during the period
    
    
    (138
    )
    
    
    (239
    )Balance at end of quarter
    
    $
    2,005
    
    
    
    1,360
 14




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##### Table of Contents



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, 2003. Overview: EMS Technologies, Inc. (the Company or EMS) designs, manufactures and
markets products that are important in many kinds of wireless
communications. The Company focuses on the needs of the mobile information
user, with an increasing emphasis on broadband applications for
high-data-rate, high-capacity wireless communications. The Company is organized into five reportable business segments: Space &
Technology, LXE, EMS Wireless, SATCOM and SatNet. Each segment is separately
managed and comprises a range of products and services that share distinct
operating characteristics. However, the Company believes that one of its
competitive strengths is the technological and marketing synergy that occurs
among the segments, as well as among the Companys various product lines.
The Company believes that this synergy creates a path to broader markets for
highly advanced technologies developed for niche markets in space and
defense. EMS has its principal office in Atlanta, Georgia, and has
approximately 1,700 employees worldwide. Over 70% of the Companys
employees are directly involved in engineering or manufacturing activities. Following is a summary of significant factors affecting the Company in the
first quarter of 2004: For continuing operations:  
    
    First quarter consolidated sales were higher but operating profits
were lower in 2004 than 2003 due to a combination of factors: (1) less
favorable foreign exchange rates in 2004 increased the reported cost of
our international selling, marketing and administrative efforts; and
(2) we launched a planned increase in research and development
expenditures beginning in the second half of 2003 and continuing into
2004.  
    
    The rates of orders in 2004 for our EMS Wireless antennas for
wireless telecommunications and our SATCOM systems for mobile
communications have been somewhat below our expectations; however,
subject to the uncertainties and risk factors discussed elsewhere in
this report, we believe that the rates of orders for these segments
will significantly increase during the remainder of the year.  
    
    Non-operating income included a $938,000 pre-tax gain for the sale
of unutilized real estate in Montreal. 15




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##### Table of Contents



For discontinued operations:
    
    We continue to pursue our plans to sell our Space &
Technology/Montreal division, and communicate with potential
purchasers.  
    
    These discontinued operations reported their first profitable
quarter in over a year due mainly to higher revenues, and also to
accrual of government incentives for research. Discontinued Operations Our Space & Technology/Montreal division and healthcare product line have
been classified as discontinued operations. During the fourth quarter of
2003, we completed the sale of our healthcare product line, and the net
assets held for sale of the Space & Technology/Montreal division were
written down to their estimated fair value upon disposal. The fair value of
the Space & Technology/Montreal division upon disposal was estimated in
Canadian dollars using an expected present value technique and a discount
rate of 20%. A 2% change in the discount rate would cause a change in the
valuation of approximately $1.5 million. The Company continues to pursue
its plan of sale for the Space & Technology/Montreal division, and
communications are ongoing with several potential purchasers. Under the
present circumstances, management believes that it is appropriate to
continue accounting for the Space & Technology/Montreal division as
discontinued operations. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S., which often require
the judgment of management in the selection and application of certain
accounting principles and methods. We consider the following policies to be
the most critical to understanding the judgments that are involved and the
uncertainties that could affect our results of operations, financial
condition and cash flows. Revenue recognition on long-term contracts 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 division 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 (percentage of completion accounting). The
determination 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. As of
April 3, 2004, the Company had recognized a cumulative total of $24.2
million in revenues under percentage of completion accounting, but which
revenues were unbilled as of that date due to the billing milestones
specified in the respective customer contracts. During the preceding year, two large contracts in discontinued operations
that were accounted for under percentage of completion accounting
experienced technical and supplier difficulties, resulting in increases to
the estimated cost at completion totaling over $38 million. The Company has
provided reserves for identified risks that could cause cost 16




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increases in the future. These contracts are technically challenging and
there is a risk that further unforeseen difficulties could cause increases
to the cost at completion that exceed the Companys provisions, resulting in
further losses associated with these contracts. Accounting for government research incentives Our accrual of provincial research incentives is a critical accounting
policy involving management estimates for our Montreal-based operations,
including the Space & Technology/Montreal division 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 three months ended April 3, 2004, total
incentives earned were approximately $1.3 million, compared with $621,000
for the three months ended March 29, 2003. 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 consolidated 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 April 3, 2004. In the third quarter of 2003, the assets of the Space & Technology/Montreal
division 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
fair value of the Space & Technology/Montreal division upon disposal was
estimated in Canadian dollars using an expected present value technique and
a discount rate of 20%. A 2% change in the discount rate would cause a
change in the valuation of approximately $1.5 million. Establishment of reserves for deferred income tax assets It is managements current expectation that our Canadian operations will
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 $33 million at April
3, 2004), because they are unlikely to be realized. However, this reserve
may be reduced  resulting in an income tax benefit to a future consolidated
statement of operations  if: (1) our profitability in Canada increases,
which would increase the tax liability incurred in future years, or (2) the
level of our qualified research in Canada decreases, which would 17




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lower the tax benefits earned in future years. Results of Operations Net Sales Consolidated net sales increased to $64.1 million in the first quarter of
2004, compared with $55.7 million in the first quarter of 2003. All
divisions had net increases from the prior year except for our SATCOM
division. The largest increases were in EMS Wireless, LXE and SatNet. Net Sales and Operating Income (Loss) by Segment Our segment net sales and operating income (loss) were as follows (in
thousands): Quarters EndedApr 3
    
    Mar 292004
    
    2003Net sales:Space & Technology
    
    $
    12,801
    
    
    
    12,088LXE
    
    
    24,900
    
    
    
    22,099EMS Wireless
    
    
    12,210
    
    
    
    8,806SATCOM
    
    
    10,115
    
    
    
    10,582SatNet
    
    
    4,049
    
    
    
    2,220Other
    
    
    
    
    
    
    (46
    )Total
    
    $
    64,075
    
    
    
    55,749Operating income (loss):Space & Technology
    
    $
    832
    
    
    
    980LXE
    

    
    1,129
    
    
    
    1,287EMS Wireless
    
    
    115
    
    
    
    99SATCOM
    
    
    233
    
    
    
    1,511SatNet
    
    
    (70
    )
    
    
    (889
    )Other
    
    
    201
    
    
    
    90Total
    
    $
    2,440
    
    
    
    3,078
 Space & Technology:This segment primarily serves defense markets, however,
net sales in 2004 were higher than in the same period in 2003 due to
increased revenues from a program to supply antennas for commercial
broadband communications. The gross margin as a percentage of sales
increased due to productivity gains on several current programs. LXE:Net sales in 2004 were higher than in 2003 due to stronger
international revenues, particularly from increased hardware unit sales and
service revenues in our European markets. Management attributes the growth
of LXEs international revenues to the competitive strength of our products
performance, service and support, as well as to the continued strong
purchasing power of foreign currencies against the U.S. dollar. In
addition, 18




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2004 domestic revenues for the first quarter were also somewhat higher than
for the same periods in 2003. EMS Wireless:Net sales increased in 2004 compared with 2003 as a result of
stronger unit sales of base station antennas mainly in the U.S. This revenue
growth reflected broad improvement in the level of system expansion activity
by wireless service providers in 2004 compared with early 2003. SATCOM:Net sales decreased slightly in 2004 compared with 2003, because a
large order that was planned for the first quarter (potential Q1 revenue
contribution of more than $1 million for an emergency management terminal)
was temporarily delayed by our customer; we expect to receive and ship this
order during 2004. The Canadian SATCOM segments reported costs (both in cost of sales and
selling, general and administrative expenses) increased in 2004 compared
with 2003 due to the unfavorable translation effect of a stronger Canadian
dollar against the U.S. dollar. SatNet:Our start-up venture to provide DVB-RCS standard hubs and terminals
for broadband communications via satellite increased unit sales of all
products in 2004 compared with 2003. Our sales volumes for both systems and
terminals more than doubled in the first quarter of 2004, compared with the
first quarter of 2003. As a result of reaching the $4 million net sales
level for the first quarter of 2004, SatNet was very close to achieving
breakeven results at the operating income line. Cost of Sales Cost of sales, as a percentage of consolidated net sales, was 63% for the
first quarter of both 2004 and 2003, although the product mix changed
significantly between the two periods. The unfavorable effect on the
cost-of-sales percentage of changes at SATCOM (stronger Canadian dollar in
2004) and at EMS Wireless (higher-cost mix of products sold in 2004) were
offset by the favorable effect of changes at Space & Technology
(productivity gains in 2004) and SatNet (higher sales volume in 2004 to
absorb fixed manufacturing costs). Selling, General and Administrative Expenses Selling, general and administrative expenses (SG&A), as a percentage of
net sales, were 24% and 23% for the first quarter of 2004 and 2003,
respectively. The increase in SG&A expenses for the first quarter in 2004,
as compared with 2003, related to the foreign currency translation effect of
stronger international currencies versus the U.S. dollar for our non-U.S.
operations, as well as to expenditures for the introduction of new products
for our SATCOM and EMS Wireless segments. 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 segment and, accordingly, are
reflected in cost of sales. Consolidated R&D increased in 2004 compared with
2003, due to planned increases in internally funded R&D efforts to develop
new products for LXE, SATCOM and Space & Technology. 19




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Non-Operating Income (Expense) Non-operating income for the first quarter of 2004 includes a $938,000
pre-tax gain for the sale of unutilized real estate in Montreal. 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 in contracts denominated in a foreign currency. We use foreign
currency forward contracts to reduce our exposure to fluctuations in foreign
currency exchange rates. Most of our Canadian operations customer 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 2004, the net foreign currency gains of $103,000 in the first quarter
were mainly the result of a stronger U.S. dollar against the Canadian
dollar. In 2003, there were net foreign currency losses of $37,000 because
the U.S. dollar was then weaker against the Canadian dollar. Interest Expense Interest expense increased for the first quarter of 2004 compared with the
same period in 2003 due to higher interest rates in 2004, the effect of
which was partially offset by lower average debt levels that resulted from
positive cash flow. Income Tax Expense The Company recognized a 32% effective income tax rate in 2004 based upon
managements expected taxable income associated with various tax
jurisdictions for the full year compared to 33% for the first quarter of
2003. The Companys U.S. and European operations have an effective rate of
approximately 36%, and our Canadian operations have a much lower effective
tax rate due to research-related tax benefits. The effective rate is
subject to change during the remainder of the year, as managements
expectations may change for the taxable income associated with various tax
jurisdictions. Discontinued Operations The first quarter pre-tax results from the Companys discontinued operations
(Space & Technology/Montreal) totaled a $418,000 gain in 2004 compared with
a $2.5 million loss in 2003. These improved results reflected a
much-improved backlog in 2004, which enabled higher first quarter revenues
($14.8 million in 2004 compared with $8.1 million in 2003). Other favorable
factors in 2004 were better contract performance, and accrual of additional 20




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government incentives for qualified research. To remain profitable
throughout the remainder of 2004, these operations must continue to increase
their backlog. Liquidity and Capital Resources During the first quarter of 2004, net cash provided by continuing operating
activities was approximately $6 million, with the most significant factors
being the LXE divisions profitable operations and additional long-term
service agreements. Another significant source of cash to the Company was
proceeds from the exercise of employee stock options. We used most of this
positive cash flow to reduce long-term debt by approximately $5 million. At April 3, 2004, the Company had $15.1 million available for borrowing
under its U.S. revolving credit agreement and $575,000 available for
borrowing under its Canadian revolving credit agreement. At April 3, 2004,
the Company was either in compliance with or had received a bank waiver of
compliance relating to all credit agreement covenants. The Company has agreed to apply the proceeds from the potential sale of its
Space & Technology/Montreal division to reduce outstanding indebtedness
under its revolving debt facility. During the first quarter of 2004, the
Company further amended its Canadian credit agreement, including pricing, as
a condition of obtaining a covenant waiver; at current borrowing levels, the
annual cost of this facility would increase by approximately $250,000.
Although there can be no assurance the Company will be able to successfully
refinance or restructure its credit agreements, during 2004, the Company
expects to enter into negotiations to refinance or restructure its existing
U.S. and Canadian credit agreements, with one of the main objectives being
to modify the covenant structure so that quarterly waivers will no longer be
needed from its Canadian lender. The Company expects that capital expenditures for continuing operations in
2004 will range from $9 million to $11 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, 2003. 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 public or private offerings of common stock or convertible
securities. 21




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##### Table of Contents



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
concerning the potential for various businesses and products. Actual results
could differ materially from those suggested in any forward-looking
statements as a result of a 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 effect a
purchasers willingness and ability to complete the transaction on
terms and timing expected by the Company (in the event a suitable
purchaser is not identified, the Space & Technology/Montreal division
would, during 2004, be reclassified back into continuing operations,
and prior-year financial statements would be restated to reflect that
status);
    
    economic conditions in the U.S. and abroad and their effect on
capital spending in the Companys principal markets;
    
    volatility of foreign exchange rates relative to the U.S. dollar
and their effect on purchasing power by international customers, and
on the gross margin on products manufactured outside the U.S. but sold
mainly to U.S. customers;
    
    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 taxable earnings in the U.S.,
Canada and other taxing jurisdictions may vary from expected taxable
earnings;
    
    successful completion of technological development programs by
the Company and their affects of technology that may be developed by,
and patent rights that may be obtained 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 succeed in providing
extensive broadband Internet access on a dependable and economical
basis;
    
    the demand growth for various mobile and high-speed data
communications services;
    
    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. Additional information concerning these and other potential risk factors is
included in Item 1 of the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. 22




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk As of April 3, 2004, the Company had the following market risk sensitive
instruments (in thousands): Revolving credit loan with a bank in Canada, no specific maturity but
subject to review at least annually, variable-rate interest payable
monthly (6.0% at the end of the quarter)
    
    $
    17,668Revolving credit loan with a U.S. bank, maturing in August 2004,
variable-rate interest payable quarterly (average rate of 4.17% at the
end of the quarter)
    
    
    10,000Term 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)
    
    
    2,128Revolving credit loan with a bank in the United Kingdom, no specific
maturity but subject to review in April 2005, variable-rate interest
payable
monthly (5.0% at the end of the quarter)
    
    
    1,453Total market-sensitive debt
    
    $
    31,249
 23




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##### Table of Contents



As of April 3, 2004, the Company also had intercompany accounts that eliminate
in consolidation but that are considered market risk sensitive instruments.
Short-term due to/(from) the parent, payable/(receivable) by international
subsidiaries arising from purchase of the parents products for sale and from
cash advances to the parent, were as follows: Exchange Rate($U.S. per unit of
    
    $U.S. in thousandslocal currency)
    
    (Reporting Currency)Canada
    
    
    0.7601
    /
    Dollar
    
    $
    1,889Australia
    
    
    0.7580
    /
    Dollar
    
    
    989Belgium
    
    
    1.2134
    /
    Euro
    
    
    469France
    
    
    1.2134
    /
    Euro
    
    
    287Netherlands
    
    
    1.2134
    /
    Euro
    
    
    159Italy
    
    
    1.2134
    /
    Euro
    
    
    153United Kingdom
    
    
    1.8315
    /
    Pound
    
    
    115Germany
    
    
    1.2134
    /
    Euro
    
    
    106Singapore
    
    
    0.5965
    /
    Dollar
    
    
    87Sweden
    
    
    0.1314
    /
    Krona
    
    
    63Total short-term due to parent
    
    
    
    
    
    
    $
    4,317
 The Company has foreign currency risks associated with forward contracts
as follows (in thousands, except average contract rate): Average
    
    ($U.S.)Notional
    
    Contract
    
    FairAmount
    
    Rate
    
    ValueForeign currency forward exchange
contracts:Continuing Operations:Euros (sell for U.S. dollars)
    
    
    700
    
    
    Euros
    
    
    1.2166
    
    
    $
    2Australian dollars (sell for U.S. dollars)
    
    
    400
    
    
    Dollars
    
    
    0.7273
    
    
    
    (12
    )Swedish kronas (sell for U.S. dollars)
    
    
    260
    
    
    Kronas
    
    
    0.1299
    
    
    
    U.S. dollars (sell for Canadian dollars)
    
    
    5,500
    
    
    USD
    
    
    1.3384
    
    
    
    83$
    73Discontinued Operations:Euros (sell for Canadian dollars)
    
    
    1,000
    
    
    Euros
    
    
    1.6427
    
    
    $
    1British Pounds (sell for Canadian dollars)
    
    
    2,090
    
    
    Pound
    
    
    2.3174
    
    
    
    (66
    )$
    (65
    )
 The Company enters into foreign currency forward contracts in order to mitigate
the risks associated with currency fluctuations on future cash flows. 24




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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. 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. During the three months ended April 3, 2004, there was no change in our
internal control over financial reporting (as defined in Rule 13a  15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. 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. 25




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##### Table of Contents



PART II OTHER INFORMATION 
 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, 1999.3.2
    
    
    Bylaws of EMS Technologies, Inc., as amended through
March 15, 1999.10.1
    
    
    Credit Amending Agreement, dated February 1, 2004,
amending the Letter, dated July 24, 2002, governing the credit
facility between EMS Technologies Canada, Ltd., a consolidated
subsidiary of the Company, and Canadian Imperial Bank of
Commerce.31.1
    
    
    Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Chief Financial Officer pursuant
to Section 302 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 March 1, 2004, the Registrant filed a Report on Form 8-K, reporting
with respect to Item 12, Results of Operations and Financial
Condition.
 26




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##### Table of Contents



SIGNATURES Pursuant to the requirements 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:
    
    May 11, 2004Alfred G. HansenPresident, Chief Executive Officer
and Director (Principal Executive Officer)By:
    
    /s/ Don T. Scartz
    
    Date:
    
    May 11, 2004Don T. ScartzExecutive Vice President, Chief FinancialOfficer and Treasurer
(Principal Financial and
Accounting Officer)
 27