EMS Technologies, Inc. (ELMG)

Q2 2010 Earnings Call Transcript

August 4, 2010 9:30 am ET

Executives

Neil Mackay – President and CEO

Gary Shell – SVP, CFO and Treasurer

Analysts

Richard Valera – Needham & Company

Michael Ciarmoli – Boenning & Scattergood

Chris Quilty – Raymond James & Associates

Mark Jordan – Noble Financial

John Powers – Millbrook Capital

Bob Jackson [ph]

Presentation

Operator

Good day ladies and gentlemen, and welcome to EMS Technologies second quarter 2010 earnings release call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. (Operator instructions) At this time, it is my pleasure to turn the floor over to your host, President and CEO of EMS Technologies, Neil Mackay. Sir, the floor is yours.

Neil Mackay

Thank you, Anthony. I thank you all for joining us on this EMS second quarter earnings call. I am Neil Mackay, as Anthony said, and the company’s Chief Executive Officer, and joining me on the call today is Gary Shell, our Chief Financial Officer.

But before we go further, any statements made during the course of this call regarding product expectations, program opportunities and schedules, and future financial results are forward-looking statements. Actual events and results could of course differ materially. I refer you to the statement of Risk Factors in our Annual Report on Form 10-K for the year ending December 31, 2009, and to our press release. These documents identify important factors that could cause such a variance.

Our remarks will also include certain non-GAAP measures of financial performance. Please refer to our press release, which is available on the company’s website at the Press Room page for a discussion of any non-GAAP measures. During the course of the call, we will take questions from participants. Under SEC rules, we cannot provide material information in subsequent private settings, but we will continue this public call as needed to respond to appropriate questions.

We will begin today’s call with a review of the financial results from our Chief Financial Officer, Gary Shell. Gary, over to you.

Gary Shell

Thanks Neil. Well, as reported this morning, we had revenues in the second quarter of this year of $88.5 million, and net earnings of $4.2 million or $0.28 a share one non-GAAP reporting basis excluding acquisition related items. These results were a sharp improvement over the first quarter of this year, when we reported revenues of $82.9 million, and net earnings of $1 million, or $0.07 a share also on a non-GAAP basis.

EBITDA, adjusted to exclude acquisition items increased to $11.1 million in the second quarter from $7.3 million in the first quarter. The growth in Q2 revenues over Q1 was due to renewed activity in LXE markets, especially North America. In the year over year comparison, LXE’s Q2 revenues were also higher, but this benefit to the company’s top line was more than offset by decreases in aviation revenue levels that began with the market slowdown in the second half of ’09, and in defense revenues after a major program was completed late last year.

The real story, the improved profitability from Q1 to Q2 this year was the result of strong execution and cost reductions throughout the company, and a more favorable product mix, including healthy order intake from military aviation and Global Tracking markets. In the year-over-year comparison, consolidated operating income and adjusted EBITDA were both higher as a percentage of revenues in 2010 versus 2009. Better execution, lower cost, more favorable product mix, all helped LXE, and our Defense & Space businesses earned higher operating profits as a percentage of sales.

Aviation’s profitability predictably decreased with the lower revenues of 2010 compared with 2009. SG&A was comparable with the first quarter, but lower than the 2009 level. This improvement reflects the benefit of our ongoing plan to achieve cost reductions throughout the company. R&D spend was generally comparable with the recent previous quarters, although slightly less than the first quarter as certain product related initiatives neared completion. All of our businesses have plans to increase their efforts on specific new product developments, and as a result we expect the quarterly R&D spend to increase in the second half of the year and be around the 7% of revenue level.

Turning briefly to the balance sheet, the company’s cash level decreased $9 million during the quarter to approximately $45 million, mainly due to 2 significant cash outlays that totaled $16 million. The first was the payment of a previously announced settlement of arbitration related to discontinued operations, and the second was payment of an earn out for one of our 2009 acquisitions. We also used about $1 million net cash from operations in the second quarter due to growth in receivables and inventories associated with the jump in revenues in Q2. As a result, our debt at the end of the second-quarter increased $11 million to approximately $39 million.

However, cash flow from ops following the close of the quarter has already allowed us to pay the debt back down by some $5 million. Total debt still represents leverage of well less than one times annualized adjusted EBITDA, and our financial position remains very strong.

Those conclude my comments on the Q2 financials.

Neil Mackay

Thank you Gary. The second-quarter performance marked a major step forward in our strategy to bring what we call a new EMS. As I told you when I first started this job late last year, one of the main elements of our plan for a new EMS was to improve our profitability, especially at our legacy businesses, LXE and Defense & Space.

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