EMS Technologies, Inc. ( ELMG)

Q3 2010 Earnings Call

November 5, 2010 9:30 am ET

Executives

Neil Mackay – President, Chief Executive Officer

Gary Shell – Chief Financial Officer

Analysts

Chris Quilty – Raymond James

Richard Valera – Needham & Company

Presentation

Operator

Good day ladies and gentlemen and welcome to your EMS Technologies Q3 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. If you should require assistance throughout the conference, please press star, zero.

At this time, it is my pleasure to turn the floor over to your host, Neil Mackay, President and CEO. Sir, the floor is yours.

Neil Mackay

Thank you, Anthony, and good morning to you all. Thanks for joining us on this EMS third quarter earnings call. As Anthony said, I’m Neil Mackay, 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 this 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 and Form 10-K for the year ended 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 discussion on any non-GAAP measures.

During this course of this call, we will take questions from participants. Under SEC rules, we cannot provide our material information in subsequent private settings but we will continue this public call as needed to respond to appropriate questions.

We’ll begin today’s call with a review of the financial results from our CFO, Gary Shell. Then I will follow up with important insight into our vision for EMS and the remarkable progress we have made over the past year.

Now over to you, Gary.

Gary Shell

Thanks, Neil. As reported this morning, we had revenues in the 2010 third quarter of 85.7 million, operating income of 4.3 million, and net earnings of 3.5 million or $0.23 a share. Adjusted EBITDA was 9.5 million.

Operating income and adjusted EBITDA were down slightly from our strong second quarter this year but still sharply ahead of the comparable quarter one year earlier when we reported revenues of 85.7 million, operating income of 2.6 million, and net earnings from continuing ops of 6 million, or $0.39 per share. Net earnings and earnings per share in 2009 included an unusually favorable 4.1 million of income tax benefits related to research credits and to the benefit of tax losses in certain jurisdictions.

Third quarter consolidated revenues were comparable year-over-year with the growth in LXE revenues offsetting the decrease in defense and space revenues which resulted from that division’s completion of a major development program in 2009. Gross profit percentage improved in 2010 compared with 2009, not only at the consolidated level but also for each of our business segments. There were several factors that contributed to this improvement including higher revenues at LXE to absorb overhead and ongoing programs of cost reduction and control throughout the organization.

Cash flow was also very strong for the third quarter with over 16 million of cash from operations. The cash generated by EBITDA was supplemented by excellent cash management by our businesses, especially in collection of receivables.

SG&A was comparable with the second quarter this year but above the Q3 level one year earlier which had lower performance-related variable expenses, such as commissions and incentive comp. SG&A also continues to benefit from an ongoing plan to achieve cost reductions and synergies there as well.

The R&D spend was also generally comparable with recent previous quarters. Our businesses are increasing their efforts on specific new product developments, and as a result we expect the quarterly R&D spend to increase in the fourth quarter of the year and be around 7% of revenues.

Now for a quick look at the results of our segments. LXE had its second consecutive quarter with revenues in excess of 35 million and adjusted EBITDA in excess of 3 million. The demand for our LXE rugged terminals remains strong, particularly in North America.

Aviation continues to experience strong demand in military markets, but the commercial market recovery is coming along more slowly.

Defense and space had another solid quarter of program execution, achieving an EBITDA margin of almost 14%; but the D&S backlog is down with order activity slowed by budget uncertainties. However, we are pursuing significant opportunities that could add to this backlog in Q4.

Revenue and profits as global tracking were down in the third quarter due to search and rescue projects that slipped into the fourth quarter and temporarily lower tracking revenues in a key military application. These were timing issues and we believe that the fourth quarter revenues will be significantly higher.

Turning briefly to the balance sheet, the Company’s cash level increased $5 million during the quarter to nearly 50 million. As a result of our cash generated by operations in the third quarter, we were able to reduce our debt by 9 million in the quarter to under 30 million. Total debt represents leverage of well less than one times annualized EBITDA. Our financial position remains very strong.

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