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Executives

Paul Domorski – President and CEO

Gary Shell – SVP, CFO and Treasurer

Neil Mackay – EVP and COO

Analysts

Chris Quilty – Raymond James

Rich Valera – Needham & Company

Mark Jordan – Noble Financial Group

EMS Technologies, Inc. (ELMG) Q1 2009 Earnings Call Transcript May 1, 2009 9:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the EMS Technologies first quarter 2009 earnings release conference call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. (Operator instructions).

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

Paul Domorski

Thank you, Judith, and good morning, everyone. Thank you for joining EMS on today's first quarter 2009 earnings call. Joining me today are Dr. Neil Mackay, our Chief Operating Officer, and Gary Shell, our Chief Financial Officer.

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 or 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 ended December 31, 2008, and to our press release. These documents identify important factors that could cause such a variance.

During the course of this 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. After I provide my views on the quarter, then I will turn it over to Gary for his comments, and then we will answer any questions you might have. Thank you for your continued interest in EMS Technologies.

This morning EMS Technologies reported first quarter 2009 revenues of $92.3 million and net earnings of $2.3 million or $0.15 per share on a non-GAAP reporting basis. For the quarter, revenues grew by 22% compared with the first quarter of 2008. EBITDA was up, was $8 million, up 10% from the same period in 2008. Earnings-per-share for the quarter was $0.15 and included nearly $5 million operating loss and restructuring charge due to significantly lower revenues in LXE.

As noted in the press release, earnings-per-share excludes certain acquisition related charges and a foreign currency exchange charge related to the funding of the Satamatics transaction in pound sterling totaling $0.35 per share. Cash flow for the quarter was a positive $15 million, which included the previously announced settlement of the Inmarsat handheld contract. Consistent with last quarter, the first quarter results were led by continued strong results in the company's communication and tracking and defense and space businesses.

Before I talk more about that, I would like to begin discussing LXE, our mobility logistics business. LXE struggled in the first quarter of the year as did most other companies in its sector due to weakness in the overall economy. While the first quarter is traditionally a slower quarter, revenues were lower than they had been in any quarter since 2003. A major a number of major orders in North America were delayed at the end of the quarter as customers delayed necessary purchases. Lower sales resulted in a $4 million loss in LXE. As a result of that unfortunate fact, we took cost reduction actions late in the quarter to further restructure this business resulting in an additional $1.1 million charge that will generate about $6 million in annualized savings. This will further lower the breakeven point.

The focus of these cost reduction efforts very indirect expenses, so as not to impact customers or product quality. As you recall, in 2008, despite the economic difficulties, LXE was a net positive margin contributor to the company. Cost control and an increased focus on the indirect channel will improve LXE's competitive position during this challenging time for the auto ID industry. Despite these difficulties, there are positives. LXE grew its international distributor base in the first quarter, expanding channel relationships into Latin America, Asia and Europe.

A major international order was closed with Autovision, the leader for car inspections in France for $2 million. A silver lining is that we anticipate orders that did not close in the first quarter will close in the second quarter, which will provide sales momentum heading into the middle of the year. Product feedback remains good. Customers understand the quality, utility and the rugged nature of the product they are getting when they buy from LXE. ROIs remains strong even in these difficult times.

In April, Stephen Newell, who previously was VP of Sales for SATCOM was named the new General Manager of the LXE business unit. Steve joined EMS in 2003 and had an outstanding track record of growth throughout his career. I'm confident Steve will reshape the business, will grow it, and will improve its profitability.

Communications and tracking comprising all of the company's aeronautical and asset tracking products, including EMS SATCOM and our recently acquired product lines, EMS Formation, EMS Sky Connect, and EMS Satamatics. This segment now represents just under half of the company from a revenue perspective and contributed an impressive $8.5 million in EBITDA. During the first quarter, EMS benefited from the continued adoption of in-flight connectivity by US airlines, led by Aircell's Gogo in-flight Internet service, which relies on EMS for two thirds of its cabin wireless infrastructure. Aircell has committed to a thousand install of Gogo this year.

American Airlines recently announced it will deploy this service across its entire domestic fleet by 2010. Similar large-scale deployments are proceeding with Virgin America and Delta, which passed the 100th plane rollout milestone. Now we are upgrading six planes each night. In March, the FCC granted system integrator Row 44 special temporary authority to operate up to 12 aircraft with satellite service for in-flight testing. This provides Alaska Airlines and Southwest which both US EMS wireless access points on board license to begin monetizing their WiFi service.

Also during the quarter, EMS received a significant contract for LiveTV's Kiteline service to provide rugged data storage for up to a thousand aircraft. Shipments are scheduled to begin in May. Airline trials continued around the world with nearly 40 at various stages. Panasonic talked about their ambitious in-flight entertainment plans in last week's Space News.

With Inmarsat's third I-4 satellite in position and operational over the Pacific, since February, SwiftBroadband service is now offered worldwide. As a result, EMS' OEM partners have more reasons to place orders for newly developed and released SwiftBroadband hardware and software products for their corporate and air transport clients.

In the business aviation market, EMS' AMT-50 sales to the top aircraft OEMs continued during the first quarter. Sales were strong for the company's CNX family of airborne network routers and accelerator products, complementing installations of voice and high speed data terminals, HSD-400s, 440s, HSD-710s, all by key avionics OEMs. EMS shipped the first prototypes of the air to ground route for Aircell's high speed Internet system to serve business jet customers with commercial production scheduled to begin in the third quarter. Furthermore, EMS is under contract with Rockwell Collins to begin developing Airbus' new electronic flight bag interface, which will enable the cockpit crew to use a laptop docking station to view flight routes and other navigational information.

Iridium based hardware sales and airtime were solid in the first quarter, especially among medivac firms in offshore oil fleet operators. Volume shipments in the Mission Management Unit 2 integrated dialer and text messaging terminal occurred during the quarter. It is the smallest and most fully featured cockpit dialer in the market, allowing voice and text communications to and from the aircraft. EMS is well positioned as ships and defense budgets move forward towards increased investment in the intelligence, surveillance and reconnaissance markets. During the quarter, EMS delivered more than 25 SATCOM antennas to two ISR customers outside the US.

EMS' aero business is diversified. We sell not only to the general aviation market, but also into the government and air transportation industries. When you read articles about cutbacks in jet orders, some of the reductions are in future years. While there are additions in the current year, volumes may still be greater than last year. Don't overlook the fact that we supply into the upgrade jet market as well. Many customers are upgrading their Swift-64 systems to SwiftBroadband.

Finally EMS' market share is increasing both with the major OEMs and through our expanding portfolio of aero products. While there is no doubt that there is softness in the market, we have used our technology and marketing strengths to broaden our position beyond any single OEM or market segment. We recognize the challenges and believe we're well positioned to weather the economic storm. We will continue to manage our costs in this and all of our segments prudently, but we will also continue to invest in platforms that enable us to continue to grow this business. These additions will position EMS for further success when the economy turns around.

As far as the asset tracking and communication segment is concerned, in the first quarter, hardware and air time revenues for low rate tracking terminals was strong, especially in the maritime industry. EMS is benefiting from customers seeking inexpensive, low data rate tracking systems during the economic slowdown. EMS launched its ship-based Long-Range Identification and Tracking or LRIT system in the first quarter and to date we have sold approximately 400 systems. The LRIT is a new solution that allows the shore side to track the position of the maritime vessel.

EMS is seeing strong demand for the LRIT and for the company's Ocean Alert system currently deployed on 5,000 ships worldwide. Ocean Alert is a discrete, tamperproof and allows a ship to send a panic or distress alert. Once the alert is sent, it continues to transmit every half an hour. Most of the major flag states have approved the EMS system, which offers additional security to ships and ports, as well as better safety environmental protection. By June of this year, all ships over 300 gross registered tonnage or passenger ships must have both types of equipment on board. In these times where maritime carriers have to worry about things like piracy on top of everything else, these are no-brainer investments.

Defense and space, accounting for almost 25% of the company's revenue, had their best quarter ever getting off to a strong start with records and revenue and operating income. Revenues were up 74% versus the first quarter of 2008 and net income increased almost 400%. Order backlog remained solid at $117.8 million, up slightly from the fourth quarter's previous highest achievement. Defense and space growth was evident across space, communications on the move, sensor and radar markets. Contributing to the strong revenue performance in the quarter were the B-2 Bomber's new extremely high frequency or EHF satellite communication systems, an international commercial anti-jam project, and two space programs, including NASA's TDRSS data relay satellites. New radar wins were particularly strong where EMS has a heritage position on several key classified defense programs.

The B-2 program exemplifies the type of multiyear production orders EMS is successfully pursuing. As other programs such as the Navy Hawklink transitioned from development into full production, EMS will benefit from substantial recurring revenue, and from defense and spaces ongoing prototypes and lean activities that continue to drive down production costs and program risk. The company is also pursuing future communication subsystems for fighter and UAV aircraft platforms. EMS is monitoring the shifting defense and space policies. The Obama administration's recommendations to cease future F-22 production will have no immediate impact on our defense and space revenues from 2010. Our analysis for proposed shifts in the defense budgets appear positive for EMS. While we may face some quarterly variance, the longer-term trend for the business appears quite positive.

So in summary, I was disappointed with our performance in LXE, but encouraged in other parts of the business. While the EMS' first-quarter results can't be changed, we have taken substantial actions to address it. Time will tell if it is enough. So I guess the rhetorical question this quarter is given that we earned $0.15 in the first quarter, what gives us the confidence to be able to have annual guidance in the range of $1.35 to $1.65. Had LXE not lost money in the first quarter, earnings per share would have been in the mid-30s. To show the strength of this company – it shows the strength of this company that we could have taken a hit like that and still generated earnings like this.

Our business leaders have all significantly reduced the amount of discretionary spending across the organization to improve profitability. We continue to be prudent with cost, but continue to invest when we see opportunity. What happens with the economy remains a real wild card. Defense, communication and tracking continue to grow at rapid rates, despite the economic headwinds. The airline industry's continuous adoption of WiFi service on major domestic fleets bodes well for EMS as does our favorable position on high-priority defense programs.

All the acquisitions we did last year and early this year are on track and have a similar profile to our defense and SATCOM business. We have lowered further the breakeven point on LXE and while this is currently the riskiest part of our portfolio, first-quarter performance was unlike any quarter we have seen in six years. But in this economy, we can't take anything for granted. Simply put, our guidance reflects what the numbers add up to, and while there is no doubt that there are economic pitfalls out there – and by the way, we stepped on one in the first quarter – we're going for what we committed to.

If we can keep LXE operating income positive or near positive and the other groups continue to achieve as they did in the first quarter, we will achieve our targets. Knowing there is risk out there, we have opened wider the range, but that does not diminish our resolve or belief that we will navigate through the challenges. In summary, we reiterate our recent guidance that 2009 earnings will be in the range of $1.35 to $1.65.

Before I turn the call over to Gary, I would like to thank the EMS team for all of their efforts in the first quarter. It is a tough environment, but your perseverance and hard work are positioning the company for continued growth and success. So with that, I will turn it over to Gary.

Gary Shell

Thanks Paul.

The dramatic effect of the economic slowdown on the LXE division was painfully obvious, including a 1.1 million restructuring charge. LXE's operating loss for the period totaled 5 million, but obscured in the first quarter consolidated results were some real success stories in the rest of the company. Defense and space had sales of 27 million, operating profit of 3 million, and these were all-time quarterly records. For communications and tracking, revenues were more than 41 million with operating profits of 4.3 million, and all of the product groups within that business, including our recent acquisitions, were highly profitable.

And now a few comments about those consolidated results. Consolidated sales increased over the comparable period in 2008 by 22% or 17 million. The increase in first-quarter sales contributed by our recent acquisitions totaled 17 million. The sales comparisons for the remainder of the company were mixed. Our defense and SATCOM businesses had combined organic growth totaling 10 million in the first quarter of 2009 versus 2008, which offset a $10 million decrease in sales at LXE for the same period.

The cost of sales percentage for the quarter increased to 69% from the 62% to 63% range that was typical last year. This increase related mainly to LXE's restructuring and lower overhead absorption in Q1. SG&A as a percentage of revenues was 25%, which was consistent with our level of expenditures throughout 2008. A somewhat lower rate of R&D expense reported in the first quarter of 2009 versus 2008 was not due to reduced efforts, but instead reflected benefits under a new Canadian government program to encourage technology development in business areas such as satellite communications. We expect to see the rate of R&D spending increase moderately throughout 2009.

Our results for Q1 included two significant items related to our acquisition activities. As a result, we presented supplemental information in this morning's earnings release about net earnings and earnings per share on a GAAP basis that excludes these acquisition related charges. We believe that exclusion of these charges provides very useful information about the results of our ongoing operating activities, as well as providing information that is more comparable to prior periods.

The 3.9 million of acquisition related charges reported in operations were for the typical services required to complete an acquisition, such as legal advice, due diligence, asset valuation, integration assistance. Prior to 2009, the cost of most of these services would have been capitalized as part of the purchase price, but they're now required to be expensed under newly effective accounting standards number 141R.

Another excluded item from our non-GAAP results was an acquisition related foreign exchange adjustment associated with the funding of the Satamatics transaction. To accommodate banking and closing attorney's requirements, we funded the transaction several days beforehand, and during those few days, the pound weakened against the dollar. In theory, if we could have waited until immediately prior to closing to fund that transaction, we would have paid $1.4 million less. Accounting rules require us to recognize this difference as a loss.

The foreign exchange gains reported in the first quarter in non-operating reflect the benefits of – generally reflect the benefits of a strengthening US dollar. Our zero consolidated effective income tax rate for the first quarter is based on our forecast and expectations for the full year. The losses in our US-based LXE operations have offset the US-based profits in other areas resulting in a very high proportion of our consolidated taxable income being earned in Canada. As reported in previous quarters, our Canadian operations have an extremely low tax rate because of a large pool of research related tax credits that we have earned over the years.

Couple of additional points about our core businesses. All of our acquisitions in the past six months fits strategically in the communications and tracking segment. These acquisitions added approximately $15 million of intangibles to be amortized in future periods. To help users of our financial information to understand the effects of this amortization, we added disclosures in the first quarter earnings release about earnings before interest, taxes, depreciation and amortization, commonly known as EBITDA.

EBITDA for the communications and tracking segment was $8.5 million, over $4 million higher than that segment's operating income under GAAP. We believe that the company is on track to report consolidated EBITDA for the full year in the mid-$40 million range. That would represent depreciation and amortization totaling about 20 million or an average of 5 million per quarter. Defense and space ended the period with a record $118 million backlog and a major portion of this backlog is currently expected to be recognized in revenues in 2009.

Turning briefly to the balance sheet, the Q1 acquisition of Formation and Satamatics increased various balance sheet items, including goodwill and other assets, which includes the acquired intangibles. The company generated free cash flow during the first quarter of approximately 15 million and our cash carrying balances continued to exceed total debt. Our financial position remains very strong.

Paul, that concludes my comments on the Q1 financials.

Paul Domorski

Okay. Thank you Gary. Judith, can you help us with questions, please?

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator instructions). Your first question is coming from Chris Quilty of Raymond James. Please go ahead.

Chris Quilty – Raymond James

Good morning, gentlemen. Just wanted to get a little bit of clarification on the LXE business. If I had understood your statement, it seemed to imply that you think you will get back to breakeven or profit in the LXE business by Q2, or were you talking more towards profitability by the end of the year?

Paul Domorski

Well, I would answer it this way, Chris, if you looked at our results last year, we were north of breakeven throughout 2008, and certainly it is our goal to remain at that point throughout the year. We have taken actions. I have summarized some of those actions. You know as well – probably you know better than I do that it is a choppy market out there, so certainly we have our goal is to get above that number.

Chris Quilty – Raymond James

Okay. And the cost reduction efforts, you mentioned in the quarter, are you on a run rate basis seeing those savings now, or are they going to accrue over time? In other words, mostly headcount reductions that immediately accrue or these things that are going to take time?

Gary Shell

Yes. About the – Chris, this is Gary. The cost should start picking up right away, because the severance related issues will of course get some payroll pickups and there were other cost-saving issues as well, and all of that should start picking up in Q2.

Chris Quilty – Raymond James

Got you. And while I have you Gary, the tax rate, obviously a little bit beneficial here in Q1. I think you have guiding towards about a 9% tax rate for the year, does that mean we should raise our expectations for the balance of the year, or should we still be modeling about 9%?

Gary Shell

No. Zero is what we were expecting for the full-year and that really reflects the shift because of the lower performance at LXE. That reflects the real significant shift in the balance towards the Canadian earned taxable income.

Chris Quilty – Raymond James

Okay. So that is – you know, I haven't run the numbers here, but a little bit of a lift in terms of your full year guidance outlook since we were previously assuming a 9% tax rate. If you're not thereby raising your guidance, are the weakness all manifested in the LXE business, the incremental weakness that is implied?

Gary Shell

I think that is a fair comment. Yes, it is – we're covering lots of risks out there in our forecast and certainly chief among them is probably the challenge that we face at LXE. So I think that is a fair comment.

Chris Quilty – Raymond James

Okay. And with regard to the aeronautical SATCOM end of the business, you didn't specifically address the business jet market, but could you give us a little bit of an update on what you're seeing there?

Neil Mackay

Well, Chris it is Neil Mackay here. In talking to our partners, they had – they had – they have got their major chance to market. They believe that the orders that we have in Q1 reflects the downturn in the business jet market already. What they are saying is that the commercial airline market, which is we will start seeing that in 2010 as Boeing and Airbus reduce their production rate. So we have kind of penciled that already into our forecast for the rest of the year.

Chris Quilty – Raymond James

Okay. But have you seen the business jet market get incrementally worse since the beginning of the year?

Neil Mackay

No, actually it is – the connectivity – while there may be less in business jets, a lot of our revenue comes from aftermarket, people upgrading their SATCOMs, I believe there are thousand of SATCOMs out there to be upgraded. So that is going on now. People are putting data added on to their voice communications. So I think what we're seeing is a slow down in the growth rate, but we are not seeing a negative revenue going forward from business jet market.

Chris Quilty – Raymond James

Okay. And also you know Inmarsat and the SwiftBroadband service seem to jump out in the lead at least with a lot of the early pilots going back a year or two ago, but more recently seemed to have been eclipsed, at least here in the US by, air to ground and KU band things taking off. Do you see some of your early trials that you did with SwiftBroadband finally beginning to get traction in reaction to what is happening here in the US or is it still the same measured pace of deployment?

Paul Domorski

I think what is occurring, Chris, is again there are different horses for different courses. In other words, you can look at Ryanair, as you are well aware of, is going through their pilot using Inmarsat-based services. There are certain advantages in the US with the air to ground services and people like Aircell are exploiting those kinds of services. So our strategy has been to seek to be suppliers of those different market segments, which is why we bought Formation, who as you know is a major supplier. Roughly two thirds of the onboard equipment that goes on Aircell's planes, the wireless access points and servers. We are also in the Iridium market. We're also in the Inmarsat market, and again we are seeking to diversify our holdings depending on how the market is also going. And beyond that, you're aware KU brand with Panasonic and other things that are under way that we are part of.

Chris Quilty – Raymond James

Okay. And one question on the defense and space business, I think from your investor presentation, you had penciled in somewhere about a $29 million opportunity on advanced VHF and maybe half that amount for the WGS satellite, and it looks like the Outlook there just got incrementally better with the cancellation of the T-Sat program, or expected cancellation. Can you just clarify for us those numbers, were those ship sets per satellite or was that cumulative backlog on the three and six satellites respectively that are in the pipeline?

Paul Domorski

Chris, I don't know the answer to that question. We would have to take that and get back to you on that. I'm sorry.

Chris Quilty – Raymond James

That is fine. We can circle back.

Paul Domorski

All right. Sorry about that.

Operator

Thank you. Your next question is coming from Rich Valera of Needham & Company. Please go ahead.

Rich Valera – Needham & Company

Thank you. Good morning. Paul, could you give us any sense of your dollar content per plane on the typical Aircell deployment? You mentioned I think they plan to deploy a thousand planes this year, give us any sense of your average content there?

Paul Domorski

While I can give it to you, I'm a little reluctant to give it to you, Rich, in dollars because of the fact that it is really a competitive issue. We are providing service, wireless access points for those. I mentioned before that we are roughly two-thirds of the gear that is on the planes themselves today. It is in the tens of thousands, but I really can't go into how much that is to be honest with you.

Rich Valera – Needham & Company

So it is in the tens of thousands per plane?

Paul Domorski

Correct.

Rich Valera – Needham & Company

But you can't go into the magnitude?

Paul Domorski

Correct.

Rich Valera – Needham & Company

How about for the server storage deal you got from LiveTV, can you give me a magnitude of that? Is that also in the tens of thousands per plane?

Neil Mackay

It is a less than that but it is at the low end of that number.

Rich Valera – Needham & Company

Okay. That is helpful. And then looking at LXE, I mean by my rough math, even baking in the sort of 1.5 million of annualized savings, I thank you have around of $30 million breakeven level that, and certainly correct me if I'm wrong…

Paul Domorski

It is lower than that. I mean we are – we have done, as Gary mentioned earlier, we have taken a restructuring of headcount there.

Rich Valera – Needham & Company

Right.

Paul Domorski

We have also taken out operating expenses, so it is – it is somewhere around the, I don't know, 26, 27, somewhere in that sort of range kind of number.

Rich Valera – Needham & Company

So that is the operative number in terms of getting back to breakeven for say the second quarter. That is a kind of revenue that you would need to get to break even in the second quarter?

Paul Domorski

Obviously mix impacts that but in a general sense, yes.

Rich Valera – Needham & Company

Okay. That is helpful. And then the old SATCOM business, you know picking out the 17 million contributed from acquisitions, it looks like that business was actually down slightly year-over-year in the first quarter. I know earlier when you gave guidance you talked about 15% to 20% organic growth in that business this year, has the target changed? You know what are sort of the puts and takes that have occurred around the business, if you could?

Paul Domorski

Well, I would say the following, and I will let Gary comment afterwards. I mean the first thing I would say is keep in mind that last year we had the handset contract and that was roughly $4 million in the first quarter and $13 million for the sort of full year. So you have to kind of pull that out of the analysis. The other thing is that, by virtue of the fact that we have – by virtue of the fact that we have these new entities that are on board now with Formation and Satamatics and Sky Connect, there are opportunities that would have been followed up by SATCOM that are now being fronted by our other business areas.

So there is a mix of things there. I mean we can seek to make this clear. We're not trying to – that is why we put them into this communications and tracking area, it is because they all related businesses that are – that we are leveraging technology across of them. So we continue to see growth in those businesses, we continue to see good growth, particularly in the airline sector, across the business, not only in SATCOM but also in Formation and in Satamatics and in Sky Connect.

Rich Valera – Needham & Company

So just to be clear, the organic growth of 15% to 20%, did that exclude the 13 million handset contract contribution from 2008?

Gary Shell

Yes. That is on the true SATCOM related business, not including the handsets, yes.

Rich Valera – Needham & Company

Okay. And then just – I don't know if you gave out these numbers, Gary, but do you have the D&A, CapEx and cash flow from operations in the quarter handy?

Gary Shell

D&A clearly was – it was going to be in the neighborhood of $5 million on a quarterly basis. It was mostly – about 4 million for the biggest chunk of that was the communications and tracking segment. And on the CapEx, I will check that and I will give you that number during this conference – during call. I don't have it immediately handy, I'll have to check a note and I'll get right back with it.

Rich Valera – Needham & Company

Okay, thank you. That handles my questions, thank you.

Paul Domorski

Thank you, rich.

Operator

Thank you. Your next question is coming from Mark Jordan. Please go ahead.

Mark Jordan – Noble Financial Group

Good morning, Gary and Paul. First, with the acquisition accounting of Formation and Satamatics, how was your cost structure impacted by potentially writing up acquired inventory, how much of a P&L impact did that have?

Gary Shell

The acquisition itself, all of that was, we didn't have any P&L, direct P&L effect related to the acquisition as far as we didn't have to take – you referred to potential adjustments related to inventory or acquired imagery or something like that, is that what you…

Mark Jordan – Noble Financial Group

Yes. So if you acquired inventory, you have to write it – you have to write it up to market value, and therefore when it is sold, it would go out, in theory it is zero profit. I was just wondering if you had measured the potential impact of that in the quarter?

Gary Shell

The quarter results were flat all post – all those acquisition adjustments, so that would have already – that was all netted out of there. Yes, of course, we did exactly as you suggested. We did have to go back and review all – revalue all that inventory and so that was already factored into the results.

Mark Jordan – Noble Financial Group

Okay. Looking at LXE and your guidance range, you've got a $0.30 range, which implies 4.5 million swing in profitability between one $1.35 and $1.65. I would assume from all of our conversations here that LXE is the big swing factor. Could you sort of give us some guidance as to what you think LXE if you were to – the 1.35 model, does that mean that LXE is losing 4 million, and at the high side, it is modestly profitable? Can you tell us how you would gauge the last three quarters of the year when you are bringing up or creating this range?

Gary Shell

What I said, Mark, in my earlier comment was that, our – we have been – if you looked at our business, for example, if you looked in our SATCOM business, you looked in our defense business, there were areas where we had overachieved versus what we set out in the plan. We also had, if you were to go back to my call that I talked about 90 days ago, we talked about the fact that we had hedged certain factors in our budget. So we are anticipating that LXE will be not a – not a big loss the balance of the year.

Now there may be some decisions that we make throughout the year. For example, I mentioned before we brought in a new leader of that business. There may be some different approaches to the business, and we may make some decisions to take further charges in response to market opportunities and other areas in that. But if you do that, we will obviously do that in light of the fact that we have over performance in the other business units. So – and the short answer, we are not anticipating big losses in that, business but we may make decisions, further decisions that will – to improve it, and we won't hesitate to do that, but we will seek to have that compensated by over performance elsewhere in our portfolio.

Mark Jordan – Noble Financial Group

Okay. Thank you. I saw that share base is down a little bit, did you buy back stock or is that just a function of the lower stock price?

Paul Domorski

The lower stock price, we didn't buy back any shares this quarter.

Mark Jordan – Noble Financial Group

Okay. In the defense and space systems, you had a couple of major longer-term programs I think in the seekers for the small (inaudible) bomb and the joint common missile, could you give us an update as to what you see for those programs and give us a gauge as to the – how effective they are now in 2010?

Neil Mackay

(inaudible) market, it is a longer-term program that is just coming on board. Now we don't have a lot of revenue in it for 2009, but we are very pleased to win those programs as they going forward. I am not sure that is helping you?

Mark Jordan – Noble Financial Group

Any sense of what – how significant they could be inside the 2010, 2011, when they get into volume production?

Neil Mackay

No. We have to go through development phases first. It is a very high-volume program, incredibly high-volume, but the production side, you won't see until probably 2011 or 2012.

Mark Jordan – Noble Financial Group

Thank You.

Operator

Thank You. (Operator instructions). You have a follow-up question coming from Chris Quilty. Please go ahead.

Chris Quilty – Raymond James

Gary, was just trying to run the numbers here, but can you give us your updated guidance range for EBITDA for the year if you have it handy?

Gary Shell

Yes. Implicit in new guidance would put us in the, as I had indicated, it put us EBITDA in the mid-40s now. We had originally targeted 50, and we thought we would be there when we backed of the guidance that would put us in the mid 40s to 50s, so the range would be something like 45 to 50 now, Chris.

Chris Quilty – Raymond James

Okay. And just a follow question or clarification on the F-22 program, if I remember correctly, you had about $1 million ship set content per aircraft, obviously the production lots are still going and I think Paul indicated that no impact through 2010 for the ongoing production. But I guess the clarification here, given the production runs of 20, 22 aircraft a year, it is a pretty slug of business, and if I remember correctly, unlike a lot of companies that have been saying, jeez, we just offset whatever we lose from the F-22, we pickup on the F-35, I don't believe that's the case with your content of the F-35, is that true?

Paul Domorski

We – I mean it represents for us, Chris, something like – you may have the right number, but 2% or 3%. It is a relatively small number for us overall. So we have firm production we believe through 2010, and we expect an order for an additional four aircraft and spares through 2011. So longer term production of the in-flight data link which is our part of that project may terminate, but a product pursuit as we understand it to replace the revenues may occur. We have done some analysis on that and we're sort of expecting a couple of million dollars more of additional development money this year. So more aircraft are better for us, but it is not – we anticipate that any impact of 3% or 2% of our base, particularly given the growth rates that we have seen in defense, that we will be able to make up.

Chris Quilty – Raymond James

Okay. And can you provide any clarification on that radar program you mentioned?

Neil Mackay

It is a classified program. I'm not sure we would want to…

Chris Quilty – Raymond James

Well, I wanted to know what it was? Or how about orders of magnitude, because it sounds like, from talking to the other guys at the satellite show a couple of months ago, that it is fairly substantial in size?

Neil Mackay

We think it will be fairly substantial, yes.

Chris Quilty – Raymond James

Okay. But is there anything in the backlog at this point?

Neil Mackay

We have the – we are talking to the customer about the program, and we do have some in the backlog, yes.

Chris Quilty – Raymond James

Okay, very good. Thank you, gentlemen.

Paul Domorski

Thank you, Chris.

Operator

Thank you. You have a follow-up question coming from Rich Valera. Please go ahead.

Rich Valera – Needham & Company

Thank you. Gary, I noticed the corporate overhead was only about 300K this quarter which is quite low relative to historical levels, is there something special going on there and what should we think of that – how should we think about that number going forward?

Gary Shell

Well, one of the issues that – is benefiting corporate overhead is that with the acquisition of these businesses, we are able to pretty much fully burden our operating units with the overhead. The only thing that is pretty much left in there is that we now report a corporate overhead level is the 123R, the stock option stuff that we report. We keep that expense at the consolidated level. There'll be some variance in the actuals versus what we allocate out to the division, that also might flow through the corporate. But our corporate number should basically be the 123R number that we are – that may be several hundred thousand dollars a quarter.

Rich Valera – Needham & Company

Great, thank you. That's all I've got.

Gary Shell

While I have you on the phone, Rich, just a follow up on you previous question, CapEx was about in the ballpark of about $5 million. So if our free cash was 15 and CapEx was 5, then our cash from ops would be 20. Now that includes – that is not going to be a regular quarterly rate, that includes of course the larger payment that we got, about $9 million from Inmarsat earlier this year related to the handheld contract. But all the businesses were doing quite well in their cash flow in Q1.

Rich Valera – Needham & Company

That is helpful, thank you. And then getting back to growth rates, specifically in defense and space, you had an sort of off-the-charts year-over-year growth rate in the first quarter, and frankly to only do your 15% to 20% prior target for that business would apply a pretty material decrease in quarterly run rate there. So I'm wondering how you are thinking about that business relative to the level of business in the first quarter. Should we expect to see a drop-off there, or do we think we're sustainable in the sort of mid-20 million range which would imply clearly a much more than 15% to 20% year-over-year growth?

Gary Shell

I think we are encouraged by what happened in the first quarter. We believe that some of our efforts that we've implemented last year and early this year is starting to pay dividends. We certainly believe that if you were to compare quarter on quarter, that you are going to continue to see a pretty significant growth in that business throughout the balance of this year.

Rich Valera – Needham & Company

Understanding that year-over-year, you're going to see good growth, but just wondering relative to the sort of 27 million level, do you think that is a bit of an unusually high number, or you know relative to what we would expect say in the second quarter, third quarter, or do we think were sustainable at or near that kind of mid-20s type of level?

Gary Shell

Our models, it looks like mid 20s kind of number is a sustainable level.

Rich Valera – Needham & Company

Okay, that is very helpful. That does it for me. Thank you.

Paul Domorski

Thank you.

Operator

Thank you. Sir, there appears to be no further questions at this time.

Paul Domorski

Okay, everyone. Again thank you for taking the time to come on today's call, and we look forward to being able to talk to you in about 90 days. Thank you now.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.

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Source: EMS Technologies, Inc. Q1 2009 Earnings Call Transcript
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