EMS Technologies Inc. Q3 2009 Earnings Call Transcript

Nov.10.09 | About: EMS Technologies, (ELMG)

EMS Technologies Inc. (NASDAQ:ELMG)

Q3 2009 Earnings Call

November 5, 2009 9:30 am ET

Executives

Paul Domorski - President and CEO

Gary Shell - CFO

Neil Mackay - COO

Analysts

Rich Valera - Needham and Company

Mark Jordan - Noble Financial

Michael Ciarmoli - Boenning & Scattergood

Chris Quilty - Raymond James

Operator

Good morning, ladies and gentlemen, and welcome to the EMS Technologies Q3 2009 Earnings Call. All lines have been placed on a listen-only mode. (Operator Instructions).

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

Paul Domorski

Good morning, everyone. Thank you for joining us today on EMS Technologies third quarter 2009 earnings call. With me today is Gary Shell, our Chief Financial Officer and Dr. Neil Mackay, Chief Operating Officer.

I will begin with an overview of the quarter, and then I will turn it over to Gary to review the financials, and then I will come back and talk about the markets, as we see them in the year. After that, we will take any questions you might have.

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 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.

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 of any non-GAAP measures.

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. Thank you for your continued interest in EMS Technologies.

This morning EMS Technologies reported third quarter 2009 revenues of $85.7million and earnings from continuing operations of $5.8 million, or $0.38 per share. EBITDA, excluding acquisition-related items, was $7.1 million. While the earnings were similar to last year, the economic conditions are very different, and, as a result, so to the composition of the earnings. Included in the third quarter is $4.1 million of tax benefits.

Before I go through the segments, I would like to thank the EMS team for their valiant efforts this quarter.

The communications and tracking segment represents 42% of the company’s revenues. While revenue was 17% higher than last year's comparable quarter, included incremental revenues from recent acquisitions. The growth has mirrored the recent slowing in the commercial and business aviation markets. Orders have moved to the right into other quarters and new built has decreased and retrofitted become more prominent.

Despite this, there have been some encouraging signs, such as Panasonic Avionics announcement that Lufthansa will be the launch customer for Panasonic's on-board broadband Internet service, our long-haul planes. EMS will provide the advanced dual panel satellite tracking antenna for Panasonic’s connectivity system. The system rollout will begin in mid 2010 that will make Lufthansa the largest international carrier to offer a wide range of connectivity in the long-haul market.

Another EMS customer Aircell continued the roll out of its Gogo Inflight Internet service for air transport. EMS provides in-cab and routers service and wireless access points to Aircell. The Gogo service has passed the milestone that been offered on more than 600 aircrafts in service, and Gogo Inflight Internet has been selected by airlines representing more than half of the North American mainline market.

Use of in-flight wireless services will accelerate, as the economy recovers and business travel begins to increase. The market driver will be companies expecting their staff to be more productive and more accessible from the road, including onboard a plane. The Lumexis Corporation shows EMS optical video/application servers for its in-flight entertainment system.

EMS’s server technology will maximize the liability and performance of Lumexis video-on-demand service. Key and future broadband system orders were closed with many classified customers and an international military client. EMS also began first deliveries of its [e-Infusion System 6 Package] to a new mainstream the Canadian government, while three systems were ordered by California-based charter operator Trans-Exec Air for its Gulfstream aircraft fleet.

We also announced three significant new jet aircraft products in the quarter. At the recent National Business Aviation Conference, EMS unveiled its Iridium-based Forté AirMail solution, which provides travelers on smaller business aircraft with affordable access to e-mail using a Wi-Fi device such as an iPhone or BlackBerry.

Forté AirMail is expected to begin shipping in the first quarter of 2010. It is aggressively priced and is equipped with market disrupting features. EMS has more than 4500 Iridium-based communication systems worldwide and its latest offering built on that leadership position.

In addition, the EMS began shipping its new air-to-ground router, the ATG4000 to Aircell for its business aviation market. The ATG4000 router enables business travelers and crews to use their own Wi-Fi enabled devices at full mobile broadband speed enabled by Aircell's advanced network.

EMS also integrated its newest aeronautical networking product, the Communications Convergence Unit 200 with ViaSat’s Ku-band high-speed data system. The CCU-200 will be part of the basic ViaSat installation on Bombardier Global Express aircraft.

Satellite-based tracking is a part of this segment and showed very strong momentum during the quarter. EMS delivered upgrades to the Brazil air force searching and rescue infrastructure. In addition, EMS was also selected to provide the Blue Force Tracking system to the European Union for use in Afghanistan. The order further enhances EMS position in sector for more than 500 units that had been deployed.

Our Defense and Space segment, which accounts for over 27% of the company’s revenue, reported $23.1 million of revenue and $2.2 million of operating income, up 46% compared with the same period in 2008. Order backlog at the end of the quarter was $93 million. The defense and space third quarter financial results, benefitted from recurring production work on long-running programs in space, radar and communications-on-the-move. New orders during the quarter included a multi-million dollar of work for additional production on the Advanced EHF satellite system.

In addition, the company received significant ongoing radar component in military and civil satellite hardware orders. EMS also received the latest order below rate production of the antenna apertures for the Global Broadcast Services Receive Suite. This communication suite is small and light enough to be carried by a soldier, and will be used to meet critical military situational radar [needs] in Afghanistan.

On the new product front, EMS delivered an important air-to-ground common data link antenna system for a classified military program. EMS also rolled out a new X-band SATCOM-on-the-move product. The EMS antenna supports airborne and ground based communications-on-the-move applications on all of the major X-band [Ad] constellations used by the US and UK military services including Skynet 5.

As stated in our press release, the B-2 contract we had with Northrop Grumman and ultimately with the airforce has come to an end. This became apparently whilst in the third quarter on follow-on orders, which were initially delayed did not occur. We are actively seeking to reprioritize our backlog, but there will undoubtedly be a period disruption as we seek to replace this program.

In the short-term we recently completed restructuring that includes reduction in headcount, and we now have more people calling on customers. LXE which comprises about 30% of the company continued its face of challenging market climate in the third quarter. In Europe and Asia economic and currency uncertainties appeared to have resulted in customers' capital funding decisions being pushed out. Competition remains aggressive.

LXE's Q3 results were just over $26 million of revenue, up from the first quarter of the year but down from the last quarter. The business in second and fourth quarters’ are historically strongest, making sequential quarterly comparisons difficult.

Key orders in the third quarter, includes US-based Advance Auto Parts, an automotive aftermarket leader and a long time LXE customer, which is deploying more than a 1000 new LXE devices throughout their nationwide network at distribution centers.

Advance is using a combination of vehicle mounted MX3 terminals, MX7 handhelds and HX2 wearables with Bluetooth ring scanners. Morrisons, the UK's fourth largest food retailer with more than 400 stores is adopting a custom version of LXE's MX7 rugged handheld terminal to handle the retail warehouse and cold storage requirements.

New products shipments in third quarter included the recently announced MX9 ultra-ruggedized handheld wide area network terminal. Customers have shown considerable interest in this product for port applications as well as in field services, in the military and agriculture.

The MX9 handheld with co-developed with Itorn the world leader in automated meter intelligence. Itron is leading smart grid initiatives around the world with the MX9 system as its go-to-market product. We believe momentum to the MX9 terminals will continue to grow and make it a significant incremental contributor to revenues in 2010.

LXE expanded its distribution, nearly doubling the number of partners signed up with LXE through the division recruiting campaigns. The trend of sales through channel partners such as BlueStar and ScanSource, as well as the exposure that LXE is gaining through its new partner is encouraging. These represents new channels to market, new customers and that bodes well for the future.

So I will save in my summary comments into the end, and at this stage I will turn it over to Gary to review the financials.

Gary Shell

Thanks Paul. Third quarter, our consolidated sales were down slightly in 2009, compared with 2008 as the combined increases in the comps and tracking and defense and space segments offset almost all of the slip at LXE. Commenting specifically on the segments, the communications and tracking segment revenue in Q3 were higher in 2009 than 2008, due to our acquisition, which accounted for 14 million of additional sales in the quarter.

Our legacy aeronautical SATCOM business was down about 20% in the third quarter year-over-year. In making this comparison I excluded about 3 million of 2008 revenues related to handheld project that terminated late last year. This drop is inline with recent industry segment data reported by practically all of the major avionics and airplane manufactures. We shipped fewer units through commercial avionics partners and military distributors, as expected orders in all sectors have slipped to the right in the current environment.

LXE revenues during the third quarter of 2009 were down 30% versus 2008 down 12% from the second quarter of 2009. LXE’s warehouse and port market continue to suffer from the uncertain economy with the North American market doing a bit better in Q3 than previous quarters, but the European market appeared to be more effected by order deferrals.

The defense and space segment was led by strong military sales resulting in another very profitable quarter; the fourth largest and most profitable period in the segments long history. About 25% of D&S revenues and profits for Q3 related to work on the B-2 program, which was the segments largest program during 2009 and was completed during the quarter.

The current $93 million backlog of program activity simply cannot immediately absorb all the excess capacity created by the end of the B-2 work. So in Q4 we have begun the necessary operational transition and workforce reductions. The extent and cost of these transition efforts depend on the success of the business development and business planning efforts.

Few more comments about the consolidated P&L; the cost of sales percentage for the quarter was 66%, which was comparable with the second quarter of 2009, but higher than the 62% to 63% range that was typical last year. This comparison reflected a sales mix with more defense related products, which typically have a higher cost of sales than commercial products.

Also affecting cost of sales percentage was amortization of intangibles, which resulted from our acquisition, especially those in 2009. SG&A as a percentage of revenues remained at approximately 25%, which was consistent with both the prior quarter of 2009 and our quarterly level of expenditures through 2008.

The dollar value of SG&A was lower than in previous quarters, due mainly to ongoing cost production efforts. R&D was up slightly from the comparable period in 2008 and significantly higher than the first two quarters in 2009 as all segments continued to invest in developments of new products and capability. We expect to see the rate of R&D spending increase moderately into 2010.

Similar to the previous quarters in 2009, we presented supplemental information in this morning’s earnings release about net earnings and earnings per share from continuing ops on a non-GAAP basis, that excludes items related to our earlier acquisition activities. We believe that exclusion of these items provides very useful information about the results of our ongoing operating activities as well as providing information that's more comparable to the prior periods.

The $200,000 credit in acquisition-related items in the third quarter related to a reduction in the estimated fair value of the earn-out ability for one of our acquisitions. This accounting treatment is nearly required in 2009 under FASB Statement 141(NYSE:R).

In non-operating, the foreign currency exchange adjustment reported in Q3 relates mainly to the net change in the value of receivables and payables in a foreign currency. [This key] element was relatively small because of the effectiveness of our ongoing program to hedge these balance sheet exposures. However, foreign currency exchange rates have remained a key operating issue in 2009. In particular, the weakening of the US dollar versus the Canadian dollar during 2009 has not been favorable to our comms and tracking business, which sells mostly in US dollars and has significant manufacturing operations in Canada.

On a year-to-date basis, our operating profit is approximately $3.5 million lower than it would have been, if the stronger US dollar exchange rates form the beginning of the year were still in effect. One of the main factors affecting the third quarter results was a total $4.1 million income tax benefit for continuing operations. This benefit related to $1.9 million additional research credits that were recognized after a successful completion of a tax audit of prior year's and also the $2.2 million of tax benefits related to operating losses incurred in certain jurisdictions.

The consolidated effective income tax rate for the remainder of 2009 will depend upon the levels of profitability achieved in various jurisdictions and the analysis of the deferred tax valuation allowance. At present, it appears unlikely that there will be further significant income tax benefits reported in the fourth quarter.

We will provide guidance about the income tax rate expectations for 2010 when we complete our annual planning process, but we believe a reasonable preliminary estimate of the effective rates for 2010 would be in the range of 10% to 15%.

One additional point about our core business. Our recent acquisitions have added $50 million of intangibles to be amortized in future periods. To help users of our financial statements understand the effects of this amortization, we’ve disclosed information about earnings before interest, taxes, depreciation and amortization and acquisition cost refer to as adjusted EBITDA based on this revised earnings guidance that we gave this morning.

We believe that the company is on track to report consolidated adjusted EBITDA in the $31 million to $34 million range. That would represent depreciated and amortization approaching $20 million or an average of about $5 million per quarter.

Turning briefly to the balance sheet. The company generated cash from operations of approximately $10 million. We paid down our revolver debt by the same amount. The balance on revolver is only $18.5 million and represents leverage of well less than one-time to annualized adjusted EBITDA. Our cash carrying balances were $41 million, compared with total debt of approximately $28 million, trade receivables are down and the aging is stable.

Inventory has increased slightly from the beginning of the quarter to prepare to meet the fourth quarter delivery schedules of firm orders, and our financial position remains very strong.

Paul, that concludes my comments on the Q3 financials.

Paul Domorski

Thank you, Gary. Before we take questions, I would like to talk some about our results, the year, and the markets, as we see it. Throughout we've tried to build the best company possible with real long-term value for shareholders. Since 2005, every year revenue profits have grown. This year we began with a good start with two acquisitions Formation and Satamatics. Without Formation, we would not have been part of the US Aero Wi-Fi market.

As I said earlier, 600 aircrafts have been equipped to-date. Satamatics enabled us to expand our existing satellite tracking capability and gave us a base of a 100,000 low cost global data beacons who can grow and build the services business. Both acquisitions are ahead of our internal projections.

We are restoring clouds in the market as we entered the year along with a lot of economic uncertainly, but we had navigated away our way through 2008 in a seemingly similar environment and still had a record year. We avoided the slowdown in business far longer than many of our peers, but have begun to face tough headwinds in the second half of 2009, as recession and credit crisis impacts our customer base. Hopefully, the pundits would be right and 2010 will be a better year.

In the first quarter, we posted strong numbers for the communications and tracking and defense businesses. LXE, on the other hand, had a 30% revenue drop, primarily in the US in the first quarter due to a severe market contraction and the result was a $4 million loss. In response, we once again cut our cost structure taking restructuring charge. The loss equated to about $0.25 of EPS just on that issue alone.

In the second quarter, while business jet market was taking a battering in the media, there was still momentum and our partners were still taking shipments, and we were still able to generate respectable numbers. This was despite the fact that dollar began to weaken against currency, such as the Canadian dollar, where our SATCOM operations are located. Rather than rebounding, the dollar fell further during the third quarter and we estimate that this has caused us $0.23 of EPS this year so far. While we hedge our balance sheet exposures, we can't hedge operating costs. We undertook cost reduction initiatives across the company to strengthen and intensify our focus for the future.

The third quarter continued the trends that we've seen at the beginning of the second quarter. Defense and space had a good quarter, with earnings up $0.46 compared to the third quarter of 2008. LXE continued to struggle, chewing up a few more cents in EPS as did most companies in this sector. In communications and tracking, new built shipments were down and sales opportunities tilting more to the military and retrofit markets. That resulted in essentially no growth and less volume going through our channels.

You can look at Honeywell, Rockwell Collin, Talus, or any of the aircraft manufactures are saying. Most that I have read see a period of uncertainty with signs of stabilization and incremental improvement beginning after the first quarter of next year. That is what it looks like to me as well. Normal growth, whatever that is probably will not fully return until 2011. We can't wait that long, so we started to find new ways to expand our market presence in areas, such as Latin America and Asia and new channels. It will take some time to establish those, but when the markets come back and they will, we expect to be much stronger as a result.

Fortunately we were able to augment our earnings, through additional tax credit this quarter. While I know these don’t have the same value that operating earnings do, they are future cash and they reduce expenses and when a business is confronted with economic times such as these they seek always ethical methods to make things better. That's what I would do if I owned a company.

Beyond that we generated $10 million in cash, paid down $10 million in debt in the quarter, we reduced our costs structure more $3 million, we squeezed but preserved our development future. We did what any private business would do when confronted with these circumstances.

Looking to the fourth quarter we see continued uncertainty. In the communications and tracking segment, some of our partners have told us that given the difficulties this year, they would rather ship product next year with hope that the economy will be better.

In the defense and space segment, as I said earlier, the B-2 contract with Northrop Grumman and ultimately air force has come to an end. Fortunately, we have a healthy $93 million in our backlog. We are seeking actively to be re-calendarize activities and are seeking replacements programs, but that will take some time.

For LXE, there have been some encouraging signs, but many customers are still going to see if the reported economic growth is real or not. Given the market uncertainty, the loss we had in the first quarter in LXE, the disruption in the business end markets, the impact of weakening dollar, the B-2 transition, we have lowered 2009 guidance.

While the third quarter headline EPS number in my opinion is not poor, there are still too much uncertainty out there at present to have short term confidence in a timing orders and other progress indicators. Before I go to questions, I want you to know that I believe that we are extremely well positioned to grow and prosper as the markets eventually regain their strength.

EMS’s acquired businesses that provide complementary technologies and market positions. For assets tracking and monitoring, the acquisitions include Satamatics and the (inaudible) trucks business. In aero connectivity EMS acquired Formations and Sky Connect. They directly complement our present business areas. Triangulating our internal research and publicly available data from sources such as Boeing, the General Aviations Manufacturers’ Association, the FAA, other airline carriers. There are about 400,000 aircraft currently.

When you add new planes, take out retirements and planes not suitable for connectivity, planes that are already connected, you were left with an addressable market of about 80,000 planes. Given our profiles, we see a $2.5 billion to $3 billion connectivity market that we are well-positioned for within our sites.

Most major commercial carriers have connectivity as a priority. You would not been able to say that year ago. Earlier in my comments I spoke about Panasonic and Lufthansa about the Forté AirMail system, Air-to-ground, military, X-band. It may or not be apparent to you, but each has a different underlying communication source. Each of these are examples of customers giving us permission in new market segments.

Our goal is to build significant market position in each. Turning to the tracking and monitoring business, EMS investments in this area positioned us squarely in the centre of the (inaudible) machine-to-machine communications industry. Industry analytics estimate that the satellites, end-to-end market for hardware and service revenues will grow at more than 12% annually for the next decade. The applications might involve the monitoring of commercial transportation, maritime vessels for fishing, shipping and recreational use of military and logistics within the supply chain.

As I said earlier, we are making traction here despite the economic difficulties and anticipate some exciting things there soon. Future applications of the EMS’s Global Tracking technology might include mobile resource management in the form of vehicle telematics just as diagnostics, performance monitoring, supply chain integration or personal tracking for personnel.

LXE is beginning to diversify its product portfolio and market reach with the recent introduction of the MX9 ultra-ruggedized handheld terminals. As previously mentioned, this terminal allows us to target markets beyond the traditional warehouse and port environment. The MX9 handheld robust designs and features that include multiple radios and the latest processing chips, these features open up opportunities in field service market.

According to the BBC research, this segment is the fastest growing vertical for mobile communicating, data collection devices and is equal in revenues to LXE’s current addressable markets.

In closing, I’m optimistic that we are on the right path and the investments that we have made in the business will put us on a growth course long-term post recession. Hopefully, the impact period will be short. The attractiveness of the markets and our position in them remain, and if any thing they have been enhanced. Until the markets improve we’ll continue to seek to maximize our results, just as we’ve done this quarter and over the past four years.

With that I'll turn it over to Art, so we can take some questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Mr. Rich Valera. Sir, you may ask your question.

Rich Valera - Needham and Company

On the defense and space business, just wondering how we should thing of the base line of this business X the B-2. I think you got around $36 million of revenue in 2009 from that program. Should we think if 2010 starting point as sort of 2009 minus $36 million or is there reason that we should think that base line should be higher?

Paul Domorski

Well, as I said it earlier. I’ll go first and let Gary add to this, Rich. We are actively seeking to move some of that backlog that we have in today into the fourth quarter and in to early quarters of next year. In addition to that, we are actively working on replacement revenue for that. As I said in my other comments, it will take sometime. So, I certainly wouldn’t assume that, that it would be forecast minus 36, but certainly there will be some disruption.

Gary Shell

It’s going to be something less than 36, may be half of that or something like it, and that’s all depended on other efforts. I think, may be half of that number would be a good factor to condition your D&S forecast.

Rich Valera - Needham and Company

Looking at your C&T segment and specifically the revenue from newly acquired businesses dropped quite sharply from $19 million to $14 million sequentially. Can you give us a little color on what’s going on there, and how you see the prospects for those acquired businesses into the fourth quarter and beyond?

Gary Shell

That’s more of a principal factor and that was more of a timing issue. We had on one particular major customer that under firm orders stretched out some aero deliveries, that’s under the new businesses. We've also seen of course some stretch out on the legacy businesses. So they are down what number, as I mentioned, is almost exactly the same that all the big avionics and airframe guys are reporting this particular quarter, something in the 20% range. So it looks like the bigger part of that drop, especially among the new business, was the timing issue that we believe will get corrected beginning in Q4 going forward.

Rich Valera - Needham and Company

So should we think that Q4 looking similar to Q2, or may be not quite back to that level?

Paul Domorski

I would say that, as Gary said, there was a lot of adoption particular at the Wi-Fi system earlier the year. Some of that has been delayed. There are still lot of encouraging signs in that area overall, but again the economy has affected all boats. I mean all parts of the business have been delayed. The question is at what level. So you will see some impact of that certainly in the fourth quarter.

Rich Valera - Needham and Company

So it sounds like we should see a rebound, but not necessarily back to 2Q levels?

Gary Shell

Yes, I think that's a reasonable assumption.

Rich Valera - Needham and Company

Then with respect to LXE, trying to get handle on how we should think about this business as well, we drop back to a loss this quarter, but it sounds like you expect some sequential revenue improvement in the fourth quarter. So, should we think that business gets back to a break-even level in the fourth quarter?

Paul Domorski

I mean we are basically looking at taking that business quarter-to-quarter and the market quarter-to-quarter. I mean you can again look at that. As you know, it was the industry, it's been a terrible market out there and predictions of it sort of getting better, seemed to always extend out one quarter. I think you're right, I mean you're absolutely right, that we anticipate that we're going to higher revenues in the fourth quarter. We don't ever forecast the loss in any of our businesses. So our plans are to continue to make progress from where we said where we were before. Certainly, as I said earlier, there are some seasonality in the business itself. Typically, the first and third quarter are more weaker than the second and the fourth quarter. So we anticipate that it will incrementally get better in the fourth quarter.

Rich Valera - Needham and Company

Then if I could just on margins for D&S, it sounds like the fourth quarter is going to be a transitional quarter where you're reallocating resources and in fact probably cutting some, but how should we think of the margins in that business? I mean, I would assume they're going to take a pretty significant hit as you observe the excess capacity from the B2?

Gary Shell

It's going to take a hit in Q4. We're not exactly sure what that tick is going to be until we get through that transition period, but in terms of margin percentage, it should be able to do some rebounding then more to the historic norms in 2010. 2004, no question about it is going to be transitional [nick] there, which we try to take that into account in the guidance that we put out there.

Rich Valera - Needham and Company

Just one final one on, C&T margins, obviously some pretty significant negative impact from currency, how do we see that playing out in the fourth quarter assuming sort of stable currency?

Gary Shell

Stable currency should see at least gross profit sort of holding its own and I believe we have an opportunity. The plan is odd. We should see some, we've got an opportunity to have some sales recovery in that C&T group, but the margin percentage should be relatively stable in Q4. There are still not a quite to the volumes, the historic volumes that have allowed them to get some real leverage over their fixed cost base. So that's a little bit of a drag in Q4 as we're just trying to get back to the level that we used to.

Rich Valera - Needham and Company

So when you say stable, that said substantially depressed levels relative to historical, you're talking sort of low single-digit operating margin?

Gary Shell

You're talking about for the C&T group all in.

Rich Valera - Needham and Company

C&T all in.

Gary Shell

Yes. Historically, I guess, they've been in the double-digit range this year. This third quarter was unusual thing, and it's probably going to be in single digits likely in Q4 as they kind of work through things, the lower sales level. So I think Q4 we're not expecting that to be a long-term issue, but, in Q4, yes, it's probably going to be a single digit kind of number.

Operator

Next question comes from Mark Jordan with Noble Financial.

Mark Jordan - Noble Financial

Two questions. One, little more color on the B-2 contract, what had been expected in terms of follow-on awards and with the delay or disappearance of that, is the DOD going to not purchase that equipment or it's being sourced elsewhere?

Paul Domorski

Well, basically, with the B-2 contract, we get orders under specific declinable period. They are typically fairly short term in nature, but it's been an ongoing program for us for about four years there about, so somewhere in that sort of prototype. Basically our customers made the decision to insource effectively. And as I said in my earlier comments, there were period, the orders were delayed and then they did not come. So as a result of that, we've had to reprioritize and take some of our existing work that we have in that area and move people around, move equipment around and we’re really on the early stages of that process.

Mark Jordan - Noble Financial

Secondly, relative to [Alexi] talked about developing your indirect channel sales. Could you talk to us about kind of feedback loops you get from your channel partners in terms of their marketing activity and what kind of forecasts or indications you have for future sales in terms of the market information you’re able to source some from that channel?

Paul Domorski

Mark, as you know, we were sort of in 2006, 2007, early 2008 we were the exception to the industry, where we’re a 100% direct. In other words, we had our direct sales people cloning on all of our customers or virtually all of our customers, and really in later 2008 and early 2009, we started to look at shifting the mix and we did that predominantly with BlueStar and ScanSource and other partners such as that. The good news is that those channels give us access to customers that we would not have seen before. We have to certainly continue to work those channels and to keep (Alexi) front of mind where those customers. The good news is they represent incremental revenue to us or deals and frankly we think we would not have seen before particularly in those markets. Our relationships with those [borrowers] has been very encouraging. We have been encouraged by frankly there perceptions of LXE's products. They see it as a premium product in the market, they see it as a value-add, and they see it as something that will enable them to win more offers, which is always a good thing.

So, we have significantly increased the amount of channels that are there both in the US as well as internationally, but like any new relationship it takes some time to get moving, and we are actively working to move those, get them inventory and get them [demo] units, get them to know who the people are, get them to know the feature and functionality of the LXE products, and, it's early days but there is sprouted progress.

Mark Jordan - Noble Financial

Okay. Kind of a final question sort of you had given a thought to obviously the stock will be under pressure for period of time. You got a good solid financial position, what the Board's position maybe in terms of buyback here given the events?

Gary Shell

There is still not an authorization that's available because to work with. I don’t that the -- they will evaluate the situation as we go forward. We are also looking as we have previously disclosed, we continue to look at opportunities to invest that might be able to supplement, help our existing businesses and leverage. So the question of where is the best place to put that money, we'll be resolving that. But I don’t think it's a slam-dunk that we would necessarily go back into a repurchase. We already have, we still have some repurchase authorized and ready to go.

Operator

Your next question comes from Michael Ciarmoli, Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood

The business jet market, the commercial aerospace markets, they’ve been weak, we’ve been seeing signs of this all year, seemingly this was expected. Where did you guys go wrong, was it the forecast, I mean, was it -- just not having enough visibility into what your channel partners were doing, the guys like Rockwell, Honeywell. If you could just help me giving me a sense of kind of what your forecasting aero was made?

Paul Domorski

Well, I will say this Michael, and I said it earlier on in my comments which is, despite of fact that there were telltale signs in the aerospace systems, the channels was still actively taking a lot of product from us in the first quarter two of this year. You can go back and look at our results in the communications and tracking segments and you will see results that were growth. While certainly there were the telltale signs that were out there about the market, I mean, more than telltale signs and the weakness in the aerospace markets.

It takes sometime to be able to reposition your sales force from into as I said, more retrofit type opportunities, and more military type opportunities, and really the third quarter was the beginning of the slowdown, as I’ve said earlier. So, we’ve done all the obvious things which are continuing to work our existing channels, but we are not waiting until the future.

So, we are looking at the new markets, Latin America, Asia, other types of deployments of our military products on some of the military platforms that are there, and we think that those things will be successful, but it was really the beginning of the third quarter that hurt us.

The other thing as Gary talked about and I can’t underestimate enough is our SATCOM operations is in Ottawa, Canada and that currency has hurt us $0.23, $0.24, $0.25 something like that in the EPS number. So, we have been attempting to work away through it, and have done that in the early stages in the year, but are not able to doing the third and fourth quarter.

Michael Ciarmoli - Boenning & Scattergood

So looking at some of the other commercial aerospace players that they are talking a lot about inventory rebalancing, I mean is it fair to say then, the channels of the Honeywells, Rockwells, they are fairly stuffed right now and you guys could see a inventory rebalance persist for the next couple of quarters, which could really hit future results?

Paul Domorski

I don’t see it is a being a rebalancing, what I do see is, is that the new normal is lower and the channel was taking lower shipments than it did before in the past. There is certainly activity that's out there. But it's much less than what it was before. As I said some of our partners are saying to us, they prefer that we make shipments more towards the beginning of next year in some of these areas, which is why we’ve given the guidance that we have today. So that that’s really the best most that I could say about it, Michael.

Michael Ciarmoli - Boenning & Scattergood

Then just thinking about where I guess legacy SATCOM business was or SATCOM communications and tracking in general. How much of the revenue shortfall can you attribute to market weakness, just projects sliding to the right versus your selling content say through formation that your revenues are just much lower than your traditional satellite equipment that you were getting may be say on average a 100,000 [applying] for. Is that kind of normal to you or you're just going to have lower ASPs on some of your product?

Neil Mackay

Michael, its Neil Mackay here. The C&T business has quite a diverse market. Military folks I’d talked to (inaudible) after market as well and there are different reason ways of looking at it. The military is still looking pretty good. Our formation folks have very strong long-term business. We're not seeing too much weakness there at this moment.

On the SATCOM side, a lot of the weakness you're seeing is really through our partners, the Honeywell, (inaudible) and so on you have pushed out orders. But we are still getting order from them, but their rates are (inaudible).

Paul Domorski

I would add to what Neil said is what Michael that I don't see a sort of – I'm sort of reading something into your questions here. I don't seem sort of cratering of ASPs in the market. What I see is that, I see a delay. I see that the plans that air carriers have to get to connectivity which they all are trying to find the way to get to. Our current estimates are similar to what they were last year.

We tracked it, most of their carriers; there are about 40 carriers. They have ongoing efforts to be able to install connectivity, the commercial airlines in their plane. Well, what's happened is that the economy is taking a toll on the timing associated with that. So it isn't a sort of commoditization in my word of ASPs that’s occurring, it's just that the market is delaying. We are fortunate enough by virtue of our diversity and the markets that we are in that whether it is on the low end side I mentioned before, this Forte’ AirMail system. This is a box basically you put on a low end jet and your BlackBerry or iPhone magically works. You can get your e-mails. You can download it. We've got a very competitive price on there and again it's oriented towards the low end of the market.

On the Aircell shipments, they're still taking shipments as we said before. There are 600 planes that have equipped on our equipment so far this year. So what's happening is in summary the economy is really kinked into the timing and that's what our numbers reflect.

Michael Ciarmoli - Boenning & Scattergood

Can you help me quantify how much of your business in the channel goes through someone like Rockwell Collins?

Neil Mackay

Within the [C&T], it's probably 15% or so I would think.

Michael Ciarmoli - Boenning & Scattergood

15%. So I mean the forecasting wide body IFCs to be down 40% in 2010, I mean how do you think that impacts your business?

Neil Mackay

Lot of the current IFC business is actually going to some other competitors, for instance Panasonic. If you read the Panasonic announcement, they are seeing a really need to pick up in that area. So we are not very heavily involved in the Collins IFC. We involved in IFC, the connectivity side of the business.

The Panasonic is really in a sweet spot, that's where the (inaudible) the carries are Singapore, Lufthansa and so on. Those are the guys were the first class big spenders. So from IFC point of view, we still will be okay.

Michael Ciarmoli - Boenning & Scattergood

Just last question with regards to recent acquisition there, you don’t foresee any goodwill impairment charges given the weakness?

Neil Mackay

I can answer that. Our acquisitions are doing very well.

Operator

Next question comes from Chris Quilty, Raymond James.

Chris Quilty - Raymond James

I just want to follow up on your last statement on the acquisitions. Those companies had been growing at a 20% to 30% growth rate prior to acquisition. Obviously, they are seeing some economic-related order delays here, but do you think those businesses can sustain that sort of historical, at what point do you think you get back to that level?

Neil Mackay

Well, they are actually meeting our plan fairly well and they are bringing the whole new look to EMS and this is our most exciting product of business I would say Chris is. We’re getting to get a lot of new enquiries from [customers] that we didn’t know about before. So I am actually quite encouraged with those three businesses.

Chris Quilty - Raymond James

Can you talk specifically about the NATO opportunity, is that using your Blue Force Tracking unit Iridium-based?

Neil Mackay

Well, there is a mix of. We have a (inaudible) tracking units as well as Iridium one and we actually have two win tracking units. We are seeing quite a consolidation of the way the NATO forces are approaching tracking and also messaging, and what I expect is that we go back and say fairly a big role in Afghanistan in the future.

Chris Quilty - Raymond James

Is that using some of the legacy program stuff you were doing or from some of the acquired companies?

Neil Mackay

A mix of both but lastly a lot of it is coming out from our Satamatics group and as well as our (NYSE:CMS) group in (inaudible). They are actually putting forward the new products, some new spins, some new applications that was available before. Satamatics have their own mapping programs and sort of the consolidation of the group that bringing up some new product portfolios. That product, they just have a business. I'm very encouraged about.

Chris Quilty - Raymond James

When you look at the downturn in the traditional SATCOM business, was that concentrated anymore heavily amongst the three markets that you serve of business jet, military and commercial?

Paul Domorski

Well, certainly the business jet market has been impacted. I mean there is absolutely no doubt about it and as I said, there has been some pickup in the commercial piece and the retro 50s to sort of make up for that, obviously impact. The new built part is also down and (inaudible) the Boeing and Airbus platforms and less planes, less connectivity systems are being installed. So it's just as I said, we don’t believe and we are confident that we are losing orders. It just if you look at the underlying shipment of product and aircraft and it's just delayed in. As I said in my earlier comments, I have read a lot of the reports that have come out in the industry and what the consensus that I have read. As I said it says that they will start being in incremental improvements sort of in after the end of the first quarter, that’s what it smells like to me as well.

Chris Quilty - Raymond James

Shifting gears on the defense and space business, do you have some specific project that you're targeting that gives you the confidence, you are not going to moves 436 million run rate on the B-2 program?

Gary Shell

I don’t think I can speculate on what our business development activities are. I mean as I said, this is combination of reprioritizing the backlog that we have today. It is orders that we have brought in recently, and it’s a matter of seeking new orders that we are actively pursuing. So, is it all here in front of us, no, but are we actively working on it, the answer is absolutely yes.

Chris Quilty - Raymond James

Well my question was the B-2 program as you mentioned that was four year lean time. Are we looking at in terms of building a revenue base for that business, another long lead into the new program or is there stuff that you can turn on more of a commercial basis with government customers in order to fill the hole there?

Gary Shell

Our priority is doing things that obviously would impact the business in the next couple of quarters. The fourth quarter doesn’t look -- there is not going to be a significant rebound in that area, but again, we are actively working to make that happen. I really can't say much more than that otherwise I’d be sort of divulging some of our prospects and that that’s not a good thing.

Chris Quilty - Raymond James

Okay. Final question, Gary did you say tax rate for the fourth quarter 10% to 15%?

Gary Shell

No, no that looking at 10, basically our guidance assumes again zero. The tax benefits that we picked up in Q3 were the unusual circumstances we pointed out, but we should not have – we should have effectively zero tax rate in Q4, and then going out in '10, it should fall into 10% to 15% range.

Operator

Sir, there appears to be no more questions in the queue at this time.

Paul Domorski

We'll draw to a close there again. Again thank you for taking the time to come on the EMS Technologies third quarter earnings call. We look forward to talking to you again at the end of the fourth quarter. Thank you.

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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