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EMS Technologies, Inc. (NASDAQ:ELMG)

Q1 2010 Earnings Call Transcript

May 5, 2010 9:30 am ET

Executives

Perry Tanner – VP, Corporate Marketing

Neil Mackay – President and CEO

Gary Shell – SVP, CFO and Treasurer

Analysts

Chris Quilty – Raymond James

Kevin Ciabattoni – Boenning & Scattergood

John Powers – Millbrook Capital

Rich Valera – Needham & Company

Operator

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

Perry Tanner

Thank you, Christina. Good morning, everyone. Thank you for joining us today on EMS Technologies first quarter 2010 earnings call. This is Perry Tanner, Vice President of Marketing, and with us today is Dr. Neil Mackay, EMS Technologies' President and CEO, and Gary Shell, our Chief Financial Officer.

Neil will provide brief introductory comments and then Gary will review the financials. After the financial overview, Neil will offer more highlights on the company's operating segments and market conditions before providing an update on the company's 2010 outlook. After that, Neil and Gary 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 and results could of course differ materially. I refer you to the statement of Risk Factors in our Annual Report on Form 10-K for the year ending December 31st, 2009, and to our press release. These documents identify important factors that could cause such a variance.

Our remarks will also include certain non-GAAP measures of financial performance. Please refer to our press release, which is available on the company’s website at the Press Room page for a discussion of any non-GAAP measures. During the course of 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.

At this time, I will turn the call over to Dr. Neil Mackay, EMS Technologies' President and CEO.

Neil Mackay

Thank you, Perry. And good morning to everyone on this call. I'd like to start by revisiting three important points from last quarter’s call and then summarizing this year’s first quarter. After that, Gary will talk about the financials, and I’ll follow with some additional detail about the quarter. Once I finish, Gary and I will take your questions.

So here are those three points. On the last call, I said our recovery would be gradual. I also said the first quarter is typically modest and we did not anticipate the year 2010 being any different. This appeared to be true. Overall, first quarter results were down slightly from Q4 of ’09, the result of a slower recovery in Aviation and an extended recovery in Defense & Space.

Second, I said the fundamentals of our LXE Logistics business were continuing to improve, especially in North America. I also said that the launch of new products, the movement beyond the warehouse was supporting this. We have tangible evidence of this improvement. LXE’s Q1 results were up year-over-year as well as compared to Q4 of 2009.

And finally, I said that EMS is a mobile connectivity company with its focus on aviation, logistics and military. This can be seen several ways. Our new Aviation business is going to market with a large and attractive portfolio of connectivity offering. Global Tracking is capturing market share in the security, tracking the logistics market with the solutions model.

And our legacy logistics business LXE is expanding beyond the warehouse. And our Defense & Space business continued this realignment and moved to volume production from major defense programs. For the quarter, we reported revenues of $83 million, earnings of $0.07 a share, and adjusted EBITDA of $6.6 million. Our cash balance remained solid at $54 million.

I’ll now turn the call over to Gary to review the financials.

Gary Shell

Thanks, Neil. 2010 kicks off a new look for the EMS financials, and this new look reflects the evolution of our mobile connectivity strategy. In previous quarters, our Aviation and Global Tracking businesses have been combined into a single reporting segment called Communications and Tracking. But this year, we began reporting those businesses as two separate segments along with our legacy LXE and Defense & Space segments.

Now for the results. The first quarter reflected the usual seasonal trend in our key markets. And so we were not surprised by the kind of start we had. Overall, the first quarter results were a mixed bag with consolidated revenues in 2010 down 10% from 2009, but LXE and Global Tracking, our businesses that focus on connectivity and logistics, both reported stronger performance in key markets as well as revenues from new products and services that help boost their top-line higher in 2010 than in prior quarters.

Aviation revenues, however, did not fare as well in comparison with earlier periods because our aviation markets are still in a slowdown that began affecting us in the second half of last year. Defense & Space revenues also were lower because 2009 benefited from a major program that was completed late in the year and had no effect on 2010.

Despite these lower consolidated sales, consolidated gross profit was higher than either the first quarter of last year or the preceding quarter, and gross profit as a percentage of sales was higher than in any quarter in 2009. This improvement reflects the hard work and commitment of everyone at EMS to continue reducing our overall cost structure and increasing our efficiency. And this improvement is even more remarkable in line of the added margin pressure caused by changes in US dollar foreign exchange rates, which has been unfavorable to both our Aviation and LXE businesses.

SG&A spend was comparable with prior periods. And at 26% of revenues in the first quarter, our SG&A level was only somewhat higher than the preceding year. We expect that the SG&A percentage will decrease as revenues grow later in the year.

R&D spend was comparable with the previous quarter, but up considerably from the first quarter of last year. All of our businesses have increased their R&D spending, and much of this expenses supports new products and initiatives that will benefit the company beginning as early as the second half of this year. We expect the quarterly R&D spend to increase throughout the year, but it will likely not exceed 7% of revenues.

Similar to 2009, we presented supplemental information in this morning’s earnings release about net earnings and earnings per share on a non-GAAP basis. These non-GAAP results exclude impairment-related charges and also acquisition-related items, both of which were minor in the first quarter. We also presented adjusted EBITDA, which at $6.6 million was somewhat lower than the first quarter of last year or the preceding quarter.

The key factor in this comparison was a lower level of revenues in our Aviation business, which has historically been our leading generator of EBITDA. Also affecting EBITDA was the movement of the US dollar against the Canadian dollar and the euro. This movement was unfavorable to our businesses and caused a net foreign exchange loss.

Turning briefly to the balance sheet, the company generated cash from ops of $8.4 million. Total debt was only slightly higher than at the end of 2009, and it represents leverage of well less than one times annualized EBITDA. Our cash carrying balances increased to $54 million. Trade receivables decreased slightly. And inventories increased somewhat, mainly as LXE built more safety stocks to cope with supply chain delays. Our financial position remains strong. This concludes my comments on the Q1 financials.

Neil Mackay

Thank you, Gary. As Gary pointed out, we now have four operating businesses; Aviation, Defense & Space, Global Tracking, and LXE. They are all part of the mobile connectivity equation. I’ll begin with LXE, our priority logistics business. I’m pleased to report that LXE closed the quarter with a 28% revenue increase over the first quarter of 2009.

These results point to the success of our new distribution strategy and to a recovery in our traditional warehouse and court markets. Another indication of improving market conditions are reports of inventory rebuilding in several industries. Analysts are predicting this inventory replenishment will continue through most of 2010, and I expect to see strong performance by LXE during the year.

We are also continuing to grow beyond the warehouse where new vertical markets account for 10% of total orders. We started with Itron, the world leader in meter reading, and now have products in hand of 50 new customers. New orders in Q1 in this new product line were over $2 million, which gives us great encouragement for our strategy. These positive developments are not just market driven. They are also the result of our strategy to expand distribution channels. We now have agreements in place with over 500 partners worldwide, which produce more than two-thirds of all first quarter sales.

I’ll now turn to our other logistic business, Global Tracking, which is quickly becoming a leader in the low data rate tracking services. We expect this business to grow by over 30% this year alone, an especially positive sign in our airtime services, which now accounts almost 50% of our Global Tracking revenues. The importance of this is both in the traditional higher margins, but service is high over product sales, as well as the recurring aspect of the airtime business. Driven by increased airtime use, our first quarter revenues rose 11% compared with Q4 of ’09 and EBITDA was $900,000.

A sizable portion of our 2010 business would come from stable government customers. Global Tracking provides products and services to track cargo, personnel and fleets for the US Army contractors in Afghanistan and does the same for NATO troops. And we were recently awarded a contract by DCNS, the French Naval defense company, to enhance the search and rescue capability in France.

Let’s now turn to Defense & Space, our primary military business, which has a strong focus on mobile connectivity, which the military call comm-on-the-move. First, backlog remains solid overall. Two-thirds of forecasted sales for the remainder of 2010 are now covered through firm orders. Second, Defense & Space is well positioned to achieve higher profitability in the coming year to realignment of staffing. And we are continuing our move to a stronger product focus.

We received another order for our Common Data Link product on the MH-60 Hawklink platform. This order brings our total to $11 million, and we expect to see follow-on sales in this product line inside and outside the US. This quarter also our Ku-band antennas were selected for our key military UAV program that promises significant revenue potential over the next six years. We intend to build on both of these recent contracts to support data link applications on other platforms.

Looking next at our Aviation business, we had a modest start of the year, consistent with our expectations. Lower first quarter revenues were due principally to lower sales to certain customers in the air transport market, with some volatilities common. The good news in the military aviation market continues to be the use of our Inmarsat products and our inside connectivity offerings.

We received a $1 million order for SwiftBroadband upgrades to surveillance aircraft platform. This is a significant step. SwiftBroadband is the natural upgrade path for all the aircraft platforms that now currently are equipped with legacy Inmarsat equipment. EMS provides least cost, highest functionality upgrade approach for its hundreds of customers. For new platforms, on the other hand, EMS Aviation is upping the ante. To accommodate the higher SwiftBroadband bandwidth, it has introduced the AMT-700 antenna as the next generation for the de facto standard EMS tail mount antenna. Two biz jet platforms have already accepted it and more will follow.

We also had a noteworthy order from a major military integrator for our ToughDisk storage product where this data is a need for storage. This used version of ToughDisk announced in November offers 50% more storage capacity to meet the growing demand for insight connectivity.

Turning to the commercial aviation market, the lower demand for business jets is closely tied to corporate profits. And although we are seeing general signs of improvement here, conditions in the market still remain uneven. But on the positive side, we did see a 19% increase in our distribution partner revenues when compared with last quarter as well as improving outlooks from companies like Boeing.

And there are some other good signs as well. One, our customers are continuing to buy our low-cost Iridium offerings despite the challenging economy. Iridium airtime rose 18% when compared with the first quarter of 2009. Another strategic contract we won with the California Department of Forestry and Fire Protection. That contract puts our Iridium products on CAL FIRE’s 55 aircraft fleet, tracking each of their helicopters in near real-time. We expect our new Iridium products to continue gaining traction throughout 2010.

Now, even though we’re talking about our businesses separately, it’s important to know that we are leveraging the synergies that are available across them. As a result, we can now offer new and more robust solutions to our customers. We are, in fact, actively engaged in discussions with several customers about how to take advantage of the increasing demand for more bandwidth in the mobile world. But I’ll talk more about these efforts as they reach fruition.

In closing, I believe today’s discussion shows that we are making tangible progress in becoming a leading mobile connectivity company. We are demonstrating it through constantly improving our connectivity products and services and then expanding our market reach. We are also demonstrating it through the way we leverage our company-wide marketing, engineering product development resources to realize our strategic vision. We are committed to further improve profitability and expand our market position in the challenging but improving economy.

Before opening the floor to questions, I’d like to just reaffirm guidance of $0.75 to $0.90 per share for the year, excluding charges mentioned in our press release. I’d like to now turn over the floor to Christina, and Gary and I are ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Thank you. Our first question comes from Chris Quilty of Raymond James. Please state your question.

Chris Quilty – Raymond James

Good morning, gentlemen. I was hoping that you might be able to give us more granularity on the aviation market, what you are seeing in terms of sort of broken down by business jet commercial and military, what the outlook would be there for uptake this year, and any specific comments with the announcement here of Continental and United, whether that would or might have any impact on you.

Neil Mackay

That’s a big question, Chris. We don’t know all the answers, but we do know some. And if you just go – going back with United and Continental, you might know of course that United is a customer of Aircell and Continental is a customer of LiveTV for some stuff. But in any case, what we are hoping is out of that will come a big order for Aircell. That’s still, I think, sometime away. Generally, within the Aviation business, you have to kind of slice it in many different ways. You’ve got forward fit and adaptive market and so on if we could spend all day on that. But what we are seeing is slowdown a little bit in – there is a slowdown in the business jet side, but the activity is definitely growing up. We’re seeing more flying hours. We’re seeing more requests for quotes. So that is starting to happen. I’m seeing activity in there. I can’t see it already happened here. But the business jet market we expect to pick up sometime in the end of this year. Rockwell Collins and Honeywell attract us as well as we do, saying it’s going to be at the end of the year as well. I’m not sure if I’ve answered all of your questions. Shoot me again, Chris, if you could.

Chris Quilty – Raymond James

Just on the military side, some of the aircraft programs, I think you recently got some order for some upgrade from Swift-64 to BGAN, relative number of aircraft or upgrade platforms you’re looking at?

Neil Mackay

On the military side, there is a tremendous demand for surveillance, and that’s exactly what’s driving the Inmarsat products. When you look at it, there is only a few countries that actually have surveillance aircraft equipment Inmarsat. That would be the US, the German Army, Australia and a few others. But there is a tremendous demand for higher bandwidth so that people can do offshore surveillance. So we are seeing a lot of activity in that area. The other product that I think we are already looking forward to is our Iridium products as well. There are thousands of planes equipped with basic Iridium voice and they have no data whatsoever. We’ve announced our Iridium Forté email, and that’s getting a lot of traction within that class of the business as well.

Chris Quilty – Raymond James

And what does that look like for you in terms of the hardware upgrade path from a voice to a data that’s selling in entirely separate paths?

Neil Mackay

It’s really quite easy to do. You don’t have to – you just add on a tiny little box and inserted into the Iridium data link and now you’ve got Blackberries onboard aircraft. It’s a very trivial thing to do. And the – what we are really going through now is the FTC process. We are getting FAA and FTC certification. So later on in the year, you will start seeing a lot more of that starting to happen.

Chris Quilty – Raymond James

Okay. And on the Defense & Space business, I mean, you’ve lost a big chunk of revenue there on the B-2. Can you give us an update on sort of how you are filling that void with new programs? And if you can give us a specific range of what we should be looking for here for the full year, that would be helpful.

Neil Mackay

Well, B-2 is behind us. We have cited the company differently, and in actual fact, it’s really being a good news out of all of that. We now are focused on developing a product line approach to EMS. And the Hawklink order and the other Ku-band order that we can’t speak of is really the first example that we are doing that. And that’s being the silver lining and that is that we now have a management team who are focused on thinking about DNS as creating product lines rather than going off to individual projects. So I think that’s probably a good thing for us. Gary can –

Gary Shell

I think, Chris, in terms of trying to scope out where you think that business is going to be just size-wise, last year they finished up the year not a million-ish kind of number, and so they had a whole – that was upwards of nearly very high 20 millions in for B-2. So that fell out. We have already, because of the success of some of the product initiatives that we’ve been getting like the Hawklink thing, we’ve gotten some new things to fill in there. So I think the defense business will be down from that $90 million level, but I think it’s going to be somewhere in the $70 million to $80 million range, something like that.

Chris Quilty – Raymond James

Okay. And you had alluded to some big radar programs you are working on. Any progress there?

Neil Mackay

The satellite program, it’s too early, we can’t say much about that. But they are kind of going through the pipeline as we speak.

Chris Quilty – Raymond James

Okay. And final question here on the LXE business, Gary, again if you could help us sort of understand what the operating profit trend line might look like for that business as the year progresses?

Gary Shell

Yes. What should happen, Chris, is you will notice that at this current level of revenues that they had, they did generate some profit, but that’s not nearly what we would expect. Their revenues should be up in the succeeding periods, and we should be able to get some pretty good leverage out of that without having to add a lot of SG&A cost on to that. So, as of right now, of course, they had a 3% kind of operating margin in Q1, but that number should be going up – that number should be, if all plays out well – and I think most of the models are expecting that it would be something in the 6% or 7% range maybe.

Chris Quilty – Raymond James

For the full year or by the fourth quarter?

Gary Shell

No, no, by the fourth quarter.

Chris Quilty – Raymond James

Okay. Great. Thank you, gentlemen.

Operator

And our next question comes from Kevin Ciabattoni of Boenning & Scattergood. Please state your question.

Kevin Ciabattoni – Boenning & Scattergood

Good morning, guys.

Neil Mackay

How are you doing, Kevin?

Kevin Ciabattoni – Boenning & Scattergood

Good. Just following up a little bit on Chris’s first question there. I know you mentioned the Inmarsat, the AMT-700 on the two business jet platforms. Can you give us a little bit of an idea of what you are seeing in terms of Inmarsat demands, maybe just quotes coming in for the rest of the year?

Neil Mackay

Specifically on the AMT-700, it’s a new product, which will eventually supersede our AMT-50. We have about 1,000 of them out there. So it’s a de facto high demand for – if you’re going to have an Inmarsat terminal onboard your aircraft, you have a really good chance of it being an EMS AMT-50 or eventually an AMT-700. We’re getting a lot of good feedback from the various OEMs, the aircraft OEMs for that. What – eventually what happened, Kevin, is that these will become supplier furnished equipment, SFE, rather than customer furnished equipment. And that’s probably the biggest strategic change in the way the antennas are going to go onboard the aircraft. Am I answering your question?

Kevin Ciabattoni – Boenning & Scattergood

Yes. Yes, that’s helpful. Okay. And then shifting gears over to LXE, you mentioned that in this quarter you had about two-thirds of the LXE business being down by distributors and VARs. Can you give us an idea what that was maybe in the second half of last year or 4Q? Just kind of give us a trend there.

Neil Mackay

Kevin, that number was below 50%. I don’t know – I can’t –

Kevin Ciabattoni – Boenning & Scattergood

That’s fair. Just a ballpark is good.

Neil Mackay

We started that process early in ’09, Kevin. And so it’s almost every quarter you see an improvement.

Kevin Ciabattoni – Boenning & Scattergood

Okay. And are you still seeing supply chain issues there in LXE that you mentioned in last quarter?

Neil Mackay

Yes, we are. In fact, I think we would have expected a slightly higher revenue in Q1 actually if we could have got some others over. What we are doing now is getting all those long lead items in place. So we are increasing our inventory Q2, Q3, to ensure that we don’t have those problems. But it’s an industry-wide problem that’s happening here. The demand – the pent-up demand is just phenomenal.

Kevin Ciabattoni – Boenning & Scattergood

Okay, helpful. And then one last quick thing, Gary, tax rate in the quarter was obviously higher than expected, which you’ve addressed in the press release. Is that the run rate we’re kind of looking at for the rest of the year or should that trend back down?

Gary Shell

That’s probably the run rate until the R&D credit gets extended, which we expect. But Congress kind of waived the last time we had a renewal like this. They got kind of deep into the year before they finally got it done. It was late in the summer and early fall. So we could go another quarter or two before we get some adjustment there.

Kevin Ciabattoni – Boenning & Scattergood

Okay, thanks. That’s all I have.

Operator

Our next question comes from Jerome Lande of Millbrook Capital. Please state your question.

John Powers – Millbrook Capital

Hi, this is John Powers for Jerome. My first question is, we noticed that you’ve removed your revenue and EBITDA guidance language from this quarter’s press release. Can you talk a little bit about your 2010 revenue guidance and what your comments on for revenue and EBITDA growth?

Gary Shell

We limited our guidance this past year only to the EPS because everybody is working those models. We didn’t get specific revenue guidance or EBITDA to support it, although I think you sort of back into – most people are backing into numbers in the EBITDA in the mid-30s and – adjusted EBITDA, and backing into numbers in the revenue range of – it's a fairly broad range of what people are looking at, but it’s going to be the upper $300 million.

John Powers – Millbrook Capital

Okay, thanks. Another question I had was, a few weeks ago Rockwell Collins made an announcement about $209 million contract for military in-flight communications. I believe it was a retrofit project for their VIP suite. Can you tell us what the implications are for EMS on that contract?

Neil Mackay

That’s good news for us, John, because insofar as Rockwell Collins we’ll be putting on Inmarsat radios or other terminals like that on those aircraft. They will be using their own – they will be upgrading the Rockwell Collins legacy equipment. But in fact, we provide all of the Inmarsat terminals to Rockwell Collins. So this is part of what I mentioned, which is the tremendous pent-up demand for upgrading all those aircraft that’s already equipped with legacy Inmarsat products.

John Powers – Millbrook Capital

Great. And do you have a ship set for that program?

Neil Mackay

Yes. What we would provide to them is all the Inmarsat SwiftBroadband and radios. So it would be one of the boxes that they would brand on the Rockwell Collins names. Are you looking for a dollar value? We couldn’t give you that number at this stage, John.

John Powers – Millbrook Capital

Okay. All right, thank you. Last question relates to Aviation, I was wondering if you could maybe walk me through how you view Aviation operating margin throughout quarter-by-quarter through 2010 similar to how you described LXE operating margin for the year. And lastly, if you will be disclosing Aviation segment results for 2009.

Gary Shell

John, in reverse order, the earnings release – 8-K that we filed today for all of the analysts out there, we did put out a supplemental schedule together to reformat the 2009 results. And with the current formats, if you go take a look at that, that’s out there available right now. As far as guidance, we don’t do quarter-by-quarter, but we would expect as the Aviation business gets – begins to recover in its revenues that it should get to something much more like its historic kind of return there and typically they have done a low-to-mid teens kind of EBITDA return on revenue. That’s generally a very profitable business, and we don’t see that changing even in this current environment. It’s an order problem, not a profit problem.

John Powers – Millbrook Capital

Okay. Thank you.

Operator

Our next question comes from Rich Valera of Needham & Company. Please state your question.

Rich Valera – Needham & Company

Thank you. Good morning. I just wanted to follow up on the discussion on LXE. It sounds like you expect that business to improve throughout the year. Just trying to get a little more color on that. Should we expect a continued sort of quarterly progression of revenue with the peak being in the fourth quarter? Is that how you see the LXE business?

Gary Shell

Rich, that’s been their trend. That’s – I think you could take that something like that, but certainly be a reasonable approach what the other businesses haven’t given specific quarterly guidance. But I think that’s – they are all historic pattern before they ran into a buzz saw of this economy would be more typical of what you would see. The other factor that we have talked about and that supports that is they do have some nice new products coming online. Of course, Neil already mentioned the MX9 product, and that contributed a nice little bump to revenue stream this quarter and should continue to do that. And then there are some other products that will be coming online we expect in the second half. So that should add to the back half momentum at LXE.

Rich Valera – Needham & Company

Great. That’s helpful. And then you’ve given commentary in the release about the “strong” back half waiting of the year. Is there any more granularity you’d be willing to give there with respect to maybe the percent of revenue or profit that we might expect in the second half or any color on the progression into Q2?

Gary Shell

I think that’s about the best we can, Rich, because the timing on this thing is so order timing sensitive. And we’ve got a lot of orders happened late in the quarter. So it’s tricky to peg, but if you look back at a little bit more normalized pattern, 2009 was obviously an odd year. 2008 had some unusual things but started to show some patterns. 2006, 2007 were decent years and more normalized patterns. And they both showed some pretty significant increases in the back half. And those would be, I think, not unreasonable guides to use in terms of how 2010 might play out.

Rich Valera – Needham & Company

Okay, that’s helpful. And just one more on the tax rate, just to clarify, it sounds like you expect the tax rate to remain I guess in the sort of 30% pro forma range that you saw this past quarter until the R&D tax credit gets updated. And then if it does, you would expect 15% for the whole year. Is that correct?

Gary Shell

That’s correct. And there could be – very likely will be some volatility. It’s not going to be a hard number. As you know, the accountants and the SEC have been fighting to see who could make things more volatile in the way we account for income taxes these days. And we have some zero tax jurisdictions that depending on how well they do, it can affect them a bit. But that’s a reasonable guide until the R&D credit is renewed.

Rich Valera – Needham & Company

Okay, that’s helpful. That’s it for me. Thank you.

Operator

(Operator instructions) Thank you. Our next question comes from Chris Quilty of Raymond James. Please state your question.

Chris Quilty – Raymond James

Okay. On Rich’s question, the full year EPS guidance assumes that you will eventually recapture the R&D tax credits to get to that full number, but the first half of the year were singing sort of the 34%.

Gary Shell

That’s right. Higher rate till that gets packed, exactly right, Chris.

Chris Quilty – Raymond James

Okay. And remind me, when you do get retroactive, you take it as sort of a one-time gain in the quarter where it becomes retroactive?

Gary Shell

Yes. To catch up, it happens in the period in which it’s inactive. So even if we find out, for example, two days after a quarter-end and it happens, you got to wait until that period in which the legislation was actually enacted. And it’s shown as a one-time bump to the retroactive correction.

Chris Quilty – Raymond James

Got you. And final question, you are still on track to get back to sort of historical operating margins in the Defense & Space business by the end of the year?

Neil Mackay

Yes, we are feeling pretty good about that, Chris. In fact, the new approach we have could lead to slightly better margins than we’ve had traditionally.

Chris Quilty – Raymond James

Okay. What has happened – I mean, you were deploying a lot of the headcount in that business. You had big hiring in the beginning of 2009 and then lay-offs post the B-2 contract. Have you hit a stable level with the employees there or are you still dealing with some excess labor overheads?

Neil Mackay

No, we have pretty well gone back to bed. What’s happening is, as you have programs that have more repetitive growth rate, production contracts and so on, your learning curve improves and your margins grow because your quality is better, you don’t’ have rework, and as time goes on, the margins would grow, because what you’re doing is a repetitive type business rather than heavily dependent on new development.

Chris Quilty – Raymond James

Got it. Thank you.

Operator

(Operator instructions) Thank you. There appear to be no further questions at this time.

Neil Mackay

Well, thank you, ladies and gentlemen, for listening in on our earnings call. We’re looking forward to continuing with Q2 and having a reasonably good Q2. And thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your patience. You may now disconnect at this time and have a great day.

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