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Executives

Neil Mackay – President, Chief Executive Officer

Gary Shell – Chief Financial Officer

Analysts

Chris Quilty – Raymond James

Richard Valera – Needham & Company

EMS Technologies, Inc. (ELMG) Q3 2010 Earnings Call November 5, 2010 9:30 AM ET

Operator

Good day ladies and gentlemen and welcome to your EMS Technologies Q3 2010 Earnings Release call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star, zero.

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

Neil Mackay

Thank you, Anthony, and good morning to you all. Thanks for joining us on this EMS third quarter earnings call. As Anthony said, I’m Neil Mackay, the Company’s Chief Executive Officer, and joining me on the call today is Gary Shell, our Chief Financial Officer.

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

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

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

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

Now over to you, Gary.

Gary Shell

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

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

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

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

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

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

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

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

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

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

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

Neil, this concludes my comments on the Q3 financials.

Neil Mackay

Thank you, Gary. Well, a recurring theme in our earnings calls this year has been the Company’s steady progress towards what we describe internally as the new EMS. We have made the new EMS our North Star and it has helped guide our many improvements throughout the organization. But the new EMS is really just about three simple things: we are increasing our profitability, we are aligning our businesses, and we are taking advantage of our growth opportunities.

First, profitability. We have focused on profitability across the Company over the past 18 months. Improvements are seen in execution and cost control and the relentless pursuit of efficiencies. At LXE, we have substantially reduced our operating costs, and our EBITDA margins are now above industry norms.

Defense and space will likely finish the year with EBITDA among the highest in the division’s 42-year history. And our aviation business remains the Company’s leading division in terms of EBITDA contribution.

Now for alignment. In the new EMS, the potential for making the greater difference in the organization is the focus on aligning our various business units. Collectively in the past, EMS businesses have always been about some form of overconnectivity; but for reasons related to market maturity and technology compatibility, there have been few opportunities for our businesses to really coordinate their activities.

But all of that is now changing as we capitalize on the rapid developments in the mobile connectivity market that we serve. We are now able to drive towards much more alignment among our businesses. For example, LXE’s new product developments include wireless technologies such as 3G and 4G, and they enable the business to pursue opportunities beyond the warehouse. These new products are breaking down the market walls that have separated that business from the rest of EMS.

Now together our business groups enable connectivity virtually everywhere – indoors, outdoors, in the air, on the sea, and at almost every corner of the globe. And how can we do that? EMS has now got a full suite of connectivity solutions starting with satellite radios, 3G, GPRS, Bluetooth, Wi-Fi, GPS mapping, data storage, and RFID; and these are incorporated into handsets, networking devices, radios and antennas.

Let me give you a few examples of this new alignment in action. Our new Aspire aviation product that we announced just two weeks ago is being developed as a joint venture between LXE and EMS Aviation. Global tracking in LXE have closed their first combined order and are exploring many more opportunities with customers for both warehousing and transportation solutions. And defense and space is collaborating with aviation on the next generation of Ka-band broadband satellite products. This will be a game-changer for aviation connectivity in the future.

The third element of building the new EMS is growth. One business area where we have seen impressive growth this year has been in rugged mobile computing. Our LXE family of products has generated at least 20% year-over-year growth in each of the first quarters of 2010; and LXE is on pace to follow up that difficult 2009 sales year with one of its best. Major factors in this recovery have been the success of the indirect distribution model that we implemented last year, and also aggressive focus on our North American markets.

The future also looks bright. As we described in the earnings release, LXE recently announced the Marathon field computer. This innovative produce is targeted for completely new markets outside of the warehouse – field force automation, router counting, public safety – where messaging and location are important. We expect the capabilities of this device will also be important for broader solutions in the aviation and tracking applications in the future.

LXE has also leveraged other products into new markets. We now have close to 1,000 LXE terminals providing aviation ground services at one of the busiest airports.

Our global tracking business is also growing. We began to roll out the new Osprey personal tracker which is opening up new markets and applications, several of which are incorporated in our new mapping and messaging application called ViewPoint. We started shipping Osprey units in Q3 and to date we have already received over 2,000 orders for that product. And our aviation business unit recently introduced the Aspire line of connectivity products which is aimed at the midsize business jet market that we had not previously served. This market represents the thousands of aircraft that are perfect for the smaller size Aspire solution.

So in summary I’m pleased with the progress that we are making with the new EMS. Our story has become simpler to understand and communicate. We are not a mini-conglomerate in various technology niches. Instead, it’s become straightforward. The new EMS is in the business of mobile connectivity, focusing on tracking and aviation applications.

We are encouraged with our progress and the outlook for 2010 and beyond; so as a result we are modifying our guidance for the year. We are tightening up the guidance range to $0.80 to $0.90 a share and we believe we are on pace to reach the upper end of that range. As with previous guidance, this excludes acquisition and impairment related charges, of course. But this guidance also assumes that we will not get any benefit in this year from extension of the expired federal R&D tax credit.

But in addition, we’ve expanded our guidance to include adjusted EBITDA for the year, which we expect to be in the range of 38 to $40 million, which would be an all-time record for EMS.

We’re now happy to take your questions, and Anthony, you can open the floor to questions.

Question and Answer Session

Operator

Certainly. The floor is now open for questions. If you have a question please press star, one on your telephone keypad at this time. If using a speakerphone, we ask that while posing your question you pick up your handset to provide favorable sound quality. If at any time your question has been answered, you can remove yourself from the queue by pressing one. Again ladies and gentlemen, if you have a question, please press star, one on your telephone keypad at this time. Please hold while we poll for questions.

Our first question comes from Chris Quilty from Raymond James. Sir, you may ask your question.

Chris Quilty – Raymond James

Yeah, good morning gentlemen.

Gary Shell

Good morning, Chris.

Chris Quilty – Raymond James

Neil, I was hoping you could give us perhaps some better granularity into the aviation business. I think you stated in the press release that you see that as one of the better long-term growth opportunities; but I think both the business jet and commercial aviation markets are recovering slower than expected. Is it reasonable to assume that you’ll see the growth pick up next year; or what sort of indications are you seeing from your customers that there may be a turn somewhere in the near future?

Neil Mackay

Well that’s a good question, Chris. If you look at the Honeywell forecast, they do an annual forecast and they upgraded it just last month, and they are predicting that it’s going to be slow to 2011. But they are showing that the high-end business jets are starting to pick up where most of our market is, although our Aspire program is for the lower end. We are not planning a major increase in the business jet market for 2011. But we still do see good business in the military side and commercial aviation will start picking up, we believe, towards the end of 2011.

Chris Quilty – Raymond James

And the commercial aviation are going to be large headline announcements by your partners?

Neil Mackay

Well, I can’t go into the details but what we are starting to see is both the single aisle and double aisle aircraft putting connectivity on, on the forward pit side. So that will be a ramp up. It won’t be a major amount in 2011 but certainly the Boeing single aisle aircraft and the Airbus single aisle aircraft seem to be expecting an increase in connectivity.

Chris Quilty – Raymond James

And given the failure to pass a defense budget, is there any risk that your anchor military business might see a hiccup?

Neil Mackay

Well, we have two pieces on the military business. We have our defense and space side, and our aviation side—

Chris Quilty – Raymond James

I’m still talking on aviation.

Neil Mackay

On aviation. Yes, okay. Hard to say. We are still seeing good demand. After all, what we do in aviation is provide cart products, and that still seems to be going fairly well. We are being cautious about it though, of course, Chris. We don’t see a major disaster but it looks pretty strong still for 2011.

Chris Quilty – Raymond James

Okay. And a specific question to the aviation market – one of your competitors, ViaSat, has done very well in the Middle East using their ArcLight modem with—I think what they’ve said is over 100 aircraft, doing a Ku-band type solution. Most of your installs have historically been Inmarsat L-band. Do you see any growth opportunities in the Ku-band market, and how do you think you’re positioned competitively?

Neil Mackay

Well of course, we have a partner – Panasonic – on the Ku-band side, and you should talk to them about how that fits in with their plan. We are also working now on the next generation of Ka-band solutions which will show up—as you know, Inmarsat announced that they will be providing a Ka-band solution in a purely aggressive time frame. It’s still several years away, but we are starting to turn our attention to Ka-band for the future. The cost per bit for Ka-band is substantially lower than that of Ku-band.

Chris Quilty – Raymond James

Okay. Switching gears, the LXE business is performing great and yet I think in the eyes of many investors, they look at that business as a piece that doesn’t fit as well with the overall EMS story. And it sounds as though—you know, you talked about some of the joint opportunities that LXE is doing with other divisions. Are you now moving to the point where you see that as a longer term piece of the overall EMS story; or is it still a business that you’re looking at for possible sale?

Neil Mackay

Well, if you remember earlier earnings calls and road trips I’ve been on, I’ve been thinking that LXE has a good place to play within EMS, but we have to change the way we manage it and we have to change some of the technology, which is why we now have two products that are now working outside the warehouse. If LXE was only going to be inside the warehouse, that’s a problem; but we now have broken those walls and we’re seeing a lot of opportunities there.

The other thing that LXE brings to the table, though, is from our manufacturing side. It is the most sophisticated as part of outsourcing and actually doing higher volume products. So we are starting to use their expertise across the Company.

Chris Quilty – Raymond James

Okay. Fair enough. I’ll jump out and jump back in the queue. Thanks.

Operator

Our next question comes from Rich Valera from Needham & Co. Sir, you may ask your question.

Richard Valera – Needham & Company

Thank you. Good morning gentlemen. Question on the space and defense segment. One, could you give us the actual backlog number for the end of the quarter?

Gary Shell

Yeah, their backlog was approximately 71 million at the end of the quarter.

Richard Valera – Needham & Company

Okay, and mentioned in the prepared remarks that you saw some bookings opportunities in the fourth quarter that could lead you to build that backlog. Any color you can shed on those opportunities?

Neil Mackay

I wish I could, Rich, but I think we’ll have to hold that. There are some programs that are follow-ons of what we have, but there are some new opportunities that are there. I’m not sure if I can say anymore than that, Rich.

Richard Valera – Needham & Company

Can you give us any sense of the magnitude, just rough ballpark, or are these kind of five, 10—any sense at all of what—is there any sort of really significant potential bookings in there?

Gary Shell

There are some, Rich. There are some significant proposals out there, much larger than average; and there’s a pretty good pot of business they’re working on that would be the—well, you could pick up several million dollars at one chunk. So it’s a pretty wide range that they’re still working on.

Richard Valera – Needham & Company

Okay, that’s helpful. And then the—a couple questions on the tracking business, if I could. You mentioned that it sounded like there were some timing related issues on the revenue line this quarter, so two questions. One – did they directly contribute to the margin there, which was down quite a bit quarter-over-quarter; and two – can you give any sense of the potential revenue rebound we might see in that in the fourth quarter? You know, I know last year you had kind of an extraordinary strong fourth quarter. Wondering if we could approach that level, or just how much we might be up sequentially in that business.

Gary Shell

Well, that business has a couple of elements, as we’ve talked about in the past. We have more a business that’s a little bit more stable that’s the core of it. That’s the global tracking business with, of course, hardware and air time. There is a lumpy element business, though, and that’s the old search and rescue part of our business that we’ve had for a while, and that is kind of lumpy. It shows up when an order slides because typically those orders, when they come in and get delivered, it can be several million dollars even on a really large application, and if something slides out then it pops up in business the size of global tracking. So that’s—we did have some search and rescue activity that slid out, but we do think that, as we indicated, that the fourth quarter would be—fourth quarter should be quite strong. I think it could be one of the strongest quarters—it should be one of the strongest quarters that they will have had since we were reporting them—since we have been reporting them as a separate segment.

Richard Valera – Needham & Company

Okay, that’s helpful color. And then just wondered if you were willing to say anything about your AirCell business. You know, that’s been very lumpy since you’ve owned Formation, and just wondering if you’d give any color on potential timing of new orders there, what your perception is of the run rate of that business?

Neil Mackay

Well, I have a lot of confidence in the ASO business model as we move forward in terms of it is the cheapest part per bit for providing connectivity for aircraft, and also the cost of the terminals is lower than others. So in the long term, I feel it’s going to be a major player in the U.S. market. There are some issues in the short term. Airlines tend to put things in all in one go, so we get large orders where we ship and then we have to wait until the next airline is ready to go. I’m saying that we look like—as if we’ll have a decent 2011. We have a little bit of visibility into other airlines besides the ones now being served, but the timing of order X or order Y could slip one or two months one way or another.

Gary Shell

Yeah, I think, Rich, this one aspect—well, there’s a couple of aspects in terms of how that model has changed that has affected how it flows through to us. In the early days when AirCell was just getting their business out, they did—their particular model allowed them to—they stocked a lot of inventory and they ramped up fairly quickly when airlines placed orders. Now they are working on improving their own balance sheet, we believe, and trying to clean up their financials and make them solid. So they’ve made their ordering system more just-in-time, which has made it a bit more volatile.

The other thing, of course, is an industry factor where you’ve got some consolidation that’s going on out there that has slowed the pace of implementation for AirCell that was kind of unforeseen by everybody.

Richard Valera – Needham & Company

Right, okay. And final question, if I could, on LXE. Recently order trends have been pretty affected by macro but I think historically you have seen seasonality in that business where your fourth quarter tends to be the strongest quarter of the year. Would you, from what you see today, do you see a decent sequential uptick in the fourth quarter in LXE?

Gary Shell

I think we were very encouraged that the third quarter, which tends to be not so good particularly because of the European holiday, was a very nice quarter. So we would expect that LXE’s seasonality would continue. We hope over time that the variations in quarters won’t be quite so pronounced, and we’ve been really happy at the more steady growth that we’ve been seeing out of the markets this year.

Richard Valera – Needham & Company

Okay, that’s helpful. Thank you, gentlemen.

Neil Mackay

Thank you.

Operator

Our next question is from Greg Clamille, who is a private investor. Sir, you may ask your question.

Greg Clamille

Great quarter, guys.

Gary Shell

Thanks.

Greg Clamille

I have one quick question. You recently responded to a letter from a large shareholder and I wanted to know, have you retained an investment bank to help you think about the issues raised by this shareholder; and if you have, what is the bank’s mandate?

Gary Shell

Yeah Greg, we get all kinds of—we are open to all sorts of proposals and ideas from our shareholders. We welcome their input and we regularly consult with advisors to consider those matters. And matters raised in that letter would be just a part of that, that we would be regularly consulting as we normally do on an ongoing basis with our advisors about those potential opportunities.

Greg Clamille

And can you be more specific about the bank’s mandate and the time frame that we can expect to hear an outcome?

Gary Shell

I think we said that we would—we indicated in our response that we would expect to have more direct discussions with MMI to hear specifically their ideas fairly soon, so I would expect that the communications would be relatively soon.

Greg Clamille

Thank you very much.

Operator

Thanks, gentlemen. Again, if you would like to ask a question, please press star, one on your telephone keypad at this time.

Sir, there appear to be no further questions at this time—actually, Chris Quilty from Raymond James. Sir, you may ask your question.

Chris Quilty – Raymond James

Neil, I was hoping you could give us a little bit more visibility on what you’re seeing in the tracking market. Are you seeing strength in particular verticals or particular applications, because you seem to imply at least in the press release that you see very good growth opportunities even into the fourth quarter.

Neil Mackay

Yeah, there’s probably two areas, but probably one that you obviously think about with what’s happening in the Middle East. There is an expected reduction in troop levels as you go forward, and so what’s happening out there is as you try to transfer the responsibility to the local forces, we need to have infrastructure built in there to tell people where they are from materiel, for emergency use and so on, and moving trucks and warehousing and so on. So we are seeing—and there are a fair number of RFIs out there, by the way. We are seeing a lot of opportunities for what—our ViewPoint solution is basically the standard for moving men and materials around in Afghanistan, so we are hoping that we’ll see a big uptick in that in the future.

Chris Quilty – Raymond James

So if I remember, that was traditionally NATO-related work that you were providing.

Neil Mackay

It seems to have expanded itself beyond that, but I can’t speak about so much. But yeah, it’s covering not just the troops now. It’s covering contractors as they move stuff around.

Chris Quilty – Raymond James

And the mention you had in the press release about the drop in the service revenues. Can you help us understand some more color on that?

Neil Mackay

Yeah, it was just—there was a network glitch which was not, I think, to do with us where our airtime was reduced significantly because of some other issues happening in other parts of the network. But that’s been fixed and now we’re back up and running again. It was a simple thing like that.

Chris Quilty – Raymond James

Okay. And in terms of new products that you’ve introduced or have in the pipeline here—I know Iridium introduced a new, low-cost device. Inmarsat has been doing some things with their network. Is there anything material that should change in either the price point of capabilities of some of your products on a go-forward basis?

Neil Mackay

Well, there are two things going. On the tracking side, the 9602 that Iridium introduced is creating a new price point, and we are building Iridium modules using—sorry, we’re building units using the Iridium modules. And Inmarsat has also created their new service to compete against that. The nice thing is we are on both sides of the fence, so we will have products – both Iridium products and Inmarsat products – to attack the tracking and messaging market.

Chris Quilty – Raymond James

Great. And are you—at what point will you give us a better breakout in terms of the service versus product mix in that business? Or can you give us an idea of where it stands today and where you think it’s going?

Neil Mackay

Well, we’re moving more and more to service, quite frankly, to be honest; and other businesses as well. We are spending more and more time with applications and service, so I’m sure—Gary’s looking—trying to look for some notes right now.

Gary Shell

I was just looking. Chris, of course, we have started splitting out service revenues and disclosures. There will be some more color in those in the Q. I think—not exactly how it will all split out for global tracking because they do have several element there, but I think the trend is going to show there because their units in the field and operating continue to go up, and with the new product should be going up at a quicker pace. We believe that the service revenue is going to reflect that, and one of the things we like about that model is it’s a very sticky revenue model in terms of sticky service. It doesn’t change over to someone else, and that’s a good long-term payoff on that hardware segment.

Chris Quilty – Raymond James

Okay. And final question on the defense business – you indicate that there’s some high volume antenna opportunities in the future. Can you give us some more color on that?

Neil Mackay

Well, where we have the high volume now is in what we call our data link applications. I can’t say much more what the possibilities are there, but generally speaking it’s in things related to antennas and data links.

Chris Quilty – Raymond James

Okay. And on the satellite side of the defense business, you’ve historically had a pretty strong position on a lot of traditional telecom and military programs. Are you also getting real estate on some of these new Ka-band satellite band projects that seem to be one of the fastest growing areas?

Neil Mackay

Well, we have a number of proposals out on various constellations, but it’s a bit early days to talk about that, though.

Chris Quilty – Raymond James

Okay, very good. Thanks, guys.

Neil Mackay

Okay, thank you. Anthony, any more questions?

Operator

Sir, it appears at this time there are no further questions.

Neil Mackay

Well, thank you folks for joining us on this call, and we look forward to talking with you again at the end of the fourth quarter. Thanks very much.

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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