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EMS Technologies, Inc. (NASDAQ:ELMG)

Q4 2007 Earnings Call

February 28, 2008 9:30 am ET

Executives

Paul B. Domorski – President & Chief Executive Officer

Don T. Scartz - Executive VP & Chief Financial Officer

James S. Childress – President and General Manager of LXE

Timothy C. Reis - Vice President and General Counsel

Al Hansen, Senior. Adviser to the Board & Chief Executive Officer

Analysts

Chris Quilty - Raymond James

Michael Ciarmoli - Boenning & Scattergood Inc

Mark Jordan - Noble Financial Group

Richard Valera - Needham & Company

Operator

Good morning ladies and gentlemen and welcome to EMS Technologies Q4 2007 earnings release conference call. (Operator Instructions). I would like to now turn the call over to Paul Domorski, President and CEO of EMS Technologies. Paul, you may begin.

Paul B. Domorski

Thank you everyone for joining us on today’s call. Any statements that we make 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 31st, 2006 and to our press release. These documents identify important factors that could cause such a difference.

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 will continue this public call as needed to respond to appropriate questions.

After I provide my views on the quarter then I will turn it over to Don Scartz, our Chief Financial Officer for his comments, and then we will answer any questions you might have.

Well, good morning everyone and thank you for joining us on EMS Technologies fourth quarter earnings call. EMS Technology ended 2007 with record results, a reflection of the continued growth and execution we have seen all year in key areas of the business. Performance for the year in Q4 was very strong due in part to a strong satellite communications business, continued operational execution [inaudible] in space segment, and strong margins in our logistics business.

To summarize our specific results, fourth quarter revenues were $76 million. Earnings from continuing operations were $7.2 million or $0.46 per share. For the same period last year, revenues were $72.4 million and earnings from continuing operations were $6.8 million or $0.44 per share. Operating income was up 19% in 2007 versus 2006. For the year, EMS revenues grew $27 million to $288 million, the company’s highest revenue increase in history, while earnings from continuing operations were $19.2 million. We were able to exceed the revised high-end range of our annual guidance by almost $0.10 with a $1.24 earnings per share. In contrast, 2006 year-end revenues were $261 million and earnings from continuing operation were $15.8 million or $1.08 per share. Earnings per share in 2006, as you may recall, included $0.34 of certain tax benefits. Excluding these benefits on a pro forma basis, earnings per share in 2007 were 68% higher than 2006. In addition, EMS’s cash balance grew to a $134 million; the healthiest balance sheet in the company’s 39 year history. Net free cash was $23 million for the year.

Cash flow from operations before investments was $42 million; both were records for EMS. This solid financial foundation gives us the flexibility to grow both organically and through strategic acquisitions that bolster core strengths. We intend on doing that in 2008.

I would briefly like to summarize how EMS’s underlying businesses performed during Q4. Our satellite communications business representing almost one-third of the company led our results with 37% revenue growth quarter-over-quarter and 27% revenue growth for the year compared with 2006. SATCOM grew its business at the same time reduced expenses by a $1 million for the year mostly through better material price negotiations for products and improved process efficiencies.

Operating profit nearly doubled, up 97%. Commercial aero was a key contributor to results with demand for AMT-50 and HSD-400 and 440 products remaining strong among commercial and military customers. The CNX Cabin Gateway family of products also was strong with strong demand among business jet customers, with sales more than doubling in Q4 2007. The product which currently supports wired and wireless local area networks works with RIMM’s newly-launched WiFi-enabled BlackBerry enabling quick convenient in-flight connectivity.

During the quarter, Air France joined the rapidly increasing list of global airlines to begin trials of in-flight communications for their passengers using EMS equipment built for one of our OEM partners. EMS’s SATCOM business is well positioned to be an infrastructure provider as connectivity on commercial aircraft increases. I recently have returned from an industry panel EMS hosted at the National Press Club with several avionics and airline industry representatives. I and other industry leaders believe it’s only a matter of time before US airline market embraces a full breadth of in-flight connectivity options that are already enjoyed by our European and Asian air travelers.

Speaking of in-flight connectivity, EMS achieved a key milestone in the fourth quarter. Our SwiftBroadband products were the first in the world approved for commercial service on Inmarsat’s network. This network provides in-flight internet access over Inmarsat I-4 satellites, which will provide worldwide coverage including North America, once their third I-4 satellite is launched later this year. We continue to benefit from the engineering capabilities in D-space acquisitions in Australia, with that organization leading the design work on the core module for Inmarsat’s next generation satellite GSM phone.

During Q4 EMS booked $3 million in new revenue for this program. Also during the quarter, EMS won a significant contract to renew the service on the NATO Blue Force Tracking System. In conjunction with a partner, this system allows NATO forces to perform force tracking functions as well as monitor and protect their assets on the move in places like Afghanistan. EMS has delivered almost a 1,000 packet data terminals and we will continue to provide network services and air time through 2008.

The Emergency Management Products group won a new contract to supply search and rescue equipment to Indonesia. This contract enhances EMS’s standing as the world leading and most trusted provider of terminals for the Cospas-Sarsat international satellite system. This system has already been credited with saving over 20,000 lives by providing distress alert and location data to the country’s SAR operations.

Our Defense & Space systems business, which represents 20% of EMS from a revenue perspective, also executed very well in the quarter. Defense’s gross margins were over 26% of sales resulting at a 28% increase in growth profit compared with Q4 of 2006.

Operating profit for the fourth quarter was $1.6 million doubling Q4 of ’06. Order backlog also increased for the fifth consecutive quarter to an all-time division high of $66 million. For the year, DS&S had the best year for the past five years. Revenue was up 13% in operating income nearly double up 90% over 2006. Orders in backlog were a record. The F-22 Raptor, B-2, SIRFC and Phalanx programs are examples of core programs that continue to deliver new orders and solid recurring P&L in Q4. For example, EMS received a significant order to continue production work on the Phalanx Close-in Weapon System, a long-running program where we are supplying RF electronics in the radar system. This radar-guided gun system designed to defeat missile attacks is on virtually all U.S. worships.

Defense also generated very strong orders for the final quarter of the year. The major highlight was winning the first commercial contract for EMS’s of anti-jam beam-forming network solutions for the protection of commercial satellites. EMS also received additional orders for continued engineering efforts on the B-2 EHF program. The EMS antenna system will allow the B-2 to connect easily to U.S. Department of Defense as the military transitions from Milstar satellites to the new Advanced EHF satellite network.

In the Net-Centric Warfare area, EMS was selected by BAE systems to develop an air and ground tactical communication system for the navy. We also successfully demonstrated a similar system for on air-to-ship communications application for the Office of Naval Research, which has also funded EMS in the emerging UAV market to develop lighter UAV antennae.

In 2007, Defense & Space provided to be a reliable and solid performer to EMS’s bottom-line. This business is benefiting from a strong management team focused on execution and growing the business through innovation and what it has always been known for - the quality of its engineering. I am confident that the actions are benefiting both our customers as well as our shareholders.

And now on to LXE, our mobile logistics business. In 2007, LXE continued its sustained record of organic growth and profitability for the 7th consecutive year despite the continued softness in the America’s market achieving revenues about $139 million for the year. In the fourth quarter, the international segment in the business continued to be our growth engine as international revenues were up 14% for the year. LXE’s overall gross margins continued to be healthy at 42% for the quarter and operating margin improved from the third quarter to 6.5% of sales. Q4 saw a number of significant new account wins in both the Americas and international including Gap in the U.S. for LXE’s HX2 wearable computer and Porsche in Germany. Porsche selected LXE’s new MX8 handheld for use in its spare parts distribution facilities in Austria and Hungary. The MX8 is the smallest and lightest LXE handset ideal for light industrial and retail environments where operators want mobile computers that balance user comfort with ruggedness. A new award with the Saigon Newport in Vietnam suggests a strategic win for LXE as it is Vietnam’s larger seaport and handles some 68% of the cargo in the Ho Chi Minh City area and approximately 40% of Vietnam’s total trans-shipment volumes.

I believe the American distribution market is showing signs of recovery as we start 2008. LXE’s international business remains a strong growth market and the one that we are investing in is evidenced by the announcement on February 11th to acquire Northern Europe’s vehicle mounted computer market leader, Akerstroms Trux. With this acquisition, the LXE business will be able to add to its product line and boost its market share in the growing European market at a time when the EMEA and Asia markets are significantly out-pacing growth in the Americas. This transaction enabled us to add incremental market share, locate talented staff, increase our product line and it made sense financially.

In summary, EMS had an excellent fourth quarter and an exceptional year that will allow us to exceed the revised upward guidance we gave in early 2007. Results reinforced that we are delivering innovation in our products and processes and customers are responding to the value we are delivering. They underscore that we are in growth markets whether it’s in the business and commercial avionics market, (inaudible) on the move defense segment, the commercial space area, or the global market for wireless computing and warehouse instant mobile environments. It’s great to see the new orders and industry recognition of EMS’s strategic position and expertise in publications such as Forbes, which named us one of the 200 best small companies.

We remain focused on continuing the track record of performance, as we have done for the past few years, in 2008. We are building a performance culture that matches our world-class engineering culture. Make no mistake, we are not confused; we fully understand that we are not relevant unless we continue to perform and exceed expectations. Despite our focus on results, we continue to invest in our future. For example, R&D engineering is up almost 19% in 2007 compared to last year and up almost 60% over the past two years. We are making the investments that will propel this company for the future. Our goal is clear; to build a much, much larger business with a healthy down payment of results each year.

Looking forward to 2008, our strategic initiatives revolve around 1) extending our position in the aerial connectivity market, 2) improving LXE’s position in the market, 3) continuing the progress we made in 2007 extending our Defence and Space business conversion into a higher margin business through solutions development and volume production, 4) capitalizing in the growing market associated with tracking, locating, and messaging within the government military sectors, and 5) continuing to invest in software-controlled radio arena and integration areas. And 6) completing transformational acquisitions which parallel EMS’s core competencies in markets in tech customers and technologies.

As we announced on January 7th, our expected earnings from continuing operations for the 2008 fiscal year are expected to be in the range of $1.30 to $1.40. Thank you for taking the time to come on today’s call. I look forward to our next update at the conclusion of the first quarter.

With that, I would like to turn it over Don who will give you the financial overview.

Don T. Scartz

Thank you, Paul. I will provide some additional financial comments regarding the fourth quarter, certain balance sheet items, and full year 2007 results.

As sales and profits have increased, most measurements related to profitability have also improved. And Q4 comparisons are generally favorable to Q4 of last year and Q3 of this year. Gross margin at 41% compared to 38% in Q4 of 2006 and 40.4% in Q3. For the full year, gross margins were 39.1% compared to 37% in 2006. Gross margins have increased in 2007 from about the 35% level which they ran for several years prior to 2006. This is due to higher margins in each division as well as a shift in sales mix to higher margin division sales.

Operating income was also higher at 9.2% of sales for the fourth quarter. As the company has indicated, increasing the operating income margin is an important long-term goal. Each quarter of 2007 was higher than the previous quarter and each quarter was higher than the comparable quarter of the prior year.

Operating profits grew from 4.6% in Q1 to 9.2% in Q4 of 2007. For the full year, operating profit grew from $14.4 million in 2006 and 5.5% of sales to $19.3 million and 6.7% of sales in 2007, a 34% increase in total dollars.

SG&A expenses were affected by the increase in the value of the euro and the Canadian dollar. Increases in absolute SG&A dollars are mainly the result of higher commitments to sales and marketing activity throughout all of our divisions. For the year, SG&A ran 25.9% of sales compared to 25.4% in 2006. The change in currency accounts for a significant portion of the SG&A increases.

Interest income was higher for the quarter and increased by $3.1 million for the year due to higher average investment balances. This was mainly due to the higher cash balance at the start of 2007 versus 2006 and the positive cash flow throughout the year.

The income tax rate for the year and the quarter were favorably affected by several factors that resulted in a lower effective rate. The company earned a greater than anticipated proportion of income in Canada and Europe. Taxes in Canada are lower due to substantial tax credits that the company has there and overall rates in Europe that affected LXE International are lower than US rates. Additionally, US rates were lower due to R&D tax credits that were available.

Now, taking a look at the balance sheet and cash flow; as Paul mentioned the balance sheet has been quite strong and improved during the fourth quarter. The increase in cash in Q4 was mainly a result of earnings above expectations. For the year, the increase in cash was due to good earnings and a reduction in receivables by $8.6 million. A reduction in receivables was mainly in defense and space systems and LXE and resulted generally from collection on various programs. Total accounts receivable decreased from $94 million to $85 million or 10%, while revenue grew by 10%.

Inventories in Q4 were about $1 million lower than Q3. For the year, inventories were up by $2.9 million or 6.7% primarily in LXE and SATCOM. Overall inventories grew by less than sales. The Company spent $18 million for the purchase of fixed assets in 2007 and spent $5 million on the acquisition of DSpace in Australia. Cash flow from operations was $42 million and net of investments was approximately $24 million.

As we look at divisional results, first SATCOM. SATCOM financial results for Q4 benefitted from the substantial sales growth of $25.7 million. Margin continued to increase and was over 46% for the quarter. This was due to sales product mix increases and aero products for corporate jets and the effect of the satellite handheld development projects, as well search-and-rescue business projects. Gross margin for the year at 44.1% was well ahead of last year at 40.6%. SATCOM operating profit for the quarter was a record for EMS at 18.3% of sales. This was due to the same factors as Q4 as well as a year-long commitment to reduce cost.

In spite of the strong Canadian dollar, SG&A was lower at 16.2% of sales. SG&A for the year was 19.4% of sales compared to a 20% to 24% range in recent years. This is a result of sales volume increases as well as the cost reduction programs. This result includes a continued strong commitment to self-funded R&D in SATCOM at 10.5% of sales. R&D was $9.4 million for the year, a 24% increase. The combination of good profitability in the balance sheet factors resulted in significant positive cash flow for the quarter and for the year.

In defense and space systems, the improved backlog in orders mix contributed to improve profitability in the defense and space business. This provided the opportunity to better utilize resources. Gross margins stayed above 26% for the second quarter in a row as a result of broadly better performance on contracts and somewhat improved pricing. Overall profitability improved at the operating line to 11.2%. This brought the operating income percentage to 8.4% for the year. The operating profits for the quarter and the year are significant improvements from recent periods. SG&A stayed stable to 14.7% of sales. This includes an increased commitment to sales and marketing efforts. Total year sales were $59 million were 13% higher than 2006 and operating income is up by 90%.

In LXE, LXE had operating profit of $2.3 million in Q4 compared to $1.8 million in Q3 of this year. Gross margin continued to be good at 42.3% of sales. For the year gross margin increased about half a point from 2006. LXE closed out the year with the highest gross margin that we have had in that business in recent years at 42%. While sales were below expectation in North America, revenue internationally more than made up for that difference.

SG&A was up for year, which is mainly a result of the strong euro. The LXE division completed the installation of an enterprise software system in Europe in 2007, which should provide opportunities to operate on a more cost effective way internationally in the future. The recent acquisition of Trux in Sweden could also provide opportunities to positively leverage the LXE infrastructure.

In summary, the strong fourth quarter financial results capped off an outstanding year financially for EMS. The balance sheet is in a solid position to allow for financing both internal and external opportunities. Paul, this concludes my comments.

Paul B. Domorski

We would be happy to take any questions that anyone would have.

Question-and-Answer Session

Operator

Our first question comes from Chris Quilty of Raymond James.

Chris Quilty - Raymond James

Good morning gentlemen.

Paul B. Domorski

Good morning, Chris.

Chris Quilty - Raymond James

A quick question for you, Don. Is it fair to assume – I think you had guided to about a 18% tax rate for the quarter, so we are looking at $0.37 based upon your guidance?

Paul B. Domorski

Using that tax rate?

Chris Quilty - Raymond James

Yes. Rather than the tax benefit you showed in the quarter?

Paul B. Domorski

That’s probably pretty close to it.

Chris Quilty - Raymond James

Okay. And you had said in the past in last quarter that we should probably model to about a 24% tax rate for your 2008 guidance and that reflects the tax benefits in Canada. I didn’t notice however whether that includes any of the US R&D tax credits which haven’t yet been passed by Congress?

Paul B. Domorski

We don’t usually include those when we look forward, but probably in modeling I’ve used probably something little less than 24, probably 22.

Chris Quilty - Raymond James

Okay. Traditionally, I know you don’t typically guide to revenue but I was hoping that, Paul, maybe you could give us a general sense of where you think each of the three segments should grow in terms of order of magnitude, without giving us specific numbers?

Paul B. Domorski

I think you going to see – I think you are going to see that what you saw basically this year. I think basically our SATCOM business will continue to grow. We believe we were at, you know, we are seeing good growth in both the military as well as the business ship market and we are starting to see a lot of activity particularly outside the US in the international market, Air France as I mentioned before, has gone on board, Quantis airline was the last airline that went on last quarter. So, we are seeing big carriers starting to move in in that space.

I think in the Defense space, we will continue to grow in that area; we believe that our position in the communications-on-the-move segment is an attractive one. We believe that many of the different platforms that are out there are very interested in some of the technology that we’ve developed. We are, as I said earlier in my comments, expanding our role and our customers are asking us basically to do that which is often to provide more value than we are providing today and we are benefiting from that and the results that I described to you before. And then LXE, I think, we are again seeing a good progress in that area. We are particularly seeing good growth in the international space. We were able to do an acquisition that enabled us to be able to add to our existing market space, which was very attractive to us in that area, and we are starting to see some progress in the US market. So we continue to believe that we will grow in the areas that you are seeing growth now.

Chris Quilty - Raymond James

So, for LXE specifically, I mean, that business grew 10% for the last four years running flat in 2007. Is that fair to assume we get back, in your assumptions to sort of a mid single-digit growth or do you think there is the opportunity to get back to a low double-digit?

Paul B. Domorski

Well, I think again the challenge will be again what the mix of products that are associated with it. That’s the part that is uncertain to me, which is how much can we get internationally versus what we get in the US market. I think that will have a large determinant in that area, but I mean we take the business really quarter-by-quarter. We look at it. We have invested in our products. We have – the head of that business has said, we have the best product portfolio probably in the last few years in that area and we’ve also invested in our engineering in that area and we continue to believe that the results that we’ve seen, which are continued progress both from a revenue perspective and a margin perspective will continue.

Chris Quilty - Raymond James

Okay. And if I can follow the same question on the defense and space business, record backlogs, expectations in terms of percentage shipment in 2008 and it looks like that clearly supports the same kind of double-digit growth you saw in 2007?

Paul B. Domorski

I think again we are going to -- we believe we are going to continue to grow there. I’m reluctant to give you individual business guidance, but we are going to continue to grow as evidenced by what we did in the fourth quarter, we believe for the foreseeable future in 2008.

Chris Quilty - Raymond James

Okay. And just a follow-on question there on the backlog. Could you possibly quantify, when you look at that backlog, how much of that would be sort of continuing programs that come in for things like the F-22 and the Faylinks versus new program wins, things that you are picking up?

Paul B. Domorski

Do you know that Don or do you have that data?

Don T. Scartz

It’s a little bit of a hard number to get at, Chris, but I would say generally probably 25% to 30% would be new wins and I would have to really study a little bit to give you a better number, but…

Chris Quilty - Raymond James

That’s good. I mean, I think that shows some good program growth. And a last one final question with regard to the SATCOM business and the aeronautical, can you give us two different things, one I know that probably the biggest commercial air transport rollout this year should be Ryanair. They have talked about rolling out all their aircraft in a two year-timeframe, so where do you sit on that particular program if you can talk about it? And second of all, on the business jet market, can you give us a sense of for the appropriate class of aircraft, where you think you are in terms of penetration rates exiting 2007, is it 20% of all the aircraft or doing it today versus it was only 2% a couple of years ago? And what are you seeing also competitively specifically in that business jet market?

Paul B. Domorski

Well, I mean, in the first question regarding Ryanair, we are again through our OEM partners working with them to deploy their technology and to go through the conversion process of their plane, as you know it takes a while for that occur. As far as the business jet market is concerned, we continue to see good growth in that market. I mean, you saw it in our results in the third quarter, you saw it in our results in fourth quarter. I think you will continue to see it in the first couple of quarters of this year. I mean there obviously what you read in the newspaper about recession fears and all those kinds of things, but to be honest we are not seeing it so far in our order rates. So we still believe that there is good growth in that business for 2008 and it is certainly implied in our guidance, in our business plans.

Chris Quilty - Raymond James

Great. Thanks.

Paul B. Domorski

Thank you. Thank you, Chris.

Operator

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

Rich Valera - Needham & Company

Thank you. Good morning.

Paul B. Domorski

Good morning, Rich.

Don T. Scartz

Good morning, Rich.

Rich Valera - Needham & Company

If I could just follow-up on Chris’s questions on SATCOM, Paul I acknowledge, you say you expect that business to grow, but I think we certainly expect it to grow given its grown sort of about 30% a year for the last three years. I mean, just trying to get a sense of magnitude here, understanding 30% is pretty extraordinary but, can we still expect something in the 20% range because its obviously a 5% growth a year in SATCOM would not be what I think everyone is looking for, so I’m just trying to calibrate that a little bit if we could?

Paul B. Domorski

Well, we have got a mix of programs on there. I mean, we have got obviously the aero segment is growing. The EMP segment that I mentioned before, which is the Emergency-Management, which is -- this is our beacon, distress beacon part of the business. We see good growth in that area. We are working on the Inmarsat handset, which is certainly part of our business, the large contract that we won last year. All of those factors go into that -- into this business. And as I have said to you before, we are in a great position on many of the platforms that exist for the commercial space since we talk about we believe that that industry is only at its infancy. So we see continued good growth in that business. Will it be 30%? I don’t know the answer to that question, but I can tell you what I have always told you before that you should evaluate us on the basis of our actuals and look at the results that we have generated and you should expect us to continue to make progress from where we are.

Rich Valera - Needham & Company

Great. With respect to the Air France trials, is there any – I know that’s not sort of in your hands as far as exactly what they are going to do, but do you have any sense of when that might conclude on a trial basis and when they might think about starting actual deployment if that’s successful, could that be an ’08 event when they would actually start rolling out?

Paul B. Domorski

I believe it will be an ’08 event. It will take time as obvious. It will take time for that progress to -- I mean for that process to occur because I don’t like to take planes out at the sky, but I believe that that will be decided in ’08 and that platform has a good chance of success.

Rich Valera - Needham & Company

Great. And on the LXE side, I mean you kind of interesting that you suggested you thought you were seeing a recovery in the North American market, clearly I think all the macro should have indicated, I’ve heard over the last certainly quarter have been quite negative and your business in North America seems to have been in decline for at least a couple of quarters. I mean, what is that you are seeing that gives you confidence that the North American part of that business is turning around?

Paul B. Domorski

Well, I see the fact that the order rates and the revenues have basically been going up in North America. I have seen continued growth in the international segment, which has gone on before. I have seen increases in profitability from where we were. I mean, as you know we had a disasterous for example first quarter of this year. We have done some things to our cost structure to be able to reduce it. We’ve done some things to our product portfolio to be better able to address it. We’ve added market share that I described before. Those kinds of things give us reason cautious optimism and I am not saying the same things about the LXE business in the short-term, I am saying about for example the SATCOM business, but I have cautions optimism that we will continue to make improvements in that business. And what we did in the fourth quarter was certainly in-line with that.

Rich Valera - Needham & Company

Okay. And finally Don, just on the tax rate. In your guidance, you mentioned 17% growth in operating income was expected in ‘08 and if I kind of use that and I use the 22% tax rate, I’m struggling to sort of getting to your EPS range, I’m not sure if maybe I’m making a mistake there, but is that right? Are we thinking about a 22% tax rate for ‘08 and that’s what’s baked into that guidance along with 17% operating income growth?

Don T. Scartz

Approximately. And, you also have interest in there as a variable.

Rich Valera - Needham & Company

Right.

Don T. Scartz

That you got to deal with.

Rich Valera - Needham & Company

Sure.

Don T. Scartz

And the fluctuation in interest rates.

Rich Valera - Needham & Company

Right, right. Okay. I will take a look at that. And in terms of, can you give any sense of what you are kind of assuming for interest rate on average for the year?

Don T. Scartz

We’ve assumed that the interest rates would decrease by full point or 1.5 during the year from 2007 averages.

Rich Valera - Needham & Company

Okay. All right. Thanks very much.

Paul B. Domorski

Thank you, Rich.

Operator

Your next question comes from Mark Jordan of Noble Financial.

Mark Jordan - Noble Financial

Good morning gentlemen. Could you discuss the operating margin trends a little bit in SATCOM that we might see? In ’07, you had those operating margins range from 8.2%, up to 18 plus this quarter. Could you talk about how wide a divergence we should have and should we -- should this be something now with a greater scale that should be double-digits on a consistent basis?

Don T. Scartz

Historically, Mark, the SATCOM business has had double-digit operating margins over a year. It might be 10, it might be 12. This past year had averaged; it was for the year 14%. It’s hard to project anything on a quarterly basis because it’s just mix changes, but it’s -- I think just look at the history and as the business grows to larger volumes, I think you can expect that the operating margins would become more stable and would kind of reflect what’s happened in that business, except for the years where we had to do major investments that’s either been double-digit or right at double-digit kind of numbers. There are R&D things that have to happen in that business that you do from time to time, but generally speaking, I think that’s the way I would look at it.

Mark Jordan - Noble Financial

Okay. Could you discuss what you think is an appropriate longer term margin goal for – operating margin goal for LXE? And what might – what would be the issues that would keep you below that target range in ’08?

Don T. Scartz

Well, what we’ve said at different times is that the company, EMS, has an operating income target of achieving close to 10% on a total basis. That’s been the long-term goal; it doesn’t mean we are going to get it next year on average or anything else. But LXE being approximately half of our business, we would have to start – in 2006, LXE was at 8%, for example. I mean, that was a good year, 2006 was a good year. Last year it was 5%. Clearly it has to go above the 5% in order for us to achieve anything approaching the 10% number. The way that probably as long as the gross margins stay strong in LXE, probably the leverage would come by – the gains would come by gaining leverage on the SG&A investment that’s in place, which is what we alluded to a few times with the enterprise-wide software system in Europe and sales organizations being in place in Asia. So, I think the way that we would leverage up the operating margin would be through better leverage of the investment in SG&A that’s out there right now, mainly sales and marketing.

Mark Jordan - Noble Financial

A final question if I may, foreign exchange expense showed up a fairly significant jump in ’07 and a high point in the fourth quarter, could you talk a little bit about the mechanics of how you incurred that expense and what you have for ’08 outlook?

Don T. Scartz

We generally try to hedge Mark, to the break even position. When the currencies are in significant fluctuation like they were in 2007 and the dollar got weaker as it did, it’s hard to hedge perfectly. We don’t try to anticipate; as we get receivable we try to hedge those in at the local currency. I think that probably we’ll do better in ’07, we are accounting on doing better in ’07 than ’08. A lot of that though is based on a continued to rather conservative hedging policy that we try to hedge, I say, what we can on the balance sheet to break even with currency fluctuations. Barring wide fluctuations in 2008, I would guess that we would probably improve at that line versus 2007.

Mark Jordan - Noble Financial

Okay. I guess one more question just for Paul, you have a sense of leads of – will you be able to put the majority of your cash to work in an acquisition in ’08, or do you have any visibility on that issue?

Paul B. Domorski

We continue to evaluate acquisition candidates. We believe that the market is more attractive this year given the economic uncertainty that’s in the market than it was last year given the volatility in the market. We anticipate and are seeking to be able to do typically tuck-in type of acquisitions similar to what we did with Trux and similar to what we did with D space this year which will augment and increase our EPS in subsequent periods. We are, I believe, fairly disciplined, meaning that the business cases have to make considerable sense to us to go do them. There are a lot of transactions that we look at that just don’t make sense to us, which is why we didn’t do some of the ones we did in 2007, and believe that that was the right thing now that it’s early 2008. So getting specific to your question Mark, we would like to be able to deploy, and are seeking to deploy a significant amount of that cash in 2008.

Mark Jordan - Noble Financial

Thank you.

Paul B. Domorski

Thank you.

Operator

You have a follow up question coming from Chris Quilty of Raymond James.

Chris Quilty - Raymond James

Just a quick follow-up question to something Don said with regard to the LXE division and the SG&A spending. I think you said in your prepared text that SG&A spending was up, but you didn’t give us a specific number. Can you give that to us?

Don T. Scartz

What period?

Chris Quilty - Raymond James

4Q – well, overall for 2007 for LXE?

Don T. Scartz

It’s up about $4 million.

Chris Quilty - Raymond James

Okay.

Don T. Scartz

Versus 2006.

Paul B. Domorski

Keep in mind, and as you know Chris, there is a fair amount of currency in that number.

Don T. Scartz

Yes and most of that was currency.

Chris Quilty - Raymond James

And the biggest impact on currency obviously euro-related?

Don T. Scartz

Right.

Chris Quilty - Raymond James

And, so I mean, I don’t have my computer in front of me here, but I guess what I am getting at is your ability to do better than 5% EBIT margin in ’08, there is probably, unless currency really goes against you, you cleared out all your ERP expenses. Those two elements alone, the ERP, foreign exchange was what 100 basis points or 150 basis points?

Don T. Scartz

Well, the two of them together would be more than that. I mean, it was – the two of those probably account for 75% to 80% of all the SG&A growth.

Chris Quilty - Raymond James

Okay. And then the other incremental was the Asian expansion?

Don T. Scartz

Yes, plus, you are going to have a little bit of increase in certain expenses.

Chris Quilty - Raymond James

Right.. Okay. Second question on the Trux acquisition, you haven’t talked about that since it was announced. Can you give us particulars there, you paid, I’m assuming about 1x revenue, you’ll probably end up booking what 2/3rds of it, goodwill on intangibles, and margins relative to LXE, additive about the same neutral?

Don T. Scartz

Margins are relatively the same as LXE, that’s right.

Chris Quilty - Raymond James

Okay.

Don T. Scartz

And as far as how much we booked, that’s kind of yet, as far as intangibles, that’s yet to be determined?

Chris Quilty - Raymond James

But normally for these types of acquisitions it’s half the 2/3rds basically?

Don T. Scartz

It’s half the 2/3rds, that’s right.

Chris Quilty - Raymond James

Okay. And in terms of the revenue base and a historical growth rate for the company?

Don T. Scartz

I would say in 2007 as LXE didn’t grow much we would expect Trux would have greater growth during that period, but Trux has some US business as we all as European. But I don’t think over the long haul we probably see the same sort of historical growth rate in that market which most market research, I think implies, you know, high singe-digits to low double-digit growth.

Chris Quilty - Raymond James

Okay. And in terms of potential cost savings here, ability to either consolidate manufacturing, sales offices or R&D activities?

Paul B. Domorski

We are in the process of doing that.

Chris Quilty - Raymond James

Okay. And one other question on the defense and space, you had mentioned you actually picked up an anti-jam contract, and if I remember, in the past you mentioned that as sort of a couple several million dollar per satellite opportunity, is that correct?

Paul B. Domorski

It’s typically around a couple million dollars, it’s roughly the rough numbers associated with it.

Chris Quilty - Raymond James

Okay. And this is your first ever commercial SATCOM anti-jam contract?

Paul B. Domorski

Correct.

Chris Quilty - Raymond James

And so, I know there is not a lot of precendent for this, but there’s been a lot of talk in the industry because of the [inaudible] rebels stealing signals and the Libyans jamming signals, is this something that you think could grow to the 20 satellites a year that get launched were you might eventually see this become a standard?

Paul B. Domorski

We do believe that there is a lot of interest in that area. I mean, there is a lot of RFP type action and frankly a lot of questions about our what we’ve done, about our network, and the role that’s playing in superior communications on some of our systems. So I do believe there’s going to be a growth area for us, and I do believe it will be a standard at some point in time.

Chris Quilty - Raymond James

And did you announce the customer or the satellite?

Paul B. Domorski

We really haven’t gone into that level of detail.

Chris Quilty - Raymond James

Okay. Great, thanks a lot gentlemen.

Paul B. Domorski

Thanks.

Operator

Our next question is coming from Michael Ciarmoli of Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood Inc

Hey guys, good morning. Thanks for taking my call.

Paul B. Domorski

Good morning Michael.

Don T. Scartz

Good morning.

Michael Ciarmoli - Boenning & Scattergood Inc

On the defense business, the backlog of $65.7 million, how much of that is recognizable in 2008?

Don T. Scartz

It’s probably about 75% to 80% of it is recognizable.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay. Are you guys seeing any out there with a lot of talk about spending winding down with the potential Whitehouse party change, I know especially you guys talk about the F22 wrap and there’s been a lot of concern that that program being the costliest jet ever, you know, there is some potential that there could be a shutdown in 2008. Are you guys seeing any headwinds from defense spending talks or an Iraq wind down?

Paul B. Domorski

We are really not. I mean, in the F22 in July we received our, you know, one of our largest awards from Lockheed Martin on that aircraft. But you know, in our area, again, communication is on the move, which is – there is a lot of interest and also a recognition that many of the aircraft platforms have antiquated technology in that area. So whether it’s some of the TSAT satellite stuff or some of the stuff that’s going on with [MillStar, J Stars], you know, we are seeing a lot of activity in those categories.

Michael Ciarmoli - Boenning & Scattergood Inc

You brought up TSAT, I know that’s been one that’s talked about, its behind schedule, over budget, it just got a pretty haircut in the ’08 and ’09 budget. What’s your exposure to that program directly?

Paul B. Domorski

I don’t know that it is exposure; I think it’s more of an opportunity because we are on two of the incumbent teams. So it’s only a question of if it gets deployed and what is the final business case look like.

Michael Ciarmoli - Boenning & Scattergood Inc

Oh really, no negative exposure really [inaudible].

Paul B. Domorski

Correct, correct.

Michael Ciarmoli - Boenning & Scattergood Inc

In terms of, maybe for Don, just looking at operating expenses, you closed 2007 at about 32.4% of revenues. What kind of range are you guys targeting going forward, if any? Just trying to get a sense of the actual dollar levels for SG&A, R&D, I mean there was a nice decrease in SG&A I guess, in Q3 to Q4 down to $92.3 million; what kind of level should we look at going forward?

Don T. Scartz

Well, in terms of percentages of sales, we expect the R&D should stay about the same as the percentage of sales. SG&A, we would expect some improvement there, perhaps a point, one point in sales percentage.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay.

Don T. Scartz

But again, that’s all still in the planning and forecasting. But as we talked about our goal is to get operating income to a higher level and more important way is that will happen with the better leveraging our SG&A.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay. And then in terms of seasonal trend, we are expecting the same, a weaker quarter, particularly – probably LXE in Q1 and then ramping throughout the year?

Paul B. Domorski

I think typically our bio-rhythms are that our second and fourth quarters are typically our two best quarters and our first and third are less than those two quarters. That is the historical trend.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay. And then, just on the LXE, you talked about some new customer wins. I am trying to get a sense for growth, I guess, in that business with a combination of the acquisition, can you give us a sense of what kind of revenue opportunity you might be looking at from a single customer like a Gap or the Porsche or Vietnam, you know, compared with some of your other customers since that’s a pretty well established business?

Paul B. Domorski

Well, we are, you know, its couple of million dollars a time kind of an order that comes out. I mean one of the things that we are – that we have embarked upon this year is putting in place global sales teams. We have opportunities that we won in certain theaters and our goal is to be able to expand that penetration in that market to other markets as well. So we are seeking to again continue to add to our vertical skills, as you’ve heard me say before, LXE has domain skills in the warehousing and in the port market. And we are adding people that understand those markets and we are seeking to be able to extend wins in one theater to other theaters as well, which leverages our SG&A in the market. So, it’s – and I mentioned earlier that we made some progress in regards to our portfolio, the Akerstroms Trux; the Akerstroms Trux acquisition will also add to our products there that give us Windows XP based products kind of thick client with the amounts of terminals which are an area in the business that we understand and that will also give us additional market share we believe in 2008.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay. Great. Thanks, guys.

Paul B. Domorski

Thank you, Michael.

Operator

The next question comes from Richard Valera of Needham & Company.

Richard Valera - Needham & Company

Paul, in your prepared remarks, I think you mentioned that you have gotten an incremental $3 million of orders and I believe it was on the Inmarsat handset development contract; is that accurate?

Paul B. Domorski

No. I think it is that we recognize $3 million of the $26 million contract in that period in the quarter.

Richard Valera - Needham & Company

Got you. Okay. I wasn’t – I didn’t understand that. The balance of that that wasn’t seen in ’07 you expect to see most of that in ’08?

Paul B. Domorski

Yes. We are going to see it now between now and mid year of ’09.

Richard Valera - Needham & Company

Okay. So it will extend through mid year ’09?

Paul B. Domorski

Correct.

Richard Valera - Needham & Company

Great. And Don, just circling back to my earlier question the plug in your model between operating income and your EPS number, it seems that you need about $4 to $5 million of sort of other income which I guess could be a combination of interest income in FX. Is that about right because it seems to imply perhaps a higher interest rate on your cash than I would have assumed given where interest rates have gone recently?

Don T. Scartz

I am not sure Rich exactly are you getting you know to all the pieces. But I mentioned the interest that we are assuming is a decrease of at least a percent to a percent and a half. We haven’t seen that we are not getting that interest rate. I don’t really know what interest rates we’ll do in total for the year. But in our total guidance, we have talked through the interest assumptions and we think it all works with the tax towards the guidance that we have talked about there. I am just not sure of all the details of how you got to that operating margins and other things.

Richard Valera - Needham & Company

Okay. We can take it offline. Thanks very much.

Operator

The next question comes from Kevin Dede of Morgan Joseph.

Operator

Our next question comes from Mark Jordan of Noble Financial.

Don T. Scartz

Hi, Mark.

Mark Jordan - Noble Financial.

Just back to what the question that Rich raised and as a point of clarification for me, was it stated earlier, Don, that you said that operating profits in ’08 were expected to go up 17%? Or was that – did we misunderstand that?

Don T. Scartz

That’s in the press release. That’s a change in EPS versus in ’08, excuse me, that’s the guidance versus the actual results in ’07.

Mark Jordan - Noble Financial.

Okay.

Don T. Scartz

That’s in the press release, that 17%.

Mark Jordan - Noble Financial.

Thank you.

Operator

Our next question comes from Michael Ciarmoli of Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood Inc

Hey Don, just one more question on the corporate gross margin, is this 41% to 42% range? Do you see that being sustainable throughout 2008?

Don T. Scartz

We think the gross margins should stay about where they were in 2007. We don’t really see any reason that they would decrease. Again, that’s kind of the way we would look at things.

Michael Ciarmoli - Boenning & Scattergood Inc

Great. And then just back to the defense business for one second. I know you talked about the Blue Force tracking opportunity. Are you seeing a lot of competition in that space? I know, on the military side particularly with the army, there are some pretty strong incumbents there. Do you think you have a chance to break into, you know, some of the armed forces with that BFT business?

Paul B. Domorski

Where we are and where there is particular interest is we have a covert beacon and there has been a lot of interest in regards to that device as well as the implications of that system and in what we are doing in the search and rescue areas. So, it is a – as it is always with us, it is an area based on the expertise and engineering of the company that the military has interest in and we are trying to work with them on what are the opportunities for that product set in that market.

Michael Ciarmoli - Boenning & Scattergood Inc

Would that be a beacon for down at the troop level or are we talking vehicles or a combination of both?

Paul B. Domorski

I don’t know what I should say.

Michael Ciarmoli - Boenning & Scattergood Inc

Okay.

Paul B. Domorski

Or shouldn’t say.

Michael Ciarmoli - Boenning & Scattergood Inc

Fair enough. Great. Thanks, gentlemen.

Operator

Gentlemen, there appear to be no further questions at this time.

Paul B. Domorski

Thank you everybody for taking the time to come on today’s call. We look forward to updating you on our progress in 2008, and again, I would like to thank each and every one of you for your continued interest in EMS Technologies. Have a great day.

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