EMS Technologies, Inc. Q4 2008 Earnings Call Transcript

| About: EMS Technologies, (ELMG)
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EMS Technologies, Inc. (NASDAQ:ELMG) Q4 2008 Earnings Call Transcript March 4, 2009 9:30 AM ET

Executives

Paul Domorski – President and CEO

Gary Shell – SVP, CFO and Treasurer

Neil Mackay – EVP and COO

Analysts

Rich Valera – Needham & Company

Mark Jordan – Noble Financial

Michael Ciarmoli – Boenning & Scattergood

Ryan Rackley – Raymond James

David Gremmels [ph] – Catapult Capital

Ed Antoian – Chartwell

Operator

Good morning ladies and gentlemen and welcome to the EMS Technologies Q4 2008 earnings release conference 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 your host, Mr. Paul Domorski, CEO and President. Sir, the floors is yours.

Paul Domorski

Good morning and welcome everyone. Thank you for joining us on the EMS fourth quarter earnings call. Any statements 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 31, 2007, 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 any material information in subsequent private settings, but we will continue this public call as needed to respond to appropriate questions.

Joining me today are Gary Shell, CFO of EMS, and the Dr. Neil Mackay, COO. After a few comments on the fourth quarter, Gary will review the financials and then I will talk a bit about 2009. After that, Neil, Gary, and I will answer any questions that you have.

This morning, EMS Technologies reported Q4 2008 record revenues of $90.4 million and net earnings of $6.8 million or $0.44 per share. For the year, revenue grew 16% to $335 million, and we achieved our 2008 full-year guidance with earnings per share of $1.31. Fourth quarter results were led by continued exceptional performance in the company's Satellite Communications as well as Defense & Space businesses. While LXE made progress, it continued to be challenged by the difficult economic conditions. Two major acquisitions were announced in the quarter, Formation and Satamatics. Both have since closed.

Included in the fourth quarter results was a charge for $3.4 million or $0.22 per share related to the conclusion of an Inmarsat handheld contract. EMS and Inmarsat had mutually agreed not to continue the remaining scope of work. This agreement will allow Inmarsat to assume more control over production phases of the product development and enable EMS to reduce risk going forward and to accelerate its growth strategy in the communications and tracking markets.

I want to comment more on this, but first let me summarize how each of our underlying segments performed during the quarter, beginning with the Satellite Communications portion of our business. SATCOM reported its second-highest quarterly earnings in history, attributable to record sales, despite the $3.4 million cessation of the Inmarsat handheld contract I mentioned earlier.

During the quarter partner revenue doubled in response to pent-up demand for SwiftBroadband products. EMS delivered two additional prototypes, including a SwiftBroadband-enabled terminal and a new eNfusion airborne communication device that functions as a PBX, Wi-Fi access point, server and router. The CCU 200 consolidates telephony and data technology, enabling a broader variety of communications to the cabin.

EMS shipped the first PDT-300i iridium-based tracking units for cost-effective force tracking. The PDT-300i is part of a system that allows government clients to establish interoperable communications with their deployed forces in war zones. Solid bookings in EMS’ search and rescue business included closing a multimillion-dollar contract with the Brazilian Air Force. Our new Mission Management Unit product that enables fast access to satellite text messaging and voice calls from a user's handset has also been very well received.

Defense & Space broke new quarterly records in revenue, backlog, and operating income for the final quarter of 2008. Funded order backlog jumped 75% to an all-time high of $115 million at the end of 2008. Q4 Defense revenues were 50% higher than their comparable quarter in 2007. For the year, they were 30% higher compared with the end of 2007.

Defense had fourth quarter growth in both heritage programs and new business in its market sectors, including space, comm-on-the-move, sensors and countermeasures, and commercial employed connectivity. Contributing to fourth quarter backlog was the latest B-2 Bomber award, valued at almost $36 million, for advanced systems development work for the B-2's new extremely high frequency satellite communications system. Most of that revenue will be recognized in 2009.

EMS was also awarded a production contract for the US Navy Hawklink Ku-band common data link antenna system. The Hawklink system will be deployed on the Navy's Seahawk helicopters. It will transmit high-speed video and radar, among other sensor data, from the helicopters to Navy ships over long distances. The company expects the Hawklink program to mature into a full rate production with a potential $30 million contract value over the life of the program.

We have talked previously about our efforts to win more production jobs in our Defense business and to leverage our best-in-class technological skills in commercial markets. We think that creates new market opportunities, reduces risks, and leverages skills we have in the Defense as well the Sat-Comm parts of our business. Our clear goal is to have the most comprehensive set of compelling aero-connectivity products. An example of this is the prototype we delivered and the substantive order we received for our new Ku-band Aurora antenna system.

LXE, the company's logistics business, continued to make progress, despite continuing to be impacted by the economic slowdown. There were a number of positive notes. We had better-than-expected margins for our vehicle-mounted product line. International revenues rose 9%, compared to Q4 2007. The percentage of revenue through distributors grew substantially in 2008. The business increased its focus on the VAR channel and making products more distributor channel friendly. Cost control actions continued in the quarter.

Significant new orders in the quarter came from beer makers MillerCoors and LaBatt, the second-largest US beer makers selected LXE's VX6 vehicle-mount computer, while Canada-based Labatt invested in both the MX3X rugged handheld computer and the VX6 vehicle-mount computer, both for standard warehouse use and cold storage applications. During Q4, Marks & Spencer, one of the UK's most respected general merchandise retailers, invested in nearly 200 MX3 rugged handheld computers for its warehousing operation.

Finally, the MX8, LXE's smallest, lightest, and most economical handheld computer, began gaining momentum as it rolled out during the quarter. LXE's new vehicle-mount computers, the VX8 and the VX9, were recently launched to positive partner and customer feedback, and they were the first product introductions after transferring Akerstroms Trux manufacturing operations from Europe to the United States.

Looking back at 2008, LXE had a record revenue year, which affirms the value customers see in our products and services. Unfortunately, they did not have a record earnings year. The challenge in 2009 is reducing cost to get our products to market and improving net margins. That effort is well underway.

So in summary, I was pleased that despite unfavorable economic conditions we continued our growth trajectory and achieved our earnings commitments and guidance, but I was disappointed that we did not overachieve. Being positive, it's an opportunity for us in 2009 that I will discuss after Gary gives you some more color on the fourth quarter. So with that, I will turn it over to Gary.

Gary Shell

Thanks, Paul. Net sales continued to be the main story behind our operating results for 2008. We set new all-time records for consolidated net sales with $90 million in the fourth quarter and $335 million for the full year.

The Satellite Communications segment reported almost $31 million in fourth quarter sales, and that's a 20% quarter-over-quarter growth. We passed the $100 million benchmark in 2008, eventually achieving almost $113 million in annual net sales and 25% year-over-year growth. Our sectors of the aeronautical market continued to fuel the demand for high-speed data products.

Our Defense & Space division was almost as big a factor in the consolidated net sales increase with a quarter-over-quarter growth of more than 50% and year-over-year growth of 30%. Fourth quarter revenues of over $23 million and annual revenues of almost $77 million were all-time records by a wide margin.

Our work on a new communications system for the B-2 Bomber was the largest revenue growth driver in Defense & Space in 2008.

LXE reported net sales of more than $36 million for the fourth quarter and almost $146 million for the full year, both of these totals increases over the comparable periods in '07.

Our geographic markets – the Americas were more negatively affected late in the year by the economic downturn than were our international markets.

Cost of sales percentage for the quarter increased from 63% during the first nine months of the year to 66% in the fourth quarter. This increase related to the $3.4 million charge on the handset contract that Paul referred to. Otherwise, we were consistent with the 63% cost of sales percentage that we averaged throughout the year.

SG&A was 23% of revenues, which is also fairly consistent with our level of expenditures throughout the year. The somewhat lower rate of R&D expense reported in the fourth quarter was not due to reduced efforts, but instead reflected benefits accrued under a new Canadian government program to encourage technology development in business areas such as Satellite Communications.

Our operating margin was 6.2% for the fourth quarter and 5.9% for the year. Of course, these percentages would have been significantly higher, but for the fourth quarter charge on the handheld.

We reported a net income tax benefit for the fourth quarter, due to several factors. First, we have an extremely low tax rate on income earned in Canada because of the large pool of research-related tax credits that we have earned over the years. With the high profitability in 2008 of our Canada-based Satellite Communications business and the economy-driven lower profitability for our US-based LXE business, our consolidated effective income tax rate turned out to be lower than we had projected in previous periods. So there was a catch-up benefit in the quarter of approximately $800,000.

In addition, Congress reauthorized the US R&D credit during the fourth quarter, resulting in a $700,000 benefit. And, finally, we reduced the reserves on Canadian deferred tax assets by approximately $1 million. This was due to the favorable earnings outlook and the future for our Canadian businesses.

A few additional points specifically about our core businesses; 80% of the growth in our Satellite Communications sector was organically driven by our existing product base. That translates to a 20% organic growth rate excluding acquisitions. $4 million, or about 20% of this sector's growth, was derived from our acquisition of Sky Connect late in the year. As expected, this acquisition was modestly profitable on a GAAP basis after amortization of acquired intangible assets.

Defense & Space ended the year with a record $115 million backlog, and the major portion of this backlog is currently expected to be recognized in revenues in 2009.

LXE continues to make improvements in its organization to lower its cost structure. During 2008, LXE recognized $1.1 million of restructuring costs, principally in headcount reductions, which should lower the normalized cost structure by more than $2.5 million annually.

And, finally, we expect our consolidated effective tax rate, again, to be below 10% in 2009.

Turning briefly now to the balance sheet, the company's financial position continues to be very strong. We reported nearly $86 million in cash at the end of the year and no debt other than a small amount of mortgage debt. This cash balance was lower than at the beginning of the year, mainly because of the effect of the acquisitions of Akerstroms Trux and Sky Connect, as well as the repurchase of common stock during the third and fourth quarters.

Our billed receivables are down from the third quarter, and neither the aging nor our experience is showing any deterioration, even with the recent economic downturn.

Inventories increased slightly during the fourth quarter, mainly due to grow at LXE. We expect to use these higher inventory levels to satisfy expected orders over the next couple of quarters. Goodwill has increased to $21 million during the year with our acquisitions, and our GAAP pretax results reflect amortization of acquired intangibles that are totaling about $600,000 to $700,000 a quarter.

Within the first 60 days after the end of 2008, we closed two acquisitions that Paul referred to. For these acquisitions, we used approximately $45 million of our cash and borrowed approximately $40 million on our revolving credit arrangement. We expect to generate sufficient cash flows to begin paying down that debt balance immediately. And after these transactions, we will still have around $40 million of cash on the balance sheet for operating purposes and over $30 million of credit available on our revolver.

Paul, this concludes my comments on Q4 financials.

Paul Domorski

Thanks, Gary, and by the way, congratulations on 26 years with EMS today.

Gary Shell

Thank you.

Paul Domorski

Before we get to the Q&A session, I want to talk a little bit about 2009. We are planning on continued growth in both the Satellite Communications and Defense & Space parts of our business, as indicated by our 2009 guidance. For LXE, we are planning on slightly lower revenue with known cost reductions to improve margins.

We think that is prudent, given the economic conditions and the continued growth opportunity in our business. We don't intend to retrench despite the current environment, but we will continue to monitor changes in demand carefully. We will continue to be aggressive and to make prudent investments which, we believe, will position us for long-term growth as the demand environment improves.

We made four acquisitions last year. While many companies are only focused on survival during these challenging economic times, given our market share and strong balance sheet, we continued to focus on market opportunities, our strategic position, and strengthening the value proposition. We think this will serve us well in 2009 as well as when the economy improves.

To us, in-flight connectivity is a given, the question is timing. We benefit from not having all of our eggs in any one basket. Commercial sales are about 23% of our business, military about a third, and the balance being partner sales. There are about 36 airlines globally that have announced or are in various stages of trials. For example, Delta's technical team are averaging five installations a week with 25 aircraft equipped as of the third week of February. The majority of hardware there is our product set. EMS hardware is used by virtually all of the IFB system providers, so decisions to proceed beyond trials are largely upside.

It's no secret volumes are generally off in the business jet market. Manufacturers such as Bombardier are off 10%, Gulfstream off 16% and Cessna off 25%, have also been impacted. Dassault, on the other hand, is up 39%. In the military aero sector, we have seen some delays as the new administration reviews programs, but there is no indication that programs will be canceled. Shipments may, however, shift from one quarter to the next.

Having said all that, our SATCOM business is composed mostly of larger and longer-range aircraft and it remains strong, and it has not been significantly impacted by the effects of the economic decline. Cessna, that I mentioned early, does not have much of our equipment. Bombardier and Gulfstream combined represent only 340 planes. Gulfstream's 500 and 550s, Bombardier Challenger Globals, Dassault Falcon 700s remain strong, and we do most of our business in that segment. The Boeing Plus Airbus 2009 build plan, which has been reduced again, is still 10% higher than last year, when there was a strike, and significantly higher than 1999, the all-time record.

In addition, the company's communications and tracking products, especially emergency services, remain solid. The acquisitions we have completed increase the breadth of products we can offer across multiple satellite systems.

Our products are not luxuries, but integral to current needs as well as a gateway for future airline applications. Business cases for in-flight operations are strong and becoming stronger in an economic environment where airlines and others are looking to have every advantage they can. This means things like better flight routes, lower fuel cost and service differentiation.

So let's talk numbers for a minute. The first week of January, we announced 2009 annual guidance of between $1.55 and $1.65. That is a 55% increase in EBITDA, an 18% increase in earnings per share over 2008. Revenue is expected to be up about 30%.

As you know, many companies have stopped providing guidance at all. The economy is the worst that I and, I'm sure, many of you have ever seen. January and February have been disastrous in the stock market. We have looked at the impact of the economy on our customers, potential further reductions in the federal and defense budgets, reductions in aircraft orders. We have hedged these factors in our '09 plans.

But the question is, how much is enough? So I guess the difficult rhetorical question is, what gives us the confidence to be able to put out 2009 guidance numbers like that? Here are a few of the reasons.

The composition of EMS is changing. A year ago, LXE was about 50% of the company, SATCOM 30%, and Defense & Space 20%. With the acquisitions and the organic growth in the business, the mix of our business is different. The Satellite Communications part of our business, which includes the recent acquisitions, is now 48% of our company. Defense is now 20%, but of a much larger entity, bringing the total to 68%. More than half of the company's revenue will be aero-connectivity and tracking. The balance, about 32%, is LXE, down about 18 points from a little more than a year ago.

The significance of that is as follows. Historically, we have earned in the teens in operating income in the SATCOM part of our business. We think we can do that in the acquisitions as well, but we have to amortize some of the acquisition cost. Defense margins have been steadily improving and are now in the high-single digits, so shifting that mix significantly improves profitability.

Next, we start the year with virtually all of the backlog we need in our defense business to make our 2009 annual revenue plan for that business. We still have to make sure we have the right skills, execute, maintain utilization, not have cost overruns on the projects – all the things necessary to make a profit. But having that backlog this early in the year is a big plus. This is the first time I have been at EMS that we're in that situation. Coupling that with more manufacturing versus development jobs in D&SS and diversifying into more commercial transactions will increase utilization and further reduce risk. We will continue to monitor changing federal budget news and information from our partners as the year progresses.

Most of the acquisitions we did last year were near the end of the year. Very little revenue and profit from those transactions were in our 2008 numbers. We anticipate that Formation, Satamatics, and our Sky Connect iridium business will have a similar profile to our SATCOM business and contribute combined revenues of $75 million to $80 million, and combined generate $12 million to $15 million in EBITDA.

As I discussed earlier, we incurred a $3.4 million charge, or $0.22 in the fourth quarter related to the Inmarsat contract. Without that, we almost would have been in the '09 guidance range in 2008. It pains me to say that, but looking at it from a 2009 perspective we lose a little revenue, and not having those costs will improve profitability.

If you ask me if we had a better chance to make our '09 targets with or without the handset contract, I would say not having the contract reduces 2009 risk considerably.

Fundamentally, there is demand for our products, and anytime there is a flight to quality in this market, we benefit. Adding the pluses and minuses up is how we arrived at our 2009 guidance of between $1.55 and $1.65.

I can't predict the future, but it's a fact that this management team has achieved guidance in good conditions and bad each of the years that we’ve worked together. We stand by that guidance.

We look forward to updating you in the coming quarters, and we will now open it up to questions. Claudia, can you help us with that, please?

Question-and-Answer Session


Operator

(Operator instructions) Our first question comes from Rich Valera of Needham & Company. Please state your question.

Rich Valera – Needham & Company

Thanks, good morning gentlemen. Congrats on the Space & Defense backlog, obviously a record there. It sounds like you have – based on your comments, Paul, you feel like you have the vast majority of your revenue for '09 covered out of that backlog. I was going to ask what percent of that you thought might be delivered in 2009. So I guess I would still ask that question with respect to your $115 million of backlog. Roughly, how much of that do you think could be delivered in 2009?

Paul Domorski

I will answer the best way that I can, which is, we anticipate continued growth in the Defense business and we have virtually all of the revenue that we need to make that number now, in-house. So, to be honest, my goal is to be in this same position next year by continuing to close business and continuing to firm up those numbers, given the changes that are occurring in the administration, and that's what our effort is right now.

Did I answer your question?

Rich Valera of Needham & Company

Yes, I think that's helpful. And with respect to – you sort of also answered my follow-up, which was, what do you feel the bookings pipeline looks like for this year? Obviously, you had a very good bookings year in '08. Do you think you have a similar type of opportunities in 2009 on the bookings front?

Paul Domorski

I think that's our goal. Our goal is to continue the progress that we have made and to continue that to occur. We have talked about the fact that we are – that we have tried to do more, gone from development jobs to manufacturing jobs. We have talked about the fact that we are also seeking commercial Ku-band opportunities in that area to be able to diversify our business. We are continuing to work with our partners on TSAT or AHF or any of the different satellite programs that are there. And all of those things, I think, are contributing to the success that you are seeing.

Rich Valera of Needham & Company

That’s great. And just a quick on the Inmarsat contract, a little more color – just why exactly did you have to pay them the $3.4 million? What were the mechanics of that process for you to end up paying them that amount?

Paul Domorski

Basically, what happened was Inmarsat and EMS have mutually agreed that SATCOM would conclude the development effort. Looking forward, it seemed more appropriate for us that Inmarsat would have more control over the production phases. The critical work was complete and being handed over smoothly. This will enable Inmarsat to make concurrent improvements in the product suite, and Inmarsat acknowledged that there has been some programs delayed but believe the changes are worthwhile.

Gary Shell

Rich, it is Gary. We are not paying them that number. That's sort of the net effect of the settlement. We will be getting a significant payment related to wrapping up that job.

Rich Valera – Needham & Company

So I'm a little confused. So will that payment essentially sort of net against the $3.4 million charge?

Gary Shell

The $3.4 million charge represents the – if things had played out, we would have collected – our collections would have been higher. That's basically the reduced amount that we are going to receive. That's the amount of the reduction that we are going to receive in cash. We are going to receive a much larger payment in cash.

Rich Valera – Needham & Company

Okay, fair enough. And then with respect to the margins in the SATCOM segment, they would have been, it looks like, 25%, 26% ex that charge, which certainly I believe is an all-time high. I'm just wondering if there was anything unusual to the positive side in those margins that would have driven them to those levels, or how sustainable you think mid-20s type of op margins in that core SATCOM business would be.

Paul Domorski

They definitely got a boost from the R&D assistance that I mentioned in the fourth quarter, and that was one of the things – if you start backing numbers out, that was one of the big contributors to that really high performance. I think, in general, just looking at their fundamental operations, they were still the same kind of strong performer they have normally been, which is a mid-teens kind of number.

Rich Valera – Needham & Company

Okay, that's helpful. And then with respect to SATCOM growth in 2009, I know you addressed this nicely in your comments, Paul, but you talked in your prior guidance issue about 15% to 20% SATCOM growth on the top line. And it sounds like there may be some puts and takes there. You won't have the Inmarsat contract, presumably, contributing revenue there; and also maybe at the margin, business jets are a little weaker. But it sounds like you have got very strong traction in some of the other areas.

So I'm just wondering how you look at the puts and takes in SATCOM, Paul, and if that 15% to 20% top line number for the core businesses still an active number.

Paul Domorski

I'll ask Dr. Neil Mackay to comment on that.

Neil Mackay

Rich, a little bit – as Paul mentioned, we work in the high-end portion of the business jets market, which is still very strong. And also we are seeing a lot of deployment of connectivity in the commercial aircraft market. There are virtually dozens of airlines either trialing or installing aircraft now.

Remember that there are over 10,000 planes flying, and we are working like 400 or 500 aircraft. So if you take a generic view of the airline or the aviation business, you come to one conclusion. But if you look at the niches that we are in, you might come to a different conclusion.

I'm not sure if that helps.

Rich Valera – Needham & Company

Well, it sounds like clearly you have got potential to grow above the market. But is it sort of still we think in that 15%, 20% range?

Paul Domorski

I think that's what we are planning on, is basically continued growth. In other words, if you took the last few years, we can see continued growth. But I think the key that I would stress, Rich, is that it's a much bigger number. In other words, if you look at SATCOM alone, you'd say – and I'm talking about our traditional SATCOM business – you'd see that the business I think between 2008 and 2005 [ph] virtually doubled. And if you look now, we have added Sky Connect, we have added Formation, we have added Satamatics. We think that has a similar profile to what we have seen in our existing SATCOM business, so it's a much bigger number. And that's part of the reason that we have confidence in our '09 guidance numbers.

Rich Valera – Needham & Company

That's helpful. And finally on LXE, it sounds like you're expecting that to be modestly down in 2009, sort of acknowledging the environment. What are your targets with respect to margins there? Obviously, there will be some costs – it sounds like some cost reductions. But you had breakeven in the fourth quarter. Do we think we get into sort of the positive, maybe mid-single-digit op margins there? Is that a decent target for 2009?

Paul Domorski

As Gary had mentioned before, that we have taken actions, we have taken restructuring charges in 2008 to be able to improve our cost profile there. We've discussed before that we have sought to be able to lower the breakeven point. We also have efforts underway to further reduce our cost in 2009. I am encouraged, and I will just emphasize a second, that we did have record revenues in that business, in 2008.

So our challenge is being able to do that. And we are anticipating that LXE will be a contributor to our profitabilities in 2009.

Rich Valera – Needham & Company

Okay, it’s helpful, and one final one if I could. Gary, do you have a figure for expected cash from operations in 2008 – I'm sorry, 2009?

Gary Shell

Yes, I do. And I'm going to search my notes, and then, Rich, you should queue it up back in a moment, and I will give you that number.

Rich Valera – Needham & Company

Okay, thank you. That does it from me. Thanks, gentlemen.

Paul Domorski

Thank you, Rich.

Operator

Our next question comes from Mark Jordan of Noble Financial. Please state your question.

Mark Jordan – Noble Financial

Good morning, gentlemen. I'd like to talk about Defense & Space Systems for a minute. Obviously, you ended the quarter on a very strong profit mode. Historically, you have had a lot more seasonality in that business. Given the backlog that you have, is this an operation that you should be much more level loaded this year with regards to both absolute volume and op margins as the year evolves?

Paul Domorski

I think, as we have talked about before, we think that some of the variability that we have had from a profit perspective will be improved in 2009 versus 2008. Part of that is by virtue of the fact that we have, I'll call it, a smoother path to revenue in the New Year.

Obviously, our business is heavily driven on utilization. Maybe you remember, Mark, I think it was first quarter last year that we had some issues with getting the right skills of the people that we needed. We had all the work, but we just didn't have the right mix of people. So it's constantly a challenge to, particularly in a growth environment like that with getting people that have the right skills.

But I think it's more of the same. I think it's continuing the trajectory that we have shown to date in that business.

Mark Jordan – Noble Financial

Could you talk about, also, seasonality for the company as a whole? How do you see the quarters evolve during the year in terms of gross order of magnitude? Do you expect a relatively weak or earlier year and then sequential growth as the year evolves? Or is there any different pattern that might occur?

Paul Domorski

Well, our typical pattern is going to be stronger in the fourth quarter and also weaker in the beginning of the year. That's our normal pattern if you went back and looked at the last three years.

Mark Jordan – Noble Financial

The 141(NYSE:R) charge that will be in the first quarter, will that be a separate line item, or will that all be buried just in G&A?

Gary Shell

We are going to carve that out as a separate line item and certainly carry it that way for this next year because it's just such a big transitional item. A lot of people have not focused on it, and we're going to make it quite clear what that number is.

Mark Jordan – Noble Financial

Back to one of the earlier questions, in terms of DS&S. Obviously, you have a great piece of B-2 business for '09. What is there out there that can replace that piece of your business? Is the missile seeker area the type of thing that can be the big elephant for 2010?

Paul Domorski

I think there's a number of things, Rich [ph], that kind of come to mind. There's a lot of activity occurring in the UAV, communications-on-the-move area, and we think that will be positive for us going forward. We think that, again, that there's a lot of activity occurring on the, what we call, comm-on-the-move, such as F-22 and TSAT revenue. And if it's not TSAT, then some of the other satellite systems, AH or WGS areas as well. And what we have talked about before is that we are clearly focused on Ku-band revenue in there as well because we have always had excellent antenna skills and positioner skills in that part of our business. And we have been able to leverage that into some new revenue that helps our factory and, in my view, diversifies our risk as well.

Mark Jordan – Noble Financial

Thank you.

Paul Domorski

Thank you, Mark.

Operator

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

Michael Ciarmoli – Boenning & Scattergood

Hi, guys, thanks for taking the call. The charges, I guess, relating to the acquisitions that you are expecting now look to be $0.12 to $0.15. I guess they were $0.11 to $0.13 when you first issued the guidance. What is changing in there for the increase?

Gary Shell

Most of the expenses that – we had to sort of peg it when we – where we first thought we were going to be, and we just continue to have acquisition-related expenses. Remember, it's a whole suite of expenses that we used to capitalize, not just closing expenses. But – if there were any restructuring charges, if they were any legal expenses, if there were any valuation expenses. And so those continue to just add on to the list. And we very likely, as acquisition activity continues, we are going to continue to incur 141(R) charges throughout the year.

Michael Ciarmoli – Boenning & Scattergood

Okay, fair enough. So, if I was looking at your guidance next year, the $1.55 to $1.65, a non-GAAP number, you guys had a $0.22 charge this current quarter, the fourth quarter, and you had an $0.18 charge in the second quarter. So you probably could have done in the neighborhood of $1.70 this year without those charges. So it would seem your non-GAAP earnings are guiding lower for next year, excluding those charges.

Paul Domorski

So you want us to raise our guidance to $1.70 right now? Is that what you're asking me to do here, Michael?

Michael Ciarmoli – Boenning & Scattergood

Well, no. I'm just trying to benchmark on apples-to-apples if you take out the charges for '08. You've got –

Gary Shell

One of the things you have to do, Mike, you have to be a little bit careful about backing out other charges, backing out particularly that Q2 charge because that was kind of a catch-up. But yes, we also had some income during the year for handheld. I think it's more appropriate to focus on the $3.4 million. That was certainly an exceptional charge in Q4, and I think that's fair game to look at that. Everything else was kind of a wash.

So I think if you looked at that as an adder, yes, that's perfectly fine.

Michael Ciarmoli – Boenning & Scattergood

So then, it would be $1.53 this year, and the bottom line doesn't really call for much – so that's a fair way to look at it, then? $1.53 versus next year of $1.55 to $1.65?

Paul Domorski

Yes, I think that's fair.

Michael Ciarmoli – Boenning & Scattergood

Okay, that's helpful. Has anything changed? Obviously, you guys cited where you are seeing some strength with some of the business jet manufacturers. I think you mentioned Dassault. You've got 67% of your revenues coming from business jet commercial, kind of the SATCOM-related markets. Can you give us a sense as to what is OEM, kind of new production, what's on the retrofit? Can break out that percentage for us?

Neil Mackay

I couldn't give you the – this is Neil here Michael – without doing some research right now I couldn't give you the exact amount. But what is happening as a trend is more and more of our SATCOM business in the aviation is going to the partners. We have Rockwell Collins, Thales and Honeywell, and they are seeing a lot of growth in the business jet connectivity market. So more and more of our focus is on the partner side, and that's still doing pretty well.

Paul Domorski

And I would just add to that, Michael, that again, there are – I could go through a whole list, but we probably don't have the time, of all these airline trials that are underway. Before I mentioned before 36 in my earlier comments. And also in the US, with what's happening with Delta and with what's happening with American and Northwest and these other carriers, by virtue of the acquisitions we have done plus our existing SATCOM business, our equipment is, as I said earlier, virtually on all of those planes in some way, shape or form.

Michael Ciarmoli – Boenning & Scattergood

I just find it surprising – Honeywell, Rockwell, Thales, everyone is just saying the outlook is terrible. And you are relying on those partners. It just seems – it's hard to fathom that you guys are still seeing strength out there, one of the only companies. Even yesterday or two days ago there was news that Dassault is actually taking down some of their production. I just find it kind of hard to believe that some of the, I guess, metrics or milestones you guys are looking at for the year are going to play out. I guess we'll just have to see how the year progresses.

Neil Mackay

But, Michael, you are right there. All those OEMs have, in fact, suggested that things are not doing as well, with the exception of Dassault. Even Dassault has just put out some negatives and is still expecting higher than that.

So we have, as Paul said, we are doing some puts and takes and assuming we won't do as well in this market but do a little bit better in that market. All those OEMs, remember, they are attacking the large market of aviation. And the biggest slides are in the smaller aircraft areas. There is some push-back on some of the bigger aircraft. But even so, it's not worse than last year.

So, you are right. If you look forward, people are saying they are not going to do as well as they thought. But even that may not be so bad for the high-end niche that we are in.

Paul Domorski

I would also add to what Neil said, which is a lot of what you see in the press are – they're talking about the used business jet numbers are increasing and the fact that there's in-service fleets that are for sale and some of these other things about down payments on some jets. So those are all factors, but they aren't necessarily factors that impact connectivity.

Neil Mackay

When you add it all up, we are not as bullish as you might – it might appear in that sense. We have kind of measured – added in lower growth in some areas. But remember, you have these new acquisitions, which are actually in very strong areas. So if you go through all the math, you come out with the guidance we have. But we are not over – we are not saying that we are going to be as incredibly high-risk as we might have been in the earlier years.

Michael Ciarmoli – Boenning & Scattergood

And you haven't seen any, since your initial due diligence, you would say, the Formation of Satamatics, you still feel comfortable with those growth projections? Nothing is changing on their business?

Paul Domorski

No, we feel very comfortable with that.

Michael Ciarmoli – Boenning & Scattergood

Okay, that's helpful. And then just if I can, you guys have exposure to the F-22. Obviously, it's a hot button issue within the Obama administration, one of the programs, I guess, to be pared back or cut. How much revenue exposure do you have to the Raptors?

Paul Domorski

I think the – what we understand, Michael, and again, is that we have orders today. We believe – in 2007, we received our biggest single contract value. I think we had a multi-year contract of about $12 million in this area. And yes, there is some discussion about whether this is going to continue or not. We understand that there hasn't been a decision that has been made. Congress has one opinion, the administration has another opinion.

But the F-22 work is only about, I don't know, 2% to 4% of our total Defense & Space business overall. And we think that existing production work will continue through 2010, no matter what happens. So it's something we keep track of, but it's not going to derail us.

Michael Ciarmoli – Boenning & Scattergood

Okay, that's helpful with the concentration number there. And then, Gary, cash was down third quarter to fourth quarter. So was cash flow from ops negative for the quarter? Do you have that number?

Gary Shell

No, the biggest factor was that we had some cash that we spent – continued to spend on the stock repurchase, and that helped push it down. We had a little bit – we are doing some CapEx additions here on our building; that added a little bit. But it was principally the stock repurchase.

Michael Ciarmoli – Boenning & Scattergood

Do you have the cash flow from ops number for the quarter?

Gary Shell

For Q4? Yes, let's see. That's going to be something on the order of – I don't want to guess; let me flip to that number. Yes, for the quarter, the ops number was about a breakeven number. We continued to have a little bit of growth in receivables as – with the slowdown at LXE, but it was about a breakeven from ops.

Michael Ciarmoli – Boenning & Scattergood

And then I think Rich asked earlier for the target for 2009?

Gary Shell

Yes, I do. The target free cash number should be in the high 20s, in the 25 to 30 range. That's free cash –

Michael Ciarmoli – Boenning & Scattergood

Okay. All right, perfect. Thanks a lot, guys.

Paul Domorski

Thank you, Michael.

Operator

Our next question comes from Ryan Rackley of Raymond James. Please state your question.

Ryan Rackley – Raymond James

Hi, guys. Gary, along those same lines, could you provide what CapEx was during the quarter?

Gary Shell

CapEx has been running, on the – again, for the year, about $14 million, which is almost exactly where we were last year. And it has been running pretty evenly, so it's in the $3 million to $4 million range.

Ryan Rackley – Raymond James

And expectations for next year would be in line with that?

Gary Shell

Yes. It's going to ratchet up a little bit, but not wildly. I think we would expect CapEx to get a lot closer to $20 million next year. With our building addition and the addition of some of these new acquisitions that we have, we're going to be hoping to improve some of the capital position they have there.

Ryan Rackley – Raymond James

Also, with the IsatPhone, given you guys did contribute some of the critical work on the phone, does that mean that you will be getting any type of royalty stream or re-occurring revenue from the phone, once it does go to market?

Paul Domorski

On that handset, we are retaining some – the access to the IP, but we are not expecting any kind of financial bonus to come from that. We've done a lot of work on that, and that's Inmarsat's business plan to execute. We don't have any contingent amounts related to that.

Ryan Rackley – Raymond James

Okay, great. Well, that does it from me. Thanks guys.

Operator

Our next question comes from David Gremmels [ph] with Catapult Capital. Please state your question.

David Gremmels – Catapult Capital

Hi, good morning. Thanks. I set way for a minute. So, I apologize if you’ve went through this already, but I just wanted to confirm, are you still looking for – on the January 5 guidance, you talked about 15% to 20% organic growth in SATCOM and 15% to 20% in Defense & Space. Are those still the targets?

Paul Domorski

Yes.

David Gremmels – Catapult Capital

And the $50 million of EBITDA in '09? That's still the target?

Neil Mackay

Yes, sir.

David Gremmels – Catapult Capital

And how much DA is in there?

Neil Mackay

Well, for the year the total DA is going to approach $20 million. Now that's depreciation and intangibles amortization, but it's going to approach $20 million.

David Gremmels – Catapult Capital

Got it. And last one, how much stock did you repurchase in the fourth quarter, and what is left on the authorization?

Gary Shell

It's straddled. It's easier to talk about the total repurchase. We repurchased about 50,000 shares, around – it's kind of a rough average, around 20. So we spent about $10 million. There's $10 million left under the authorization.

David Gremmels – Catapult Capital

Got it. Okay, and thanks very much.

Paul Domorski

Thank you.

Operator

We have a follow-up question from Rich Valera of Needham & Company. Please state your question.

Rich Valera – Needham & Company

Thanks, Gary. Mine was just on the cash from ops. Just to confirm, it sounded like you said free cash in I think, the high 20s to $30 million range, and then $20 million of CapEx? Is that right?

Gary Shell

Yes, that's right. For '09, Rich, yes.

Rich Valera – Needham & Company

For '09, yes, thank you.

Operator

Our next question comes from Ed Antoian of Chartwell. Please state your question.

Ed Antoian – Chartwell

Hi, guys. I know you have already given us this; I just want to get it cleared up. On the operating income by division, so SATCOM, $4.5 million or – $4.5 million, but this year includes a $3.4 million credit charge for the Inmarsat phone. But can you give me, on the R&D – I want to see the R&D effect in operating income by division. Can you give me what the R&D was on a gross basis year-over-year and how much credit there was and maybe a little more understanding of, should I expect these kind of credits going forward again?

Gary Shell

Well, the credit on the specific program I talked about was related to '08 expenditures. There was some work on that, to finalize all of that, and that will be going forward. It should be going forward at a similar level, so that the amount we accrued, which was between $1 million and $2 million, Ed, was – that was the number related to last year.

Ed Antoian – Chartwell

All in Q4?

Gary Shell

But it was picked up in Q4 because that was when the funding arrangement was finalized. So we should expect – but that covered a significant portion of the year. So you can expect to see a similar number going forward for probably the next couple of years.

Ed Antoian – Chartwell

And how much is that a quarter?

Gary Shell

Well, if it's annualized, if it's $1.5 million to $2 million, something like that, you're going to see $400,000 to $500,000 a quarter, I suppose.

Ed Antoian – Chartwell

Okay, and can you tell me what gross R&D was before credits year-over-year?

Gary Shell

Well, the consolidated number was, all in year-over-year, was going to be something like – well, that would have pushed it north of $20 million. So it would have put the number between $20 million and $21 million. And that's as compared to a little south of $19 million last year. So it went up, say, $19 million to $21 million. So we had to continue to bump it.

Ed Antoian – Chartwell

And feeling for gross expenditures in '09?

Gary Shell

It's going to be a similar bumped number. It's probably – the pace of R&D net of future benefits, I think, it's probably going to see a similar increase of $1 million or $2 million, net, next year. Gross might be a little bit higher than that. So we should see a number – if we were in the low 20s, we should see a number approaching the mid-20s in R&D next year.

Ed Antoian – Chartwell

And on the Inmarsat charge, $3.4 million, I do want to understand the accounting because you made it clear that you're not writing them a check for $3.4 million. So can you try to give me the abridged version of what the accounting was and what you had to write off?

Gary Shell

Sure. We had a receivable, and we basically to sort of a cumulative amount that we would have expected to receive, had everything played out. And we basically agreed to settle it for $3.4 million less than we otherwise had on the books.

Ed Antoian – Chartwell

So how big was that receivable?

Gary Shell

Well, we should – the number, Ed, on that one is in the $12 million to $13 million range.

Ed Antoian – Chartwell

So, kind of back to one of the other questions, so there was profit in that receivable and probably at the normal SATCOM margin, that was earned in – call it Q1 through Q3, maybe even through Q4, and – that we then wrote down?

Gary Shell

Well, that number would have had some profit in it. Now you are going from simple accounting to complicated accounting there now, to try to sort that – to sort through those the specific effects. But yes, there would have been some profit element in that receivable, yes.

Ed Antoian – Chartwell

A part of my question goes back to an issue we dealt with in the past of booking business and then the margin or the contract. It didn't pan out to the margins we expected. And I guess, in a sense, that's what happens here because we booked business that we ended up having to write down.

Was this contract – this contract was kind of an at-risk kind of business, or was this just a way to get out of a situation that just wasn't working?

Paul Domorski

I would say this, Ed, which is it is in the past, as far as we are concerned. And as we look at our '09 number – and as I said in my earlier comments, we believe we have less risk in our business going forward without it than we do with having it. So we stand by the guidance that we have out there. As I said, I think we have a better chance to make that number at this stage than we did prior, in the previous time.

Ed Antoian – Chartwell

And last, on LXE, I just want to make sure there wasn't an issue that I'm not aware of. But last quarter, we talked about new business in LXE being kind of flat but that you were working on cost reductions. Was there a particular piece of revenue? And maybe it was the change in distribution channel that changed the margins faster than you could adjust your cost in the LXE business?

Paul Domorski

I think all that's very fair. I think, as I said, I think the issue is that we are going through a shift in our business. We still see value in having a direct relationship with our customers. We are still interested in having indirect relationship, and there were some overlapping costs during that period of time.

Ed Antoian – Chartwell

So is it fair to say that gross profit margins in LXE were down, not just net margins?

Gary Shell

No. They didn't really see a reduction so much in the gross profit margin, but their structure and sort of the tailing off of volume – we were geared up for a bit higher on the admin and overhead side that we've got to ratchet back.

Paul Domorski

And I would just add to what I said, which is that our challenge is getting our products to market at a lower cost than where we are now. We have done things to be able to lower the breakeven costs. Some of those were in '08, some of those were in '09. We are also going through, and we have got identifiable cost reduction programs under – in place in there, and we think LXE will be a contributor.

But the issue is, is that it's all of the economic conditions that are out there. And we are having to continue to work through those issues as we proceed.

Ed Antoian – Chartwell

Maybe we can talk in more detail later, but I am just a little puzzled. Revenues were actually up year-over-year, and I think they were even up sequentially at LXE. And you said your gross profit margins weren't down. So I don't know if there was – what you had to do below the line that actually increased costs that dramatically.

Gary Shell

Well, their SG&A structure, Ed, and what they were doing on the engineering side and even to some degree on the gross profit – I don't mean to imply that gross profit hasn't deteriorated any, but in general it's the same order. But they were for a higher – all of those other costs below gross profit were for a higher-volume business than –

Ed Antoian – Chartwell

I misspoke. Your LXE revenues were down sequentially, so – but it's interesting that your operating income actually went down more than the revenue decline on a sequential basis. So it would almost have to be gross margin had to come down somewhat.

Gary Shell

It came down somewhat, and we also have restructuring charges in there as well.

Ed Antoian – Chartwell

Okay, fair, good. All right, I'll let you guys go, thanks.

Paul Domorski

Thank you, Ed.


Operator

We will have a follow-up question from Michael Ciarmoli of Boenning & Scattergood. Please state your question.

Michael Ciarmoli – Boenning & Scattergood

Hi, guys, thanks. Two quick ones. The joint air-to-ground missile – I guess you put that press release out of a couple weeks ago. Is there any revenue – it looks like that's more of a 2010 event. Is there any revenue baked into your plan, or is there anything in backlog related to that program?

Paul Domorski

I actually don't know the answer to that question, Michael, I'll have to take a look at that.

Michael Ciarmoli – Boenning & Scattergood

Okay. And then, just on the gross margins, did the $3.4 million charge impact your gross margin at all in the quarter?

Gary Shell

Yes, all of that was reflected in cost of sales.

Michael Ciarmoli – Boenning & Scattergood

Okay, so, ex-that, what would the – do you have the margin number there? I could probably do the quick math myself here.

Gary Shell

That we leave up to you. That gets complicated for us to start announcing what-if numbers. What you're about to do is a straightforward calculation.

Michael Ciarmoli – Boenning & Scattergood

Okay, so it looks like it was a 37.9%, 38% number. How should we look at margins going forward, given the acquisitions? Is there any major changes with some of the newer products that would push those margins lower? Certainly, you look on an '09 – or '07 to '08 basis, the margins were down. Is this kind of a 36% level, where we should be thinking about the business?

Neil Mackay

That's why one of the things that we're going to talk more about in '09 is the EBITDA number. It's a little bit hard to draw those same percentage lengths because we are going to have a fair amount of intangibles amortization in there. So we're going to be talking more about EBITDA on a comparative basis. But I'll refer back to what Paul said. We do believe that our acquisitions are going to be comparable. Excluding all the intangibles that we have to amortize, they should be, just from their normal operations, sort of an operating percentage similar to what we get in the SATCOM business, which is a mid-teens kind of number.

So it should improve the – the acquisition of those, excluding the amortization of intangibles, that should be improving our profitability.

Michael Ciarmoli – Boenning & Scattergood

Okay, so you did about 16%, 16.5% EBITDA in the fourth quarter, and that should be kind of around that range, mid-teens, is where you are taking? And, obviously, I guess that's what you need to get to do, to get to that $50 million.

Gary Shell

Yes, that's right.

Michael Ciarmoli – Boenning & Scattergood

All right, fair enough, thanks guys.

Paul Domorski

Thank you.

Operator

There appears to be no further questions at this time.

Paul Domorski

Okay, Claudia. Thank you, everyone, for taking the time to come on the call. We look forward to giving you an update at the end of the first quarter. Have a great rest of the day.

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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