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EMS Technologies Announces Strong Third Quarter Profits

5 November 2010

 

EMS Technologies, Inc. (NASDAQ: ELMG) today announced significantly higher third-quarter operating income in 2010 compared with 2009. The continued recovery in the Company’s LXE mobile-computing business was the biggest contributor to the this increased profitability. These consolidated third-quarter results also follow year-over-year growth in operating income reported for the first and second quarters of this year.

Third-quarter 2010 operating income was $4.3 million and earnings from continuing operations were $3.5 million, or $0.23 per share, on revenues of $85.7 million. For the comparable period in 2009, operating income was $2.6 million and earnings from continuing operations were $6.0 million, or $0.39 per share, on revenues of $85.7 million. The 2009 net earnings included $4.1 million of income tax benefits for research credits and the benefit of tax losses in certain jurisdictions. Adjusted EBITDA for the third quarter increased 24% year-over-year, with $9.5 million in 2010 as compared with $7.7 million in 2009. The Company also generated approximately $16 million in cash flow from continuing operations during the third quarter, further improving an already strong balance sheet.

 

“Among our key goals for 2010 has been to execute a strong year of recovery and to improve alignment across our segments. The first three quarters have shown the success of the EMS team’s focus on these goals, resulting in improved efficiency, quality and profitability in our businesses and more coordinated development,” stated Neil Mackay, president and CEO, EMS Technologies. “Although revenues from some market sectors in commercial aviation remain slow, renewed activity in markets for our rugged mobile-computing products, especially in North America, have also helped our overall profitability continue to improve.”

 

Continued Improvement in Market for Rugged Mobile Computers

The Company’s LXE rugged mobile computers generated higher revenues (year-over-year for comparable quarters) for the third consecutive quarter, mainly on the strength of recovering North American markets. Sales growth and operational improvements combined to push LXE’s Adjusted EBITDA to $3.2 million, which was the highest third-quarter total in history. The third quarter’s 9% Adjusted EBITDA margin was the highest for any quarter since 2006.

In addition to the profit performance for the period, we believe the third quarter included a step forward for the LXE product line, which in September introduced the Marathon™ field computer. The Marathon field computer is part of EMS’s long-term strategy to project its terrestrial terminal technologies and products into broader markets for mobile connectivity. Smaller than a laptop, with a larger screen and greater computing power than a PDA, and able to communicate over wide-area networks, the Marathon field computer is targeted for the mobile worker in field-force automation, route accounting and public safety. We expect that the capabilities of this device will also be important to the development of broader solutions for aviation and tracking applications in the future. The Company expects to begin delivering this new product in early 2011.

 

High-Speed Data Products Drive Profits in Aviation

The Company’s Aviation business generated $3.4 million in Adjusted EBITDA on revenues of $24.1 million for the third quarter of 2010, compared with $1.8 million in Adjusted EBITDA on revenues of $25.7 million for the comparable period one year earlier. The higher profitability in 2010 compared with 2009 resulted from a more favorable mix of contracts and ongoing cost reductions.

 

Sales of high-speed satellite connectivity products for both military and larger commercial aircraft anchored the third quarter. However, the business jet market remains slow, and the rollout of air-to-ground connectivity systems has been uneven, with both of these sectors still feeling the effects of an uncertain economy. We believe that these sectors are unlikely to show stronger signs of recovery before mid-2011.

 

Recently, EMS announced the launch of its new Aspire™ airborne communications systems. This family of innovative products supports communications via the Inmarsat or Iridium networks and offers valuable flexibility to aircraft operators and manufacturers. Aspire products will allow EMS to expand its business base into the market for small- and medium-sized business aircraft. The first Aspire systems will be available for shipping in the fourth quarter of this year.

 

Expanded Market Reach of Global Tracking

Third-quarter Adjusted EBITDA for the EMS Global Tracking business was $0.9 million in 2010 on $9.4 million of revenues, compared with $1.5 million Adjusted EBITDA in the third quarter of 2009 on $10.8 million in revenues. Factors affecting this comparison included search-and-rescue orders that were delayed into the fourth quarter and a temporary drop in airtime revenues while a defense customer upgraded its network capabilities. Based on high activity in the Company’s tracking markets, fourth-quarter revenues are expected to be significantly higher than the third-quarter level.

 

There are several reasons for the positive outlook for Global Tracking, one of which is the favorable reception that tracking markets have given to the recently-introduced Osprey™ personal tracker. The Company has just announced its first 1,000-unit order for this new product, which was selected by a major provider of satellite-based services for its vessel monitoring system (“VMS”). This VMS uses the Osprey personal tracker not only to enable alerts and messaging in emergency situations, but also to help effective management of fisheries. In addition to the expanded product reach offered by the Osprey personal tracker, the EMS Global Tracking business has also recently expanded its geographic reach with a significant order for tracking equipment and services for a major U.S. defense supplier in the Middle East.

 

Maintaining Strong Execution at Defense & Space

The EMS Defense & Space business continued to execute effectively on production-phase programs and to control costs well in the third quarter. As a result, this business achieved an Adjusted EBITDA margin of 14%, earning Adjusted EBITDA of $2.3 million on revenues of $16.8 million in the third quarter of 2010, which is comparable with the second quarter of this year. The 2010 third-quarter results were lower than the 2009 results of $3.1 million in Adjusted EBITDA on revenues of $23.0 million, due to completion of work on a large cost-plus defense program.

The D&S backlog was down from $85 million at the beginning of the quarter to $71 million at the end. The Company believes that the low orders level in the third quarter reflects the current uncertainty in defense budgets, with the start-up of some communications programs being delayed for a quarter or more. However, we believe that there is promising new business potential in high-volume antenna applications, where the Company has exceptional expertise and experience.

 

Business Outlook Is Optimistic

“The favorable business developments in the third quarter, and indeed in the first nine months, do not merely reflect improving economic conditions in certain of our markets. They are also the product of the Company’s focus on doing things that make businesses better: reducing product and operating costs, expanding channels to market, and capitalizing on new technologies,” said Mackay. “We believe that our rugged mobile-computing and global tracking businesses are already realizing substantial benefits from this Company focus. Our Aviation and D&S businesses, though facing lower revenues and current market uncertainties, have nonetheless continued to improve their profitability as well, and I believe they have put themselves in very good position for future market opportunities. We are especially optimistic about the long-term prospects for our Aviation business because of our market position as the leading connectivity enabler for commercial aircraft.

 

“We believe that the Company is on pace to achieve earnings from continuing operations in the upper end of the range of revised guidance of $0.80 to $0.90 per share, excluding acquisition-related charges and goodwill impairment and related charges. This estimate includes an effective income tax rate for the year of approximately 19 percent, based on the assumption that the tax credit provision related to research and development expenditures in the U.S. is not enacted into law for 2010. Furthermore, we expect that our Adjusted EBITDA for the full year 2010 will be in the range of approximately $38 to $40 million, which would be an all-time record for EMS.”