EMS Technologies Announces 2009 Year-End Results

March 10, 2010, 8:15 a.m. EST
EMS Technologies Announces 2009 Year-End Results
Improved Profitability from Higher Aviation Revenues, Cost Control
ATLANTA, Mar 10, 2010 (BUSINESS WIRE) –EMS Technologies, Inc.today announced financial resultsfor the fourth quarter and the full year 2009. EMS reportedfourth-quarter revenues of $85.0 million and earnings from continuingoperations of $2.4 million, or $0.16 per share, on a non-GAAP reportingbasis, excluding acquisition-related items and an impairment charge forLXE goodwill. EBITDA, excluding acquisition-related items and LXEgoodwill impairment (“Adjusted EBITDA”), was $7.7 million for the fourthquarter. Net cash provided by operating activities from continuingoperations was $9.4 million in the fourth quarter, and cash exceededdebt at December 31, 2009 by $19.4 million.
As described in more detail below, the Company will recognize a non-cashimpairment charge to goodwill in the LXE division for the fourthquarter. The Company has not completed the process to determine thespecific impairment charge, but this determination requires that asignificant portion of LXE’s fair value should be allocated tounrecorded intangibles and appreciated assets rather than goodwill. As aresult, the impairment charge will be higher than the $5 milliondeficiency between estimated fair value and carrying value, andmanagement expects that the charge will be in the range of $16 millionto $21 million. Taking into account this impairment charge using themidpoint of the estimated range of $18.5 million, together with $1.9million of acquisition-related charges in the fourth quarter, wouldresult in a GAAP-basis loss from continuing operations for the quarterof $1.18 per share. The LXE goodwill impairment does not affect theCompany’s forecasts for the LXE business or compliance with the terms ofthe Company’s credit facility. There was no impairment related togoodwill in the Company’s other business units.
Dr. Neil Mackay, EMS president and chief executive officer, commented,”EMS’s main business focus is enabling mobile connectivity in placeswhere connectivity is really tough to achieve. And the ever-growingdemand for mobile connectivity helps our key markets to have resilience,even in the current challenging economic climate.
–The communications and tracking (“CT”) markets helped thefourth-quarter results to show a $2.8 million increase in revenues anda $2.3 million increase in Adjusted EBITDA as compared with the thirdquarter. Aviation sales were key, with better-than-expected ordersrelated to in-flight connectivity (“IFC”) and military connectivity.
–Through cost control and good performance on production-phasecontracts, our defense and space (“DS”) business was able tobasically break even, despite a $6.5 million drop in sales from the Q3level and accrual of approximately $1 million of restructuringexpenses following completion of our B-2 work, and cost growth onseveral development-stage contracts; and
–The LXE mobile logistics business also neared breakeven, led byimproving revenues in North America.”
Aviation Businesses To Combine, Revenues Up from Aviation and GlobalTracking Markets
In 2009, communications and tracking markets were the core of theCompany’s largest mobile connectivity business, contributing 45% ofconsolidated revenues for the year. Higher total orders for aviationproducts, for both commercial and defense customers, were crucial toachieving $39.1 million in revenues in the fourth quarter, as comparedwith $36.4 million just one quarter earlier. In the fourth quarter, theCompany made its largest single-day shipment (valued at $3.6 million) toits largest in-flight connectivity customer, Aircell. Aircell uses EMS’sin-cabin routers, servers and wireless access points for its Gogo(R)Inflight passenger Internet service. Aircell recently announced itstwo-millionth customer milestone, with the Gogo service now offered onmore than 700 commercial aircraft.
In January 2010, the Company announced that it would begin combining theaviation-sector business units within the CT segment to create EMSAviation. The markets for EMS Aviation’s mobile connectivity productsgenerated $130 million in revenues for the Company in 2009. This newunified aviation business will result in greater scale and operationalefficiencies, new sales opportunities from cross-selling and moresystems solutions, and better coordination of product development.
“The market for connectivity with our military, general aviation andcommercial users continues to create new business for our suite ofaviation solutions,” Mackay said. “With the emerging consolidation ofour aviation divisions, we believe that EMS will offer a connectivityportfolio unmatched in the aviation industry.”
Global tracking revenues also contributed to communications and trackingbusiness in the fourth quarter. Global tracking airtime servicearrangements have very low turnover, and offering airtime service afterthe hardware sale is key to our success in this market. Significantglobal tracking hardware orders in the fourth quarter included almost $1million for security applications in Afghanistan, and $2.3 million for asystem upgrade and support contract for a search-and-rescue system inTurkey. EMS also began beta trials of its new Osprey Personal Trackersystem, which the Company expects to release later this year.
DS Focuses on High-Volume Potential in Communications-On-The-Moveand Radar
Mobile connectivity in defense and space accounted for nearly one-fourthof the Company’s revenues in 2009. Most of the segment’s sales relate tomarkets for communications-on-the-move (“CoTM”) and radar.
During the fourth quarter, EMS was selected by L-3 CommunicationsSystems to supply the antenna system for the Hawklink U.S. Navyhelicopter airborne Common Data Link, which is a strategiccommunications-on-the-move program. This win reaffirms EMS as a leadingcompetitor in military data link applications, which is yet another keymobile connectivity target market. The Hawklink antenna design may alsobe adaptable to other airborne platforms as U.S. armed forces updatetheir data link capabilities. In addition, the DS segment began work ona classified radar panel production contract, which has the potentialfor significant long-term production; this type of contract is a highpriority in DS’s new business development efforts.
“EMS’s defense segment goes into 2010 focused on the growing CoTM andradar markets, areas that we believe have long-term importance in U.S.Department of Defense plans,” Mackay said. “And through awards likeHawklink, EMS is well positioned to capture more potential high-volumeproduction awards that capitalize on our proven antenna capabilities formobile platforms.”
Improving Conditions in the Americas for LXE, Strong Backlog Headinginto 2010
Approximately 30% of the Company’s consolidated revenues come frommarkets for logistics and the LXE product line.
In the fourth quarter, LXE accomplished a significant milestone, as itbegan shipping the MX9 ultra-rugged handheld terminal to Itron, theworld leader in automated meter intelligence. Management believes thatthe wide-area terrestrial communications technology behind the MX9provides an important avenue to go beyond the warehouse by supportingcustomers in service applications. The MX9’s technology could alsocomplement EMS’s satellite-based tracking technologies in emergingapplications to track high-value assets.
LXE continued to expand its indirect distribution channel in the fourthquarter. Management believes that LXE’s exposure through high-profilechannel partners such as BlueStar, Barex, ScanSource and others ishelping to build sales momentum.
“LXE begins the new year with a stronger-than-usual backlog. We areencouraged but cautious in the near-term. Economic uncertaintiespersist, especially in Europe. Quarterly revenues have an additionalelement of uncertainty from delays in our supply chain, as suppliersthat had cut back their operations must now rebuild their capacity tomeet rising product demand,” said Mackay.
Guidance for 2010 Fiscal Year
Mackay concluded, “EMS remains focused on enabling mobile connectivityin select markets with the potential for strong growth. EMS’s recoveryshould follow improvement in the key markets of aviation, tracking andlogistics, and defense. We are seeing early signs of what could be animproving economic outlook. However, we — like others in our markets –are tempering our view on 2010 to reflect the ongoing uncertainties inworld markets, particularly in the first half of the year. For the 2010year, we expect single-digit-percentage growth in overall revenues andAdjusted EBITDA. Due to current market and economic conditions, as wellas historical business cycles in our markets, we believe that earningswill be weighted toward the second half of the year. We expect thatearnings from continuing operations will be in the range of $0.75 to$0.90 per share, excluding acquisition-related charges and assuming aneffective income tax rate of 15%.”
For its annual goodwill impairment testing, the Company compared thefair value (estimated using traditional valuation techniques) of each ofits reporting units with the carrying value of each reporting unit. Onlythe LXE business unit’s fair value was less than its carrying value (byapproximately $5 million), which implied that LXE may have an impairmentof goodwill. To determine the actual amount of impairment undergenerally accepted accounting principles (“GAAP”), the appropriate levelof goodwill is determined as if in a business combination. Thismethodology requires that a significant amount of LXE’s total estimatedfair value be assigned to intangible assets (such as intellectualproperty, tradename, customer relationships, etc.) and appreciatedassets (such as property, plant and equipment). This reduces the amountof LXE’s total estimated fair value that can be assigned to goodwill,even though GAAP does not permit the Company to record the fair value ofthese other intangibles or asset appreciation on its books. As a resultof the effect of unrecorded intangibles and asset appreciation on theLXE goodwill impairment calculations, the GAAP-determined impairmentcharge for goodwill is estimated at $16 to $21 million, rather than the$5 million deficiency in total estimated value for the LXE businessunit. The Company has not completed the complex analysis process todetermine the specific impairment charge, but it expects to completethis work prior to the due date for filing its Annual Report on Form10-K. The LXE goodwill impairment is a non-cash charge and has no effecton either the Company’s forecasts for its LXE business or compliancewith the terms of the Company’s credit facility.
The Company has presented its earnings and earnings per share fromcontinuing operations on a non-GAAP basis, excluding acquisition-relateditems and a noncash charge for impairment of goodwill. The Companybelieves that exclusion of these items provides useful information aboutthe results of its ongoing activities that is more comparable to resultsfor prior fiscal periods and that is not subject to volatility arisingfrom the timing and cost of acquisition activity and impairment charges.
Acquisition-related charges in 2009 have included typical servicesrequired to complete an acquisition, such as legal advice, due diligenceand asset valuation, which are now required to be expensed under FASBStatement No. 141(R), which is new in 2009. In addition, FASB StatementNo. 141(R) required that the Company initially record the earn-outliability related to one of its recent acquisitions at estimated fairvalue on a discounted basis; accretion of that discounted liability andadjustment to its estimated fair value are reflected in the incomestatement in the GAAP results. In the fourth quarter, the Companyreached agreement to settle the earnout provisions, resulting in acharge of $1.9 million, which mainly represents accretion of thediscounted liability that would have otherwise been expensed in 2010.
focuses on enabling mobileconnectivity where it is tough to be connected — in the air, on land, atsea, or in space. EMS segments serve three market groups:
–In Communications Tracking markets, customers use the Company’sproducts to communicate from aircraft and other mobile platforms oversatellite and air-to-ground links, as well as to track mobile,high-value assets (including aircraft) over satellite links;
–In Defense Space markets, customers use the Company’s products forhighly-sophisticated applications involving mobile platforms — frommilitary communications, radar, surveillance and countermeasures tocommercial high-definition television, satellite radio, and live TVfor innovative airlines; and
–In LXE markets, customers use the Company’s rugged terminals andwireless data networks for logistics applications such as distributioncenters, warehouses and container ports. LXE’s automaticidentification and data capture products serve mobile informationusers at over 7,500 sites worldwide.
There will be a conference call at9:30 AM Eastern time on Wednesday, March10, 2010 in which the Company’s management will discuss thefinancial results for the fourth quarter of 2009. If you would like toparticipate in this conference, please call 888-674-0222 (international:201-604-0498) approximately 10 minutes before the call is scheduled tobegin. A taped replay of the conference call will also beavailable through March 17, 2010 by dialing 888-632-8973 (intl:201-499-0429), and enter the replay code 60157753 followed by the # sign.
Statements contained in this press release regarding the Company’sexpectations for its financial results for 2010 and the potential forvarious businesses and products are forward-looking statements. Actualresults could differ materially from those statements as a result of awide variety of factors. Such factors include, but are not limited to…
–economic conditions in the U.S. and abroad and their effect on capitalspending in our principal markets;
–difficulty predicting the timing of receipt of major customer orders,and the effect of customer timing decisions on our results;
–our successful completion of technological development programs andthe effects of technology that may be developed by, and patent rightsthat may be held or obtained by, competitors;
–U.S. defense budget pressures on near-term spending priorities;
–uncertainties inherent in the process of converting contract awardsinto firm contractual orders in the future;
–volatility of foreign currency exchange rates relative to the U.S.dollar and their effect on purchasing power by internationalcustomers, and on the cost structure of the our operations outside theU.S., as well as the potential for realizing foreign exchange gainsand losses associated with assets and liabilities denominated inforeign currencies;
–successful resolution of technical problems, proposed scope changes,or proposed funding changes that may be encountered on contracts;
–changes in our effective income tax rate caused by the extent to whichactual taxable earnings in the U.S., Canada and other taxingjurisdictions may vary from expected taxable earnings;
–successful transition of products from development stages to anefficient manufacturing environment;
–changes in the rates at which our products are returned for repair orreplacement under warranty;
–customer response to new products and services, and general conditionsin our target markets (such as logistics and space-basedcommunications), and whether these responses and conditions developaccording to our expectations;
–the increased potential for additional asset impairment charges asunfavorable economic or financial market conditions or otherdevelopments might affect the fair value of one or more of ourbusiness units;
–the success of certain of our customers in marketing our line ofhigh-speed commercial airline communications products as acomplementary offering with their own lines of avionics products;
–the continued availability of financing for various mobile andhigh-speed data communications systems;
–risk that the recent turmoil in the credit markets may make it moredifficult for some customers to obtain financing and adversely affecttheir ability to pay, which in turn could have an adverse impact onour business, operating results, and financial condition;
–development of successful working relationships with local businessand government personnel in connection with distribution andmanufacture of products in foreign countries;
–the demand growth for various mobile and high-speed datacommunications services;
–our ability to attract and retain qualified senior management andother personnel, particularly those with key technical skills;
–our ability to effectively integrate our acquired businesses, productsor technologies into our existing businesses and products, and therisk that any such acquired businesses, products or technologies donot perform as expected, are subject to undisclosed or unanticipatedliabilities, or are otherwise dilutive to our earnings;
–the potential effects of Statement of Financial Accounting StandardsNo. 141(R), “Business Combinations,” which requires, foracquisitions completed in 2009 and thereafter, that certainacquisition-related expenditures should be accounted for as periodexpenses in the income statement, and that the acquisition-date fairvalue will become the measurement objective for all assets acquiredand liabilities assumed, resulting in potential unfavorable effects onthe income statement, including any changes in the amounts expected tobe paid on post-acquisition earn-out agreements, as well as theaccretion of the discounted value of the estimated payments;
–the potential effects, on cash and results of discontinued operations,of final resolution of potential liabilities under warranties andrepresentations that we made, and obligations assumed by purchasers,in connection with our dispositions of discontinued operations;
–the availability, capabilities and performance of suppliers of basicmaterials, electronic components and sophisticated subsystems on whichwe must rely in order to perform according to contract requirements,or to introduce new products on the desired schedule; and
–uncertainties associated with U.S. export controls and the exportlicense process, which restrict our ability to hold technicaldiscussions with customers, suppliers and internal engineeringresources and can reduce our ability to obtain sales from customersoutside the U.S. or to perform contracts with the desired level ofefficiency or profitability.
Further information concerning relevant factors and risks are identifiedunder the caption “Risk Factors” in our Annual Report on Form 10-K forthe year ended December 31, 2008 and our Quarterly Report on Form 10-Qfor the period ended October 3, 2009.
EMS Technologies, Inc. and SubsidiariesConsolidated Statements of Operations(In millions, except per-share data)UnauditedThree Months Ended Years EndedDecember 31 December 31 December 31 December 312009 2008 2009 2008Net sales $ 85.0 90.4 360.0 335.0Cost of sales 55.4 59.7 241.1 213.9Gross profit 29.6 30.7 118.9 121.1Selling, general and administrative 21.3 21.2 87.7 81.4Research development 5.1 4.0 18.7 20.1Impairment loss on goodwill (1) 18.5 – 18.5 -Acquisition-related charges 1.9 – 7.2 -Operating (loss) income (17.2 ) 5.5 (13.2 ) 19.6Interest income other – 0.1 0.2 2.5Interest expense (0.4 ) (0.5 ) (2.2 ) (1.7 )Foreign exchange (loss) gain (0.4 ) (0.3 ) 0.6 (0.6 )Acquisition-related FX adjustment – - (1.4 ) -(Loss) earnings from continuing operations before income taxes (18.0 ) 4.8 (16.0 ) 19.8Income tax benefit – 2.0 4.3 0.7(Loss) earning from continuing operations (18.0 ) 6.8 (11.7 ) 20.5Gain (loss) from discontinued operations net of tax 0.1 – (0.7 ) -Net (loss) earnings $ (17.9 ) 6.8 (12.4 ) 20.5Net (loss) earnings per share:From continuing operations $ (1.18 ) 0.44 (0.77 ) 1.31From discontinued operations – - (0.04 ) -(Loss) earnings per share $ (1.18 ) 0.44 (0.81 ) 1.31Outstanding shares – diluted 15.2 15.3 15.2 15.6Supplemental data for continuing operations:Adjusted EBITDA $ 7.7 8.2 33.3 34.0Adjusted EPS 0.16 0.44 1.01 1.31Change in net cash provided by operating activities 9.4 4.2 42.6 16.5(1) Reflects the midpoint of the range of the Company’spreliminary estimate of the impairment loss on LXE’s goodwill inthe three months and year ended December 31, 2009. The charge andpotential tax effects are subject to finalization of certain fairvalue estimates and may be adjusted when all aspects of theanlayses are completed.
EMS Technologies, Inc. and SubsidiariesConsolidated Condensed Balance Sheets(In millions)UnauditedDecember 31 December 312009 2008AssetsCash and cash equivalents $ 47.2 87.0Trade accounts receivable 61.0 65.8Revenue in excess of billings on long-term contracts 25.3 30.5Inventories 40.7 35.7Other current assets 21.1 13.8Current assets 195.3 232.8Net property, plant and equipment 47.9 40.6Goodwill 61.4 31.4Other assets 67.1 22.6$ 371.7 327.4Liabilities and Shareholders’ EquityCurrent installments of long-term debt $ 1.4 1.3Accounts payable 27.3 25.4Other current liabilities 60.9 40.7Current liabilities 89.6 67.4Long-term debt, less current installments 26.4 9.3Other noncurrent liabilities 11.3 8.0Shareholders’ equity 244.4 242.7$ 371.7 327.4
EMS Technologies, Inc. and SubsidiariesSegment Data(In millions)UnauditedThree Months Ended Years EndedDecember 31 December 31 December 31 December 312009 2008 2009 2008Net salesCommunications Tracking $ 39.1 30.8 159.0 112.5LXE 29.5 36.4 109.4 145.9Defense Space 16.4 23.2 91.6 76.6Total $ 85.0 90.4 360.0 335.0Operating income (loss)Communications Tracking $ 2.8 4.4 11.4 14.2LXE (0.4 ) – (6.6 ) 2.8Defense Space – 2.5 7.3 6.4Corporate Other 0.8 (1.4 ) 0.4 (3.8 )Impairment loss on goodwill (1) (18.5 ) – (18.5 ) -Acquisition-related items (1.9 ) – (7.2 ) -Total $ (17.2 ) 5.5 (13.2 ) 19.6Adjusted EBITDACommunications Tracking $ 5.5 5.2 24.3 19.2LXE 0.2 1.0 (3.4 ) 6.8Defense Space 0.9 3.2 10.7 9.3Corporate Other 1.1 (1.2 ) 1.7 (1.3 )Total $ 7.7 8.2 33.3 34.0(1) Reflects the midpoint of the range of the Company’spreliminary estimate of the impairment loss on LXE’s goodwill inthe three months and year ended December 31, 2009. The charge andpotential tax effects are subject to finalization of certain fairvalue estimates and may be adjusted when all aspects of theanlayses are completed.
This press release contains information regarding our earnings fromcontinuing operations and earnings per share from continuing operations,excluding impairment loss on goodwill, acquisition-related items and anacquisition-related foreign exchange adjustment, and earnings beforeinterest expense, income taxes, depreciation and amortization andexcluding discontinued operations, the acquisition-related items andacquisition-related foreign exchange adjustment (“Adjusted EBITDA”). TheCompany believes that earnings that are based on these non-GAAPfinancial measures provide useful information to investors, lenders andfinancial analysts because (i) these measures are more comparable withthe results for prior fiscal periods, and (ii) by excluding thepotential volatility related to the timing and extent of non-operatingactivities, such as acquisitions or revisions of the estimated value ofpost-closing earn-outs, such results provide a useful means ofevaluating the success of the Company’s ongoing operating activities.Also, the Company uses this information, together with other appropriatemetrics, to set goals for and measure the performance of its operatingbusinesses, to determine management’s incentive compensation, and toassess the Company’s compliance with debt covenants. Management furtherconsiders Adjusted EBITDA an important indicator of operationalstrengths and performance of its businesses. EBITDA measures are usedhistorically by investors, lenders and financial analysts to estimatethe value of a company, to make informed investment decisions andevaluate performance. Management believes that Adjusted EBITDAfacilitates comparisons of our results of operations with those ofcompanies having different capital structures. In addition, a measuresimilar to Adjusted EBITDA is a component of our bank lending agreement,which requires certain levels of Adjusted EBITDA to be achieved by theCompany. This information should not be considered in isolation or inlieu of the Company’s operating and other financial informationdetermined in accordance with GAAP. In addition, because EBITDA andadjustments to EBITDA are not determined consistently by all entities,Adjusted EBITDA as presented may not be comparable to similarly titledmeasures of other companies.
Following is a reconciliation of our 2009 earnings from continuingoperations and earnings per share from continuing operations to thenon-GAAP financial measures that exclude impairment loss on goodwill,acquisition-related items and an acquisition-related foreign exchangeadjustment (in millions, except per share data – unaudited):
Three Months Ended Year EndedDecember 31, 2009 December 31, 2009Net (loss) (Loss) Net (loss) (Loss)earnings earnings earnings earningsper share per shareFrom continuing operations:As reported $ (18.0 ) (1.18 ) (11.7 ) (0.77 )Impairment loss on goodwill 18.5 1.22 18.5 1.21Acquisition-related items 1.9 0.12 7.2 0.48Acquisition-related foreign exchange adjustment – - 1.4 0.09As adjusted $ 2.4 0.16 15.4 1.01
Following is a reconciliation of net earnings (loss) from continuingoperations to Adjusted EBITDA and earnings (loss) from continuingoperations before income taxes to Adjusted EBITDA by segment, for thethree months and years ended December 31, 2009 and December 31, 2008 (inmillions – unaudited):
CT LXE DS Corp TotalOtherThree Months Ended December 31, 2009Net loss from continuing operations $ (18.0 )Income tax expense -Earnings (loss) from continuing operations before income taxes $ 2.6 (19.0 ) – (1.6 ) (18.0 )Interest expense – (0.1 ) – 0.5 0.4Depreciation and amortization 2.9 0.8 0.9 0.3 4.9Impairment loss on goodwill – 18.5 – - 18.5Acquisition-related charges – - – 1.9 1.9Adjusted EBITDA $ 5.5 0.2 0.9 1.1 $ 7.7Year Ended December 31, 2009Net loss from continuing operations $ (11.7 )Income tax benefit (4.3 )Earnings (loss) from continuing operations before income taxes $ 12.1 (25.3 ) 7.4 (10.2 ) (16.0 )Interest expense 0.1 0.1 (0.1 ) 2.1 2.2Depreciation and amortization 12.1 3.3 3.4 1.2 20.0Impairment loss on goodwill – 18.5 – - 18.5Acquisition-related charges – - – 7.2 7.2Acquisition-related foreign exchange adjustment – - – 1.4 1.4Adjusted EBITDA $ 24.3 (3.4 ) 10.7 1.7 $ 33.3Three Months Ended December 31, 2008Net earnings from continuing operations $ 6.8Income tax benefit (2.0 )Earnings (loss) from continuing operations before income taxes $ 4.0 0.1 2.4 (1.7 ) 4.8Interest expense – 0.2 – 0.3 0.5Depreciation and amortization 1.2 0.7 0.8 0.2 2.9Adjusted EBITDA $ 5.2 1.0 3.2 (1.2 ) $ 8.2Year Ended December 31, 2008Net earnings from continuing operations $ 20.5Income tax benefit (0.7 )Earnings (loss) from continuing operations before income taxes $ 14.0 3.0 6.3 (3.5 ) 19.8Interest expense 0.1 0.4 – 1.2 1.7Depreciation and amortization 5.1 3.4 3.0 1.0 12.5Adjusted EBITDA $ 19.2 6.8 9.3 (1.3 ) $ 34.0
EMS Technologies, Inc.Gary B. Shell, 770-729-6512Chief Financial OfficerorInvestor Relations, 770-729-6512investor.relations@ems-t.com www.ems-t.com
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