Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Ultralife Corp. (NASDAQ:ULBI)

Q2 2009 Earnings Call

July 30, 2009 11:00 am ET

Executives

John Kavazanjian - President & Chief Executives Officer

John Casper - Chief Financial Officer

Jody Burfening - Lippert/Heilshorn & Associates

Analysts

Trey Grooms - Stephens Inc

Walter Nasdeo - Ardour Capital

James McIlree - Collins Stewart

Ted Kundtz - Needham

Jamie Sullivan - RBC Capital Markets

Operator

Good day and welcome to this Ultralife Corporation second quarter earnings conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead ma’am.

Jody Burfening

Thank you, operator. Good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for the Ultralife Corporation’s earnings conference call for the second quarter of fiscal 2009.

With us on today’s call are John Kavazanjian, Ultralife’s President and Chief Executive Officer, and John Casper Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning and if anyone has not yet received a copy, I invite you to visit the Ultralife website at www.ultralifecorp.com, where you will find the release under Investor News in the Investor Relations section.

Before turning the call over to management, I’d like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include worsening global economic conditions, increased competitive environment, and pricing pressures, disruptions related to restructuring actions and delays.

The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company’s analysis only as of today’s date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. A more detailed description of such uncertainties is contained in the company’s filings with the Securities and Exchange Commission, such as the company’s Annual Report on Form 10-K for the period ended December 31, 2008.

In addition on today’s call, management may refer to certain non-GAAP financial measures that management considers to be useful metrics that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures.

With that, I would now like to turn the call over to John. Good morning, John.

John Kavazanjian

Thank you, Jody. Good morning and welcome to the Ultralife Corporation conference call for the second quarter of 2009. Joining me today is John Casper who I’d like to welcome as our new Chief Financial Officer, and also with us today are Julius Cirin, our Corporate Communications Officer, and Bill Schmitz, Chief Operating Officer.

Today, we reported revenue of $39.6 million for the second quarter of 2009 and an operating loss of $6.3 million. Revenue declined compared to last year when we were fulfilling more than a $100 million in advanced communications systems orders.

Quarter-over-quarter, revenue was consistent with the first quarter due to continued delays in contracting associated with funded government programs. Revenue was virtually zero in automotive telematics due to further inventory corrections in the automotive business and declined in standby power due to deferral of capital spending and the data processing in telecom industries.

Revenue was slightly up in all other sectors of the business. In the second quarter, we booked several non-recurring charges due to legal action, various operational changes resulting in termination costs and an increase in inventory provisions.

John Casper will take you through these charges in his commentary. Much of this expense was related to our initiatives to get more efficient and drive our operating costs down to a lower level. While the legal action resulted in the judgment in our favor, defending our position in court cost us higher than normal legal fees. Our operational changes included the closing of our Seattle amplifier operation and the consolidation of it into our newly acquired AMTI unit and certain severance costs.

Inventory reserves were a result of an examination of our inventory in the light of a slower economy. Slowdown in economic activity has caused us to revaluate the parts deemed to be slow moving and a relationship of their cost to their market value. We still await the award of the SATCOM-On-The-Move systems for the M-ATV and other programs, while we are still specified as the GFE or government’s first equipment in the programs. The government has yet to come to terms on a contract vehicle with a prime contractor to supply these parts.

We stand poised with over $8 million in inventory, ready to execute on this known demand and still believe that it is not a matter of if, but a matter of when. [D cells] and batteries remained strong, a notable weakness only in the automotive sector and in standby power. They are still being designed as a new and existing application with particular strength in military markets.

Standby power, we’ve seen the weakness in the capital markets manifest itself for continued deferrals of project. This has pushed out several significant programs with major customers. It is also exerting pricing pressure on lead acid battery sales and suppliers are fighting to liquidate inventories and generate cash in a tighter market.

We have reduced expenses in this business segment, consistent with further consolidation of operations and are remaining poised to execute as we believe that the mission critical applications that this area addresses can only defer replacements, upgrades and investments and back-up power for so long. In the Communications Systems business apart from being ready for the SATCOM-On-The-Move orders, we have now consolidated our amplifier manufacturing under the AMTI business that we purchased last quarter from SAIC.

By consolidating our Seattle area operation into the AMTI operation in Virginia Beach, we are able to significantly cut down on overhead while leveraging a strong technical base. This will involve the outsourcing of some of the Seattle production and the relocation of some of the technical talent.

Along with the closing of our facility, it is estimated to save us up to $2 million a year on expenses. The AMTI business got off to a very strong start in the second quarter and with sales of amplifiers and their utilization in our advanced communications systems, we will show growth of sales and profits over the next year.

Delays in two major programs have impacted profitability in the first half of the year. The delay in the SATCOM-On-The-Move orders and the delay in our program with the UK MoD.

Regarding the SATCOM orders, we are still specified as I have said as a GFE, the MRAP and other programs, including the M-ATV program that’s just been awarded to Oshkosh Corporation. Because we supply this product to one or more prime contractors, our visibility on timing is derived from the information we received from the primes involved.

The government has been in negotiations working through contracting issues now for over nine months. Because the M-ATV program has been awarded and demand for other vehicle programs remained strong, we still expect to receive an order, not an issue of whether this will happen as I have said, but one of when.

As to the second program we mentioned on last quarter’s call that we’ve been selected as the new battery supplier for the UK MoD for their primary communications radio. The program start was pushed out one quarter and we have been making the engineering changes requested by the customers for this new set of product.

We had a major engineering [maintenance] program for over one year now. We expect the revenue from this to commence in the fourth quarter of this year on a three-year contract. These programs coupled with the challenges faced by our standby power business impacted profitability for the first half of the year.

In response, we have taken these responsible steps to get expenses down to its lower level of [prudent] so that the profits in these programs can be as incremental as possible. 2009, we are adjusting our revenue guidance to $180 million to $210 million in recognition of the government contracting delays and our uncertainty about delivery schedules. We still expect contracts awards to be made, but with some significant deliveries, potentially pushed towards the end of the year, timing issues can cause us uncertainty.

Because of the wide potential range in revenue, we are also forecasting a wide range for operating income in the range of $1 million to $10 million for the second half of the year. We are still confident in the strength of demand in our markets and the business model of the company. Now, I would like to turn it over to John Casper, after which we will open it up for questions. John?

John Casper

Thank you, John and good morning everyone. I am pleased to be here on my first quarterly earnings conference call as part of the Ultralife management team.

As John mentioned during the quarter, we undertook an extensive review of the Company’s cost structure at current and projected revenue levels. This study has been my highest priority since joining Ultralife in June. We are continuing to evaluate areas of savings and cost efficiencies in the business. We are also focusing on asset management and working capital improvements.

The outcome of this study was a combination of operational decisions designed to lower the fixed-cost basis of the business. Cost reductions, some deferral of discretionary spending and tightening of cost controls was the result. As I go through my prepared remarks this morning, I’ll detail the expenses associated with the actions that we are taking during the quarter.

Starting with the income statement. Consolidated revenues totaled $39.6 million for the second quarter, a 55% decline versus revenues of $87.9 million in the same period a year ago. The $48.3 million reduction is attributable to a $55.3 million decrease in communication systems revenue that was partially offset by increases in rechargeable and non-rechargeable products revenue of $5.8 million and $1.2 million respectively.

Communications systems revenue was impacted by the absence of last year’s shipments against the $100 million plus in orders that we received in the fourth quarter of 2007. The communication systems revenue included the addition of the AMTI branded amplifier products that we acquired last quarter.

Rechargeable products revenue grew on strong demand from customer, both government and defense customers. However, as John mentioned, the automotive telematics sales were down relative to the second quarter last year as customers adjusted current demand levels.

Year-over-year design and installation services revenue was flat. Gross margin was $6.8 million for the second quarter compared to $20.6 million for the second quarter last year, a decrease of $13.8 million primarily on lower sales volume.

As a percentage of total revenues, consolidated gross margin was 17.1% in 2009 versus 23.5% for last year’s second quarter reflecting unfavorable product mix, ongoing pricing pressures in the design and installation services segment and a $1.8 million increase in the inventory reserve that I will talk about in a moment.

Gross margin for both non-rechargeable and rechargeable products improved year-over-year due to increased volumes and favorable product mix. Non-rechargeable product gross margin was 17.7% compared to 12.7% for the second quarter last year and rechargeable product gross margin was 19.3% versus 18.3% last year.

Gross margin in the communication systems segment declined from 27% to 17.8% on lower sales, unfavorable product mix and the increased inventory reserve. Ongoing intense price competition put pressure on the design and installation services gross margin, which declined from 21.7% last year to 6.9%. Included in product and cost of product sold was $1.8 million increase in inventory reserve that resulted from an extensive review of inventory levels we began during the quarter.

We conducted the review because the working capital cycles have been lengthening over the past several months of economic weakness. The $1.8 million addition to the inventory reserve accounted for 4.6 percentage point of the 6.4 percentage point swing in the gross margin rate. The company also implemented a four-day work week for production personnel in our New York operation, beginning with the third quarter to align inventory and production levels with current sales volumes.

Operating expenses totaled $13.1 million compared with $10.7 million in the same quarter last year, an increase of $2.4 million. This increase reflects the addition of the AMTI brand and the higher sales and marketing expenses related to investments in our standby power business.

Included in operating expenses are some non-recurring items totaling $1.2 million which fall into two buckets. First, we incurred charges associated with staff reductions in some parts of the business of approximately $700,000. Second, we incurred $0.5 million in legal expenses related to the litigation matter that was successfully resolved.

Second quarter non-cash operating expenses, namely depreciation, intangible asset amortization and stock compensation expenses amounted to $2 million compared with $2.2 million a year ago. As a result, we reported an operating loss of $6.3 million compared to operating income of $9.9 million for the same period last year.

Moving down the income statement, net interest expense for the quarter was $350,000 compared to $240,000 last year, reflecting higher average borrowings under our credit revolver. We also recorded $209,000 in miscellaneous expenses related to transactions that were impacted by changes in foreign currencies relative to the US dollar.

Income taxes amounted to $95,000 reflecting a tax provision related to book/tax timing differences pertaining to goodwill and intangible assets. The net loss for the quarter was $7 million or $0.41 per share compared to net income of $6.4 million or $0.36 per share last year.

Turning now to the balance sheet and cash flow. We continue to draw on the revolving credit facility this quarter, primarily to fund inventory balances. As of June 28, the outstanding revolver balance was $23.9 million, an increase of $7.3 million from the first quarter of 2009. Inventory stood at $51.2 million compared to $48.1 million as of March 29 of this year.

Accounts receivable at $30.6 million, were down slightly from the end of the first quarter. DSOs for the quarter were 67 days. CapEx for the quarter was $900,000. We ended the quarter with cash and cash equivalents of $1.2 million compared to $900,000 at the end of Q1.

As I said at the beginning, we are continuing to analyze the company’s operations, cost structure and working capital management in an effort to extract additional cost savings and improve operational efficiencies.

In the second half of the year, we will continue to lower the cost basis of the business. We’ve identified actions to reduce manufacturing costs and to lower operating expenses by approximately $1 million. These operating expense savings, combined with the absence of the second quarter’s $1.2 million in non-recurring items is expected to reduce quarterly operating expenses from approximately $13 million to $11 million by the end of the year.

We are keenly focused on strengthening our business model and lowering the cost basis of the business without jeopardizing near and long-term initiatives to drive revenue and earnings growth.

Back to you, John.

John Kavazanjian

Thank you, John. Operator, I would now like to open it up for questions

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steve Sanders - Stephens Incorporated.

Trey Grooms - Stephens Inc

First, if we could start with revised guidance. You mentioned the UK MoD and a couple of other things in the Coms business. Besides from that, you talked a little bit about what’s changed from your perspective given the new range and if you could quantify the downside between Coms and the backup power market?

John Kavazanjian

The real issue is in comps. MRAP M-ATVs are starting to be produced, we actually know that because in this phase of the program, we’re going to be shipping and selling the cables directly to the equipment manufacturer so that they are ready for installation of the rest of the system. We already have our cable orders. The problem is that we supply the system part through primes and we don’t have that yet.

It’s going to happen, but we don’t want to get pushed. Last year and the year before when we’re supplying this program, we were into this supply issues with our supply chain of turning them on real fast trying to ramp them up real fast.

One of the reasons why we have a substantial amount of inventory ready for this program, because we really wanted to keep our supply chain going. We didn’t want to start them on this start stop. We’re a little frustrated by how long it’s taking, but it’s going to happen.

We just don’t know how we’re going to get crunched at the end of the year and we don’t want to get in those situations like we got into at the end of 2007, when at the end of the year, we had a substantial amount of products waiting for one part which didn’t show up.

It caused us to move revenue from that year, December end to the January quarter. So, we don’t want that to happen again. It’s a reason for the large range and frankly it’s a reason for us dropping our guidance. It’s not that, we don’t expect somebody is going to demand delivery of these things. But, we are in August right now and we want to make sure that when we do this, we do it efficiently, in the right way and that we don’t try to kill ourselves to make some artificial number, but we try to kill ourselves to help to do what the customer wants.

John Casper

Something I will add to that is that the range is a function of the anticipated timing of the orders, the two large programs that John referred to. So, it’s that uncertainty and timing that drives the range.

John Kavazanjian

It’s really the timing, not a volume issue, it’s the timing issue.

Trey Grooms - Stephens Inc

Okay. I guess then the difference between the high end and low end of the range is almost solely on the comp side of the business.

John Kavazanjian

Yes.

Trey Grooms - Stephens Inc

It’s just the timing and it’s not more. I guess broad based from other segments?

John Kavazanjian

No, it really isn’t. On the UK MoD program, we have some engineering changes. We thought we would be shipping that this quarter, but they wanted some engineering changes to make the product better and we are doing those now. So, we expect that to be a fourth quarter shipment. We don’t think there’s any problem with that.

Trey Grooms - Stephens Inc

Okay. So, we should be looking then at the second half guidance as more for Q-weighted as opposed to I guess more even split.

John Kavazanjian

Yes.

Trey Grooms - Stephens Inc

Okay, that was helpful. Then kind of moving to the rechargeable business. I know this was an area that you previously expected to provide some growth. Can you give little more color on what triggered this sequential drop off in the quarter?

John Kavazanjian

Purely timing on shipments. We produced product for a number people, people like Harris Corporation and others and we do lot acceptances and it really did turn out to be a timing problem or timing issue.

Lots were ready at the end of the quarter that kind of sucked the pipeline dry and then we had to start it up again and we got to the end of this quarter and some lots weren’t ready for acceptance. Really it’s timing issue. There is no change in run rates in particular that I know of.

John Casper

Each lot has to be certified by the government prior to shipment and that takes time. We usually try to make those happen on the quarter, but as John said the timing of which is often a function of when the government could come in and [put] the lot for shipping.

John Kavazanjian

Yes, it happens in our non-rechargeable business also because of the lot sizes sometimes.

Trey Grooms - Stephens Inc

Okay. So should we expect to catch up in this quarter?

John Kavazanjian

I have not looked at the numbers that shows by segments this quarter, but rechargeables will be pretty consistent.

John Casper

It is going to be big growth in the fourth quarter again.

John Kavazanjian

Fourth quarter will be good size for us because the UK program is rechargeable.

John Casper

Then we are just half a back into it.

Trey Grooms - Stephens Inc

On standby power, you noted in the release and commented that you are still seeing the pricing competition in the market, which is impacting your margins. Do you see this abating anytime soon and if not how can you respond?

John Kavazanjian

I wish I knew the answer to that; it’s a very good question. It’s [Author ID1: at Fri Jul 31 02:01:00 2009

]a question we asked ourselves about everyday. Our thrust in that market has been with national accounts. They are the people we service the best and have the best proposition for.

A lot of people are just playing delaying capital expenditures whether they are upgrades or added facilities, capacity and such. Add more battery backup time in their facilities, facilities moves and things like that that we are anticipating. People are delaying because of the capital markets not wanting to commit capital.

We are seeing some loosening of that, but I think it’s going to go with the general economy. It is not just us, everybody is seeing it. What’s happened is that we have gone from kind of a real boom in battery sales in that marketplace because there are a lot of buildouts in communications business going on still.

To one where it is restricted a little, people were building a lot of inventory and it’s really affected prices in inventory. Sooner or later inventory corrects itself. We are not ready to predict that that’s going to happen in the second half of the year, but we have our eye on it. I don’t know that I have any better judgment than you would have on that trade.

John Casper

We are keenly focused on that segment during the second half. We have expectations forward that we watching closely and we have got opportunities with national accounts that I won’t go into here, but that we are keenly focused on to continue to strengthen that business.

John Kavazanjian

We have done a lot of work to get our cost structure down in that business as well in this quarter.

Trey Grooms - Stephens Inc

Could you give us an update on your cash flow outlook for the second half and your current liquidity position?

John Casper

W have maintained a long standing success relationship with both JPMorgan Chase and M&T, both are on a revolver. I have had some positive discussions with them in the last week, actually in the last couple of days. We are actively working the relationships so that it can address any questions or concerns they may have as we continue to fund the company operations and the growth in SATCOM.

John Kavazanjian

But they know on a cash flow basis, we have probably got $10 million in inventory that will turn pretty fast into receivables and then cash. On one side of the equation, we had some lots that we didn’t get finished yet to get through acceptance that starting to go out this quarter that another standard inventory that gets out and then return to profitability. We have got $2 million a quarter on non-cash expenses which is we get profitable add to the profitability.

We expect to generate cash in the second half of the year. So, we are in pretty good state with our banks and I don’t see any problem. We are going to make some major strides in getting that cash flow in shape this quarter. But of course receivables then have to flow through. So it will probably be the till the end of the year before you see really substantial decreases in that revolving credit facility.

Operator

Your next question comes from Walter Nasdeo - Ardour Capital.

Walter Nasdeo - Ardour Capital

We have been looking at the timing of the government contract and obviously these are things that out of your control, but it may do have a major effect on, not just the results but the perception of what’s going on.

If we can like maybe extrapolate out a little bit and say, okay there’s some other things going on contractwise through the government bidding process, that maybe appealing to Ultralife to be involved with and assume that you get another opportunity to try to fulfill the contract there.

On the inventory side, as you are trying to get somewhat of a balance between the government side and a more commercial exposure. Obviously, put through years and years we have been looking at the pendulum swinging and as soon as you kind of get a little closer to a better mix of commercial, a big government order comes in and swings you back over and ties you up that way.

As you are planning out, what steps are you taking to kind of help smooth out some of this because as John mentioned it’s not. This has happened for years now, where a quarter is kind of been held up or half a year has been kind of held up. No fault of your own, but the government side of getting the bid out or getting the award out and really kind of it causes a lot of a upheaval in your quarter.

What can you do? How can you manage this better and make this a little bit smoother process going forward because now what’s happening is these numbers are just getting bigger and having the same type of effect as when three or four years ago when the numbers were smaller, but still had a major effect on what was going on in the company?

John Kavazanjian

That’s a really good question, Walter and I will answer it with two things. First thing I will say is we are keenly aware of the large swings. It’s really hard for us when we are making larger investments. We probably have of our $2.5 million a quarter on R&D.

There is a good $2 million of it probably 60% to 80% of it, but as high as $2 million of it is dedicated to three or four programs that are really driving large volumes, but are lumpy in nature, whether it’s large energy battery storage, whether it’s the UK MoD program on which we spent a lot of money on development because we are paying for the development cost. Whether it’s future SATCOM program and now amplifier development, we have a lot of expenses that are coming in whether we get that stuff or not.

So, we are very cognizant of it and I’d say we have two biggest initiatives we have are in commercial areas. One of them is in standby power where we need to build the services sector and it’s our biggest opportunity to do that is in that market place. It’s going to take some time. We had a model which is making money, selling batteries and services and picking up the service contract which is what was not happening with the people before.

So that’s an important part of it. We are making inroads into that, but battery sales are down in that sector because of delayed programs and the margins are hurt. It’s going to come back; it’s not a permanent thing. In fact, we are seeing competition actually lessening in the services side of that because a lot of people are having problems there. Again that’s one of international accounts because we are uniquely positioned to able to do that in an industry that’s very local typically. So building the services sector is fundamental of that.

Second, in alignment with that is energy storage using lithium-ion batteries for energy storage. Standby power is the biggest use of energy storage. Its lead acid batteries are a value proposition for lithium-ion batteries, but it goes beyond that. It goes to microgrid activity of solar and wind, where energy storage is fundamental to them being successful and economic and it goes to the larger energy storage projects.

As you watch us develop, that’s where we have a lot of R&D effort, a lot of investment, a lot of work that’s trying to change that. Now once we do that, we still going to have ups and downs in military business, but you are right. Paying for that base R&D to get into these higher margins businesses that are more service, more engineering oriented, right now, we what pays for are these large lumpy programs. That’s a function of the way kind of the US government works.

A last thing I would say is the other things we are doing in the military markets is taking things internationally. More than half of our battery business in military markets we developed is an international business. It may have swung a little bit back now, but with UK MoD we will back to more than half being international.

I think we are doing the same thing is with our communication product. We have talked a lot about our Tactical Repeater. That’s the product because international military organizations use handheld radios like the [Telus Embider] or the Falcon from Harris, that’s the biggest opportunity there because that’s really the SATCOM analogy range extender technology for the handheld radios is the Tactical Repeater.

So, our problem is we are investing in these areas, whether its energy storage, whether it’s Tactical Repeater, whether it’s standby power, we are investing in building these areas now. When we get this hiatuses which we’re going to go from famine, believe me to feast where it’s going to be hurry up, we need these things right away. Even though it took us nine months to get it in place, that’s what we cope with everyday. That’s the challenge of our business, but those are really the three initiatives we have there to do that.

Walter Nasdeo - Ardour Capital

Okay, if I could just that follow that up real briefly, because as you said, going from famine from feast and saying okay, we need this stuff the day today after tomorrow kind of thing. Because of your other initiatives that you have got in place, how do you allocate capacity? How do you prepare?

Obviously in this one, you have already got your inventory built up, but assume going forward and some of these other initiatives really starts to take root, how do you allocate relatively scarce resources to say, okay we can now fulfill a $100 million or $150 million government contract in the next 60 or 90 or 120 days?

John Casper

Well, to be honest with you, that was a part of our motivation. As we get into some of these businesses, we’re much more picky about what we do ourselves. In non-rechargeable batteries, we make everything ourselves, but in the communications products area, we don’t stuff our own printed circuit boards. We were making our own amplifiers up in Seattle.

For the Seattle line, we are now outsourcing that. That products mature, it can be done with the vendor. So we’ve taken a lot of steps to go, do more things with outside resources, but we cause them problems of feast or famine which is why we have inventory right now, because we’ve had to keep them at a decent level as well, so that we don’t shut them off and then shut them back on.

John Kavazanjian

One thing to keep in mind as well is that our manufacturing operations have been built to be scalable. We’ve got a temporary work force. We have lines that can be lit up and green lighted, when the time comes at a moments notice, but we can flex that very dramatically when as need be. We continue to design products that cross multiple prime opportunities. They aren’t designed for just one solution. There are products that can be sold through more than one prime bidder, Raytheon or Harris or others.

So, we have grown the base business from $30 million to $40 million. We continue to do that. As John said services will help us start to benefit from the law of large numbers overtime to take out some of the lumpiness of this. But, it is an issue that we are attentive to as we deal with the seasonality if you will.

John Casper

But, we are aware of the issue and when we ramped up last time in the SATCOM line. Internally, we had to do training and get people online. But we had to get our vendors going also and most of our problems end up with our vendors. One of the reasons why we’ve got to afford they work free, instead of laying people off is we need these people when the orders come back.

So, we’ve taken advantage of the ability to do that and our people can do unemployment for that fixed date under some of the new programs out there because to ensure order we are going to have to bring them back.

Operator

Your next question comes from James McIlree - Collins Stewart.

James McIlree - Collins Stewart

John, can you talk about the UK radio order, who is the prime on that? Are you getting the engineering changes from the MoD or you’re getting it from the prime?

John Kavazanjian

Well we work through a prime contractor who manages all their batteries in the UK. I am not sure we have permission to say it.

John Casper

Yea. No, we haven’t announced the prime.

John Kavazanjian

We haven’t gotten their permission to announce it.

John Casper

We are working on the wording of that announcement. So, it should be coming out very shortly.

John Kavazanjian

So, it’s the prime and the UK MoD. We work directly with the MoD people on it, but also with the prime because they are integrating the batteries into the communication systems that they supply. So, a lot of the changes have to do with some of our electronic signaling, for things like state-of-charge or state-of-health which is a new addition. Some of it’s cosmetic to make it easier to maintain, put it on the radio, put it in the charger.

James McIlree - Collins Stewart

Okay and then on the satellite?

John Casper

Jim, we are not trying to be evasive, we just need permission before we say.

James McIlree - Collins Stewart

No, I understand that. That’s fine. Then on the Satellite-On-The-Move, do you have an explicit dollar amount that is in the guidance for the second half? I know you’ve talked about ranges and there’s all sorts of possibilities. But if you hit the midpoint of your revenue guidance, what does that imply about Satellite-On-The-Move revenues.

John Casper

The best way for me to say it is, we are running at $40 million a quarter, although, we are growing that segment too. Bill keeps pointing out to me that non-SATCOM and others was about $30 million a quarter this time last year.

We are growing that part of the business, but if you assume that that’s flat, then that’s $160 million of it. So, there’s $20 million to $50 million tied up in the other programs before the end of the year. The MoD program is probably in the ballpark at $10 million. We have to do a little probabilistic analysis here about what we can get out of what, but that’s pretty round numbers.

James McIlree - Collins Stewart

What did you say on the MoD amount?

John Casper

It’s about $10 million for this year. That will be $12 million and SATCOM will be $28 million.

James McIlree - Collins Stewart

Right, I recognized that’s one of the issues here. Okay and then finally on the M-ATV specific?

John Kavazanjian

You know real well that Oshkosh was in the Wall Street Journal the other day. They have to deliver 2200 vehicles by the end of the year. That’s number of SATCOM system somebody needs. It’s the question of what is the order going to look like, when we are going to get it and how many could we get out.

James McIlree - Collins Stewart

Right. So on the M-ATV specifically, are you assuming that your share of that is going to be a 100% or something less than that?

John Kavazanjian

Well, all we know is that they are put that cables in the 100% of them so far. They have the orders for 2,200. So we have orders for cables and release schedule for cables for those units, okay. There is another 3,000 they’re expecting to get. We’ll let you know if we get the cable orders for those. But right now, our cables are going in all the units. So if they can figure how to make somebody else system work with our cables, great.

James McIlree - Collins Stewart

That was my next question. You said something about your cables that would suggest that only your systems are going to be supplied?

John Kavazanjian

Pretty much. Yes, if match the RF signature of shielding and the connectors.

James McIlree - Collins Stewart

Do you think that the orders for the Satellite-On-The-Move kits for the M-ATV procurement, will those come from Oshkosh or will those come from the government who then takes delivery and give them to Oshkosh?

John Kavazanjian

The cables now under this program we are getting them by Oshkosh. The rest of the equipment will through a prime. The government has to pick who their prime is. Last time, it was a couple of different people we sold them to. This time the government has got to decide and that’s kind of what we are waiting for.

James McIlree - Collins Stewart

So that prime is going to be some electronic systems integrator, it might be Oshkosh, it might be somebody else.

John Kavazanjian

Exactly. I can’t even speculate because they are doing their thing about it. I’ll even say we know there is demand for other systems and other vehicles and other things that people would like to get this on an IDIQ so they can buy it. Right now it’s on GSA. We get some GSA orders, but they are onesies, twosies because of the dollar limitations on GSA orders.

You are going to get so much, we’ve talked about spare parts before, we know they like to order spare parts, but they order what they need in spare parts, you have been ordering onesy, twosy of a GSA, because of dollar limitations, we get this thing on an IDIQ contract, and let’s all those other things happen.

John Casper

In Iraq, in Afghanistan there is no line of sight and we know people who would like to put these systems on things like Bradley’s and another vehicles, but right now there’s not a vehicle.

Operator

Our next question comes from Ted Kundtz - Needham.

Ted Kundtz – Needham & Co.

Good morning, guys. Questions for you would be on what kind visibility do you have for the $100 million at the low end of your range which really kind of excludes the SATCOM business I guess and some of the UK, probably some of the UK Mods in there. What’s your confidence level in that number?

John Kavazanjian

It’s very high. I won’t tell you every dollars booked, but we have very good visibility on that.

Ted Kundtz - Needham & Co.

Okay. That’s good to hear.

John Kavazanjian

Things that are under contract with the government, things that we have in the commercial business, flow really well. It’s just these kind of the lumpy business that’s really tough and our hope is that when they do award a order contract and I can’t speculate it, we are hoping that they award a five year procurement vehicle, not like a one year. I think that’s what we’d like to see and that would just make life so much easier.

Ted Kundtz - Needham & Co.

Hopefully that’s the trend or going to be the trend. Do you have any comfort in that that is going to happen?

John Kavazanjian

We’ve heard that that’s what they trying to do, because it’s getting harder and harder to do contracting because of new regulations and new disciplines that are been put in place. The only way of dealing with that with a limited contracting force that they have their contract officers is to do multi-year contracts. So, we suspect that’s what’s going to happen that’s our hope. The UK MoD contract is the bid we have done as a three-year procurement. So, that’s certainly in that category.

Ted Kundtz - Needham & Co.

Can you say how big that business is?

John Kavazanjian

All I can tell you is that the quotations that were done, that we answered was $120 million for three years.

Ted Kundtz - Needham & Co.

Okay. That’s what you quoted.

John Kavazanjian

Yes, that’s the quantities in their procurement tender.

Ted Kundtz - Needham & Co.

For you?

John Kavazanjian

For anybody.

Ted Kundtz - Needham & Co.

For anybody, the total bid, right. Okay.

John Casper

Just to be clear, the low end of the range does presume some modest unit shipments of SATCOM late in the year; it presumes that orders received late.

Ted Kundtz - Needham & Co.

Another question would be regarding the non-rechargeable business. The revenues went up fairly nicely in the quarter though the margins went down, the gross margins and I know they are well below where your target ranges are, could you explain what happened there?

John Casper

We took about $1.8 million in inventory provisions and that is spread out across some of those different product lines. We had a private label agreement for the 9-volt product which was a unique product for somebody else. We discontinued, our volume hasn’t gone down because we are selling it direct to people now.

We discontinued it earlier in the year and we have looked at that inventory. It’s saleable, it’s a good product, but it’s two different [stack] and we’ve taken some reserves on that product. As part of a qualification process, we use to build and have the capabilities to build our D cells in the UK and we built some of our D cells in our UK operation.

While they are not certified now for certain applications, they are certainly usable on others, but because that’s a slowing moving inventory given the economic conditions we reevaluated our carrying costs for that. We took some reserves for things like that. So, you’d see that in the non-rechargeable.

Ted Kundtz - Needham & Co.

Where do you expect those margins to rebound to because I assume that the charge you took was not all there, but you just described some of it being there, probably some on the rechargeable side too because those margins also went down.

John Casper

We typically run with, who are running in the low 20s in a non-rechargeable business. The biggest reason for that is that our 9-volt product carries below 20% gross margin right now. We are in the middle of a redesign of that, that will take significant cost out of it, but it’s 10-year battery, so it will be next year before we can get that out.

John Kavazanjian

That is clear as well because you mentioned non-rechargeable, [Inaudible] we posted 17.7% as the margin rate in my remarks for non-rechargeable, that was up from 12.7 second quarter last year.

Ted Kundtz - Needham & Co.

I look sequentially. I think everybody is looking at you guys sequentially because you really sort of lead out your margin goals here, going forward and sequential improvement was kind of in the model and we are not seeing that, so that’s where we are all kind of focused on.

John Casper

What you are seeing there is reserves that we are taken.

John Kavazanjian

Yes, and also on the rechargeable side as well.

John Casper

I don’t think we took any reserves. I think GM, we are getting paid for everything that point in time just in case you wonder about that.

John Kavazanjian

General Motors receivables are paying their receivables on a regular basis, so nothing and no reserves for that were required.

Ted Kundtz - Needham & Co.

The other one, you really talked about a target operating expense line John of $11 million by the fourth quarter, which really assumes your SG&A has to get down to about $8.5 million. Is that a realistic because your R&D I assume is going to be running around $2.5 million?

John Kavazanjian

Sales, marketing and admin, that SG&A about $8.2 million is the predicated in that $11 million number we are aiming for year end.

Ted Kundtz - Needham & Co.

Okay, that’s a big drop.

John Kavazanjian

It’s the only caveat there as you might expect as if we hit meaningful sales above and beyond, then there is commissions that go along with that.

Ted Kundtz - Needham & Co.

Okay, but that’s a pretty realistic objective to reach?

John Kavazanjian

We believe we can get there.

Operator

(Operator Instructions) Your next question comes from Jamie Sullivan - RBC Capital Markets.

Jamie Sullivan - RBC Capital Markets

Just to make sure I got the right number. You said 12.7 for the gross margins in non-rechargeables, is that right in the quarter?

John Kavazanjian

Non-rechargeable in the quarter was 17.7. It was 12.7 same quarter last year.

Jamie Sullivan - RBC Capital Markets

That’s where the bulk of that inventory charge was taken?

John Casper

Not necessarily, the inventory charge was across the board. We looked at each segment. It was pretty evenly split across coms segment and the battery business.

Jamie Sullivan - RBC Capital Markets

If we think about the cost programs and the long-term margin targets that you’ve laid out in the past, are there any changes to those targets, are you thinking about the business differently at this point in terms of the margin profile?

John Kavazanjian

It’s been fundamental to the investments we are making to move to higher engineered content or a higher service content, types of businesses. In standby power for example, the battery business is kind of 20s gross margin in the past and services business is 30 plus.

Unfortunately the battery business gross margin has plummeted significantly in the last two quarters with the price competition in that business. We are building our services segments; it’s probably started at 5%. It’s between 10% and 15%, but we’d like that to be 30% to 40% of our business in the sector, we are just not there yet.

So that’s part of it. In the communications area, these are vast communication systems; there is SATCOM or the MRC-200 Tactical Repeater program. That’s fundamental and those margins are well over 30% and that’s fundamental too. We don’t have those this quarter.

Then lastly, rechargeable battery systems because they are chargers and smart batteries and state-to-charge and state-of-health. That’s a highly engineered product that carries really good margins and we didn’t have that this quarter. You want to look at we are unhappy about what we expect it to be right now.

The programs we have got and kind of whacked on to this point have been the higher margin product. They are going to be there. They are coming. We are still spending the money on the engineering item. The customers there are committed, they need them. They are happening, but it’s just longer than we though it would be.

Jamie Sullivan - RBC Capital Markets

If we look at the end markets and some of the soft areas like standby power and auto, in standby power if you think it was kind of the current run rate, when do you foresee a restocking start to be necessary in those customers?

John Kavazanjian

A good question. We’ve taken a lot of the restructuring work we have done in cutting back on activity in that area to get that thing right sized, our assumption is that it will be soft through the end of the year.

I think we’re going to maintain the revenue in pretty good shape, but the margins are going to be tough in that business. We will grow our percentage of service there as we pick up new accounts and our goal is to not just sell product and installation, but pick up the service. We are doing that pretty successfully.

This could take some time before that more meaningful percentage. So, our assumption is, we will do okay on the revenue side and we will bring back the margins slowly. But it’s going to be next year before that market recovers.

The lot of resistance in that marketplace even though there is more and more build outs and things going on, but the resistance for people to spend money. We actually think we’re gaining market share there, but that doesn’t give us any solace in the tough market.

In other areas, in automotive, we’ve made the correction in kind of the absolute volumes of cars that we go into, I think this quarter and to some extent last quarter has been an inventory correction. I think there is massive one going on across that whole industry.

You guys are no better than us, how long that takes to shake out, but I think, we would have expected to do kind of $12 million to $15 million in that business this year which probably is going to be more like a six. Maybe four or five, but we do have orders and see shipments resuming in the third quarter, at some level into the fourth.

Because we’re actually going in additional platforms. We’re actually going in more vehicles. So I would say that business is back, but it is still going to be soft that booked into our numbers as well. The other business we have, we still see pretty good demand.

Our 9-volt business is in pretty good shape. It’s not raging, but we had some inventory correction, but still at pretty good shape there. Then our other businesses are military business and some of the other things whether it’s medical or pipeline inspection or things like that, some fringe markets are doing pretty well. Not in great shapes, but nothing lower than expectations. We are doing pretty well there.

Operator

(Operators Instructions) It appears there are no further questions at this time. Mr. Kavazanjian I would like to turn the conference back over to you for any closing remarks.

John Kavazanjian

Thanks you. We have a really strong company here focused still on growing markets and applications. We are frustrated with contractor delays, but ultimately we are going to have those orders and have those business.

While the economic downturn has delayed some of the progress, we continue to grow our business while staying lean and we are still making the investments we need to capitalize on the markets as the business in time improves.

We think that the strong companies are the ones that in these kinds of markets can stay the course and stay lean and grow market share and really come out stronger. We look forward to sharing with you the progress of these initiatives on the next call and we would like to thank you all for participating.

Operator

This concludes today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ultralife Corporation Q2 2009 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts