Ultralife Corporation Q2 2010 Earnings Call Transcript

Jul.30.10 | About: Ultralife Corporation (ULBI)

Ultralife Corporation (NASDAQ:ULBI)

Q2 2010 Earnings Call

July 29, 2010 10:00 am ET

Executives

Jody Burfening - Lippert/Heilshorn & Associates

John Kavazanjian - President & CEO

Philip Fain - CFO & Treasurer

Analysts

Walter Nasdeo - Ardour Capital

James Mcllree - Merriman

Sam Bergman - Bayberry Asset Management

Operator

Good day and welcome to the Ultralife Corporation Second Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Ms. Jody Burfening. Please go ahead.

Jody Burfening

Thank you, and 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 2010.

With us on today's call are John Kavazanjian, Ultralife's President and CEO; and Philip Fain, 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 contains 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, and possibility of intangible asset impairment charges that may be taken, should management decide to retire one or more brands of acquired companies.

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 report on Form 10-K for the period ending December 31, 2009.

In addition, on today's call, management will 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.

John Kavazanjian

Thank you and welcome everybody to the Ultralife Corporation conference call for the second quarter of 2010. Joining me today is Philip Fain, our Chief Financial Officer.

Today, we reported revenue of $37 million for the second quarter of 2010, with an operating profit of $400,000 and an adjusted EBITDA of $1.8 million. Despite the lower revenue, we showed an operating profit due to the continuation of strong gross margin performance and disciplined financial and expense control.

Revenue was flat due to government contracting delays along with continued weakness in the energy services market. We expect a sequential growth in revenue for the third quarter and have shipped over $20 million worth of products in July already. We also expect energy services revenue to start to grow in the third quarter, as capital equipment expenditures start to recover.

In Battery and Energy products, we've continued to see delays in contracting and order activity for standard battery products with the Defense Logistics Agency. Despite order history and contract estimates that are significant, we've seen no orders on standard battery products since the fall of 2009 as contracting efforts continue.

International defense business and commercial business continued strong in ever and operational improvements continued to effect margins positively. Communication Systems sales were on target at $11.2 million with a gross margin performance at 35%. We commenced shipments on our SATCOM on the move order in the first week of July and expect to complete this order in the fourth quarter of this year, which will contribute to further revenue growth this year in communication systems.

While, energy services revenue continue to be weak, bookings have seen a significant pick up, which will result in a return to revenue growth in the third quarter. Activity is strong for the second half of the year and we see signs that could indicate permanent recovery in this sector, as deferred capital projects have been reactivated. With our continuing work on operational improvement and overhead costs firmly entrenched, we are also focusing on new product development.

In energy products, much of our work is on international variance of our Land Warrior product line, initially developed for the US military. We are now in discussions with a number of international military organizations interested in adapting this product line for their use. With the US now deploying this system and others looking to adopt our power system, we see this area as a major growth sector of our defense business.

On the commercial side, we have several new medical applications either in starting production or in final development qualification testing. Utilization of our SmartCircuit technology is capturing interest and design programs in the medical space, as designers of advanced medical equipment start to utilized smart battery technology.

As we’ve finalized the contracts process with the state of New York, we haven't got the go ahead to start some work on our large scale energy storage batteries. Interest in this work is high, as both the wind and solar industries start to understand that energy storage is intracle to the long-term success of both of these alternative energy technologies.

While, we do not expect to have finished megawatt size product until next year, we expect to apply to intermediate-sized products that we will develop on the way, that have applications in many of our existing markets.

In the Communication Systems business, we've just launched two significant new products. Our new A-321 amplifier based on our industry-leading A-320 amp now brings that compact technology to a new form factor. The A-321 has a low-noise amplifier capability which enhances satellite communications and allows operation at as low as 9 volts for vehicle operations, while also supporting manpack operations from a single battery.

We also launched our new Dual Port Adaptor for our pocket amplifier family, this adaptor allows for the connection of two antenna, for instance allowing a land base communications and satellite communications from the same radio through the A-320 amplifier without swapping of cable, providing maximum flexibility to the operator.

As we move forward, our focus on highly-engineered products is fundamental to further increasing gross margin, combined with our embedded efforts on cost control is a critical component in widening the operating margins for business. This is how we will run our business, with positive EBITDA, decreased inventories and a solid business model which puts a net positive cash position in our sites.

Now I will ask Phil to cover the financial summary after which, we will open it up for questions.

Philip Fain

Earlier this morning, we released our second quarter results for 2010. Consolidated revenues for the second quarter totaled $37 million versus $39.6 million in the same period last year and $38.5 million for the first quarter of 2010.

The year-over-year variance reflects revenue decreases for battery and energy products in energy services of $3.2 million and $0.2 million respectively. This was partially offset by a $0.9 million increase in Communication Systems revenue.

Despite lower consolidated revenues, gross margin was significantly higher in the second quarter of 2010, $9.4 million compared to $6.8 million for the second quarter of 2009.

As a percentage of total revenues, consolidated gross margin was 25.4% in 2010 versus 17.1% for last year's second quarter. As we noted last year, the gross margin for 2009 was negatively impacted by 4.6 percentage points due to the recording of inventory reserves of $1.8 million in that period.

Gross margin for our battery and energy product segment rose almost 6 full percentage points from 16.8% to 22.6%, primarily reflecting manufacturing efficiencies and higher selling prices realized for some of our products. Gross margin also increased in our Communication Systems segment by 12.7 percentage points going from 22.4% to 35.1% benefiting from favorable product mix, improved manufacturing efficiencies and the impact of inventory reserves recorded in 2009.

In the gross margin, our Energy Services segment increased by 7.8 percentage points to 12.3% despite lower revenue caused by continued customer delays of large capital projects in the standby power industry. Our consolidated gross margin of 25.4% for the second quarter was slightly higher than the 25.3% achieved in the first quarter.

Operating expenses totaled $9 million compared to $13.1 million in the same quarter of last year and $8.9 million in the first quarter. The across the board cost reduction and consolidation actions we commenced in the latter half of 2009 were fully realized in the first quarter of 2010 and have been sustained throughout the second quarter.

These actions more than offset the increased expenses resulting from our acquisitions of U.S. Energy in November 2008 and AMTI in March 2009. Operating expenses for the second quarter of 2009 included approximately $1.2 million of non-recurring costs associated with staff reductions as well as legal expenses relating to a litigation that was successfully resolved.

Second quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.6 million versus $2 million for the year-earlier period, primarily resulting from lower stock compensation expenses in 2010.

Operating earnings were $0.4 million versus an operating loss of $6.3 million reported for the second quarter of 2009. This $6.7 million year-over-year improvement absent the $3 million of non-recurring items recorded in the second quarter of 2009 reflects the higher gross margins across all business segment coupled with our lower cost base and improved operational efficiencies.

Net interest expense for the quarter was $223,000, compared to $349,000 last year, reflecting lower levels of borrowing. Our average outstanding revolver balance was $7.7 million for the second quarter of 2010 versus $20.2 million for the year earlier period. Our second quarter tax provision amounted to $51,000 reflecting the alternative minimum tax on US taxable income and booked tax differences related to the amortization of intangible assets.

Net income for the second quarter amounted to $20,000 or $0.00 per share, compared to a net loss of $7 million or $0.41 per share for the same period last year. In adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense amounted to $1.8 million in the second quarter versus negative $4.5 million for the second quarter of 2009.

With continued cash flow generated from operations and the favorable improvements made to our balance sheet, the outstanding balance in our new credit facility was $9.3 million and our net borrowings were $6.7 million at the end of the second quarter. By comparison, at the end of the fourth quarter, our outstanding revolver balance was $15.5 million and net borrowings were $9.4 million.

Our second quarter financial position reflected an increase in inventory by $3.1 million over year end to $38.5 million. This increase was attributable to fulfilling our SATCOM On-The-Move orders for which shipments have commenced in July. During my comments to you on February 18, when we presented our fourth quarter results, I stated that, ‘During 2010, we intend to continue to focus on improving gross margins across all segments and controlling our operating expenses to leverage them as we grow in the future”.

We now have made considerable progress as gross margins have exceeded 25% in both the first and second quarters and we continue to strive for additional operating efficiencies and the introduction of higher margin new products. Although our operating expenses have been significantly reduced, we continue our everyday focus to ensure the critical balance between providing the necessary funds for product development and revenue generation and keeping our business model right sized to deliver value for our shareholders. We now focus our attention on leveraging the improvements we have made over last year to generate strong incremental returns and revenue growth.

Regarding our outlook for the full year, we are revising our revenue guidance to a range of $177 million to $182 million. Our guidance now assumes that shipments of SATCOM-On-The-Move systems valued at approximately $21 million are completed in the fourth quarter. However, because visibility for orders of batteries from the Defense Logistics Agency remains very low, we have excluded any such revenues from our outlook for 2010. With the improvements we have achieved in gross margin and our reduction in operating expenses, we are raising our operating income outlook from $4.6 million to approximately $7 million for the full-year period.

I will now turn it back to John.

John Kavazanjian

Now operator, I would like to have us open it up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Steve Sanders of Stephens.

Unidentified Analyst

This is [Zach Larkin] on for Steve Sanders. First off I just wanted to talk a little bit, see if you could provide a little more color on your guidance. It looks like you have increased a little bit but with the SATCOM order being included, but nothing else what are you seeing on weakness in all of the other divisions?

John Kavazanjian

Yes, I think we refer to this in the release and Phil and I were little more specific in our comments. I’ll be real specific, there are couple of battery types that we buy that are standard military batteries to the Defense Logistics Agency. We have been on contracts for most of them for six to seven years now. The contracts expired last year and they commenced a process of contracting for them, it’s actually used to be done by the Army Communications and Electronic Command and moved over to DLA a few years ago. While this is some of the first real major ones that they have done.

The contract for one group of batteries was awarded finally in May-June timeframe. We announced those and I think we talked about on the last conference call possibly, but we have seen no orders for those yet. There are some minor requalifications that have to be done, but usually we get some guidance, there were estimates they have to give their best phase estimates of volumes and the volumes we quoted against were substantially they’ve been running.

No big surprises, but we haven’t seen orders yet and for whatever reason, we haven’t been able to give any guidance on what’s coming. They are very busy, there is a lot of things going on, but we haven’t got an answer on that.

Second, the biggest battery type, the BA-5390, that contract expired the end of last year. The last order we got for that was September of 2009. And towards the end of the year they were talking about stalking order to get them through this year, while they did the contracting. They said no, we are going to give the contract out fast. They did a proposal, they asked for proposals. We put it in and they just a couple of weeks ago came along and extended it another 60 days.

It was really no visibility. They are basically saying in the middle of this contract process, they don’t want to make any comments. So no visibility, these two batteries together have run usually anywhere from $3.5 million to $5 million a quarter in volume for us. Very steady, very predictable, but we haven’t had a order since September of last year and the rest of our business has been very strong.

We know their deployed troops are using products, there is inventory in the pipeline. So they have period of times where they can draw that inventory and then correct, we had assumed that and I think we said in this conference call that they fixed ordering in the second half of the year, we just haven’t seen it. We don’t have any visibility to it.

At least we knew somebody was saying we are going to order, so we need them. We just want to get to this contracting process, that’ll be one thing, but it is pretty much silence.

Unidentified Analyst

I know you mentioned in the prior calls they were having a bit more competition on some of the contracts with potentially bringing in a second party to bid. You have any sense to that, that has impacted or is that on one of the other battery contractors, is that potentially impacting the delays in contracting?

John Kavazanjian

There is at least three people who were awarded in the last contract, we were awarded part of it, the ones that were awarded in the spring, I think it was the 5347 and the 5368 and 5372 and so we were awarded part of it. Saft who has been in this business for a long time was awarded part and Bren-Tronics was awarded part of the 5347, Bren-Tronics actually was awarded part of the 5347 five years ago when that was awarded and they never qualified.

So we’ll see if they get qualified this time or not, but those were the competition I expect no different competition this time in the 5390, although Bren-Tronics is not a cell manufacturer. They may for all we know have started to try to do that, but it takes more than a year to manufacture these things and meet the spec actually which I think even for us it took a couple of years to get it down. So I won’t make any comments about that other than the fact that it’s always been us and Saft and certainly I would expect Bren-Tronics to probably bid it.

We don’t have any visibility, I don’t know if there is anybody else or not. I mean anybody can bid this. It’s really a question of who can actually perform against it and get qualified. We’ve been qualified and been the only qualified source to this and it actually requires you to do a fairly high technology [de-cell] and fairly high technology product to get qualified, but even when this is awarded. If somebody knew where to get it awarded, it would take a minimum of six months and as much as a year for them to make it qualified.

So now the question is what do you do for supply during that period of time? I mean we again have the only qualified product and so we fully expect that there would be some volume this year, they used some pretty good clip of batteries last year.

There is 30,000 more troops deployed in Afghanistan. We know they are using the product, but like I said Zach, we don’t have visibility. So we thought the prudent thing to do was to say, “Let’s back it out of this year, if we think there is some pent-up demand coming there”, but we got to wait and see.

Unidentified Analyst

Turning to OpEx assumptions for the second half, I mean congratulations you’ve been doing a great job in really lowering expenses across the board. Is it reasonable to assume that current levels of R&D and SG&A continued throughout the year and do you see any need to ramp up it all or should we look for what we are seeing this quarter?

Philip Fain

See, I would expect there to be a ramp up in R&D spending. I would peg our OpEx between where they are right now and a rate of no higher than $10 million with a quarter, with higher sales I would anticipate a higher commission and of course with our international penetration, it does require some additional selling expenses, but I reassure you as I reassure the folks I work with everyday that the expense side of the equation is very much under control here.

John Kavazanjian

I like what Phil said, he is really working with the general managers, put a very good system in place for controlling expenses and it’s built into our guidance, although we took up our guidance on profitability, on operating.

Although we think of the guidance there, it does anticipate spending more on R&D, we have additional work we are doing in the Communications Systems business, we have got a work going on there. On the battery side, we do expect we’ll be doing variance of the Land Warrior for one or more international governments and we do that work, sometimes they pay for it.

But sometimes we pay for it because we want to own that design, like we did with the UK MoD and so we have to expense those, but like Phil said we are firmly committed to be between $9 million and $10 million while still making the right investments and keep us close us to $9 million as we can, but we do have some of these NRE expenses, $100,00 to $200,000 cause a little bump up..

Unidentified Analyst

One final question, I wondered if you had any updates on the China facilities manufacturing, how things are proceeding with that?

John Kavazanjian

We are doing real well in China. I mean their margins continue to climb, their volume has being strong, they had a really good second quarter. We started production on our new version of our 9-volt there. There is a little bit of a lag because we sea-shift that product so we started our first sea shipments.

We started our first sea shipments of that product, so there is like a 45-day lag get it to the US. So we’ll start putting that product in the market place, supplementing the 9-volt that we make in the US and we expect to have by the beginning of next year, half the volume moved. We will be in production about half of the volume in China for the fourth quarter, but there is a lag like I said before that flows through the system.

So that’s going real well. It cost us less to make, it’s a smaller product and it’s physically smaller. So it fits into more places and it’s a better product. It’s a little higher performance, so that is going along well and then the other thing as we moved our Thin Cell a couple of years ago to China and we have actually started getting some fairly substantially volume with Thin Cell which is really good for RFID type applications and asset tracking. We’ve done some pretty good business there, so it’s going along real well.

Operator

We’ll take our next question from Walter Nasdeo of Ardour Capital.

Walter Nasdeo - Ardour Capital

If we could touch on the military side of the business for a little bit and other than Land Warrior, are you guys looking to do any other types of sales with them as far as pure battery cells, or any of the SATCOM type of equipment also.

John Kavazanjian

You’re talking about the US military?

Walter Nasdeo - Ardour Capital

No.

John Kavazanjian

The worldwide? Well I’ll just cover it all. In the US we have substantial sales of the A-320 pocket amp, we are also selling that worldwide. That product is starting to do really well, it’s the only real portable pocket option for someone with a handheld radio who wants to increase the range to 4X to 5X.

And that just continues to increase both in interest and sales and distribution agreements and it’s doing really well. Our accessories business has been very strong, that business runs $30 million or $40 million a year now and that’s all kinds of different products that are components to surround, whether the transit cases or amounts or antennas or cables or power supplies that augment the use of radios.

We started selling those internationally and we’re starting to see good sales internationally, but also at the US military. The US military, we sell some of that direct which has done well and we’ve opened up additional channels through [wars] or prime contractors.

We make some product that’s in the [Karas] catalogue, made some product for people like L-3, ITT people like that, that go with the stuff that they sell. So that’s been strong and continuing to grow that product line we’re actually part of the R&D invest who want this investment more there.

And we’ve done a lot of work in the last year, As I said before in reducing the production cost in some of that product and through engineering and then on the battery side, we are continue to work with the UK MoD and we have another battery and a charger, whether in development and qualification work, that will further expand that, you can always supply them and we have multiple, it’s two or three right now with a couple of more in initial stages and people that we are working on putting together agreements to adapt our Land Warrior Battery Charger cable power distribution system for use for their soldier programs.

Virtually every military in the world, that’s of any size has had the plans to put in future soldier programs, kind of wearable, portable power because everything is power, whether it’s thermal or night vision or GPS or radio communications whatever it is. It just uses power in the soldier and they were all going to go their own way and nobody has the money anymore.

A lot of them are looking at that saying, why should I have to do power system when the US has done it already. We are already deploying that system in the US with several combat teams. We announced an order to that. There is going to be more business there as I think it’s deployed further and we are going to adopt it for international use.

So that’s probably where most of our activity is and then we have on going business of rechargeable batteries in the US and elsewhere with our UBI-2590 which is highest capacity 2590 in the world. It is the battery that is designed in to the JCEW system, the portable ID jammers that they are still using, but it’s also used in a lot of other applications where somebody wants the capacity and the smarts that we have there.

So, I don’t know, that’s pretty much what we are doing there Walter which is a lot of things.

Walter Nasdeo - Ardour Capital

Out on the horizon, are you guys seeing any pick up or any large type of SATCOM on the move orders possibly out there, larger ones?

John Kavazanjian

Everybody focuses on the large orders, but the fact is last fall, we got a $12 million order, we just got $22 million, that one large order, the two large ones was initial deployment of the MRAPs, that went out there, but in the defense budgets for 2011 and the plans looking forward, they are going to buy, 25,000 vehicles a year and about a third of those are planned to be MRAPs I believe.

The latest things we’ve seen is that the Marines have starting to ask for MRAPs in place of the M-ATVs, not that we wouldn’t like to run that program or gotten that program, but we think the MRAP is still the most popular mine resistant vehicle out there, but also Bradleys and Strikers and Humvees, [power] Humvees, a lot of those have SATCOM systems in it.

That was where the $12 million, we were made to understand the end of last year went to. So there’s continuing business there. It just tends to come in lumps as vehicle programs get deployed, but there’s going to be more vehicles in 2011 and when and if we get out of Afghanistan and Iraq, there’s going to have to be a reset of prepositioned vehicles as well and those are all going to we think, a high percentage are going to have SATCOM systems in them.

So this is a continuing business, it’s not one-time shot, it just tends to come in chunks, so we expect more business in this area

Walter Nasdeo - Ardour Capital

Final for me, you briefly mentioned some of the medical work and development work you are doing there, can you kind of expand on that a little bit, as to what we see on medical devices side?

John Kavazanjian

Yes, we’ve seen that in variable medical devices, that people are starting to move to lithium batteries and smart lithium batteries because somebody is going to wear it all day and have it all day, there are going to want to know the state of charge and manage the utilization of the power on that system because it’s part of their everyday life, not something that is occasionally used by somebody.

So there have been muscle stimulation, oxygen concentrators, things that markets were engaged in, variable devices that trip some kind of a drug into somebody’s system, infusion devices. Those are starting to move to smart batteries and we’ve got several new ones that have just come in the markets that we are making product for and there’s others who are doing designs for, really the niche is smart battery packs and smart charging.

Operator

We will take our next question from James Mcllree of Merriman.

James Mcllree - Merriman

The inventory increased quarter-to-quarter, Phil did you say that that was a function of the Satellite-On-The-Move order that you are delivery on?

Philip Fain

Correct complete. Out of the door.

John Kavazanjian

And that stuff went out the door in the first week of July.

James Mcllree - Merriman

The Communication System business this quarter, is it safe to assume that that’s kind of normal base level of business excluding these lumpy Satellite-On-The-Move order, let’s call it $10 million to $12 million per quarter.

Philip Fain

It’s generally lower than what I would expect in second half of the year with the Department of Defense spending, that usually occurs in the second half of the year, so we are looking at enough tick in the second half.

James Mcllree - Merriman

That’s mostly due to that $21 million?

John Kavazanjian

It’s absent SATCOM. What happens Jim, in the accessories business we find that people end up with end-of-year money they have to spend by September 30 and then there’s some deferrals in other places where people get their money on the first of October, where they commence. So the second half usually is stronger in that business. I mean it’s not huge, but it’s about $2 million

James Mcllree - Merriman

John, the services pickup that you referred to, is that a specific customer driven or market driven or is it broad based, can you categorize that pickup a little bit more.

John Kavazanjian

We’ve seen it broad based, we don’t deal, I’d say it’s in two places. We have a couple of major customer accounts and we’ve seen them start to release projects much faster that will differ quite honestly. And then on the smaller ones, where it is either the municipalities or utilities or computer rooms or stuff and not the larger caps which tend to be telecommunications in nature.

We see them, we just see pickups of people replacing whether replacing strings of batteries or banks or particular locations that we know, probably will differ it for the same types of reasons. So it’s both a major project side and on the smaller more numerous safe side.

James Mcllree - Merriman

I think the longer term goal of that business was to replace the lead acid batteries with Lithium-Ion, is that taking place in this pickup or is it just a replacement of the lead acid?

John Kavazanjian

Right now it’s just a replacement of the existing lead acid.

James Mcllree - Merriman

The $75 million in revenue you did in the first half generated I think a $1.2 million of operating income. So if we just annualize that, we get a $150 million in revenue and $2.5 million of operating income.

In order to get your guidance of be in incremental $30 million of revenue and an incremental $4.5 million of operating income, which seems like a relatively modest incremental operating income margin, am I missing something? Is the incremental revenue, that’s coming from the Satellite-On-The-Move low margin or the incremental revenue coming from the Energy System’s low margin?

Philip Fain

It’s just a combination of the mix we anticipate in the second half of the year. Now we carefully chose our words, we said approximately because again it’s contingent on the mix of the orders coming in, but it’s based on strong margin, we expect in the second half of the year and continued control of spending, it’s the mix factor that is the variable here

James Mcllree - Merriman

What if the low margin or the poor mix products that could drive margins lower?

Philip Fain

I don’t want to use the word poor mix, because we’re poor margin products because we’ve seen margins generally increase throughout our entire portfolio. So let me attack the question from the other end to higher gross margin products that we are looking at.

Right now would be the amplifiers coming from AMTI, it would be the communication accessories, it would be the higher volume batteries that we’re selling. With that there’s always a mix of the lower margin items that still are providing us a good return on the sale.

And when you look at energy services, there is a wide mix between the type of job that you’re doing, whether it’s lead acid replacement project, whether it’s service which certainly carries a higher margin or whether it’s getting much more heavily involved in servicing a wireless applications cell towers that carry an even better margin. So that’s something we are working through with our second half forecast that we deal with day in and day out.

John Kavazanjian

Jim just to be clear, I think Phil is saying there is some variability depending on mix. We just want to make sure that we don’t get caught on the bad end of a mix change. We don’t see, but we just have to be careful about that.

James Mcllree - Merriman

Lastly, the tax rate for the rest of the year, is it reasonable to assume that you are just going to be paying this, let’s call it $100, 000 AMT?

Philip Fain

Yes.

James Mcllree - Merriman

And pretty much nothing beyond that?

Philip Fain

Yes, we had our NOLs that we are utilizing, that we would utilize.

Operator

We will take our next question from Sam Bergman of Bayberry Asset Management

Sam Bergman - Bayberry Asset Management

Can you give us an idea of what the pipeline looks like for RFPs, maybe quantifying the highest particular award that’s out there and going down, is that all possible for the range of bid?

John Kavazanjian

I don’t have that in front of me right now. I can talk in general terms, we don’t have that in front of us right now and frankly for competitive reasons we wouldn’t disclose that kind of information.

But, in the energy, I’ll just start from the bottom up in the energy services market, there is probably two to three times the level of activity in RFPs and we have seen if you go back to the beginning of the year, it increased in the second quarter, it’s increased again in the third quarter and so, you have to make some assumption what your hit rates are, but RFPs is due to some competition, but that’s why our forecast about certain revenue growth again there is out there.

Those businesses have very large range. We do projects that’s are $30,000 to all service, we do projects that are $1 million and there’s a whole range there. In the Communication Systems business, those are mostly. A good part of that business, Sam is sold off the GSA price list.

It’s very widely dispersed, a lot of different product types, a lot of more combinations of different power supplies and cables and different charger configurations and stuff, but a lot of that is just off the price list. With the amplifier sales of handheld amplifiers, again that’s while there is one or two distribution agreements, not direct sales.

The companies where we talk about, which are worth millions of dollars, primarily you know those are order of magnitude of $100,000 acquisitions where somebody will buy 20 and sometimes bigger than 2200 amplifiers at a time.

It will be particular military units, it’s bought with their discretionary funding because on handheld radios, there is no in the US and in most of the countries, it’s more unit based, there is no blanket programs to buy those kinds of things. So, Communication Systems sale go that way except in SATCOM and the SATCOM programs are once that are driven by again vehicle deployments.

Typically, there are some spare parts or something that they add in the vehicle, but they are really, typically driven by new vehicle deployments. And that’s what this last one was based on. There is not anything out there that we could talk about, that plan committed deployment or anything like that, we get asked all the time, what would it take to do another 100, 200, 500, 1000 systems.

We have no way of gauging until we get an order. We buy that, we supply those through a prime contract who also supplies the radios and the service around those. We have no way of gauging what that prime contractors pipeline looks like on Communication Systems.

In batteries, again batteries are something, almost all the batteries we sell is driven by qualification, the exception is the 9-volt battery that we make. We actually had to work on Saturdays to keep up with 9-volts. That business is doing very well, we’re trying to hold the line there, not add capacity here because we are bringing up in the US because we are adding capacity in China to accommodate.

That’s one where we basically, we are very much scheduled out for the quarter on that. We schedule 60 days advance on that. No more than that because we found that people order pass then, it’s usually prospective and we can react fast enough and we want to know when they really just need them, order them from us.

So, because it cost some ups and downs in the past and by doing it that way, we smooth it pretty well. And in the stuff that requires qualification, we have a pretty decent pipeline, this quarter is either booked or we have pretty good visibility here. We know that the orders are coming and we’re starting to fill up quarter four.

Those again, there is just a whole range of things and one absent from all that is DLA where we typically get releases of $0.5 million to $1 million or more on different battery types and we haven’t seen anything since September of last year. We have been in the middle of contracting process. Just finished one and we haven’t seen orders from that one and we haven’t seen the contracting process finish on the other one.

Sam Bergman - Bayberry Asset Management

Phil, because of the LA delay to try to drive your cost even lower knowing that, that hasn’t come in yet for the past couple of quarters or do you feel the company is because they are exactly where they should be.

Philip Fain

We think they are exactly they way they should be. If you looked, we actually brought SG&A down further this quarter and we spent a little more on R&D, $, 200,000 maybe, but that production line is running still because we make products for other people on it, but we have a depreciation bill that comes in everyday on that product line, capital that was bought three, four, five, six years ago or longer that we have depreciation on and you can’t make that go away.

Sam Bergman - Bayberry Asset Management

What industry has the most growth potential going from cadmium batteries to lithium?

John Kavazanjian

Well, NiCads aren’t used very much, you must be talking about lead acid?

Sam Bergman - Bayberry Asset Management

I mean lead acids.

John Kavazanjian

Like we said, we’ve always said, energy storage, the bright area of energy storage from everything from back up power, all the way up through storage for wind and solar has the biggest potential.

It’s a huge potential market, there are part to that market there aren’t served at all. Spinning reserve is an example where utilities have to hold back 10% of their capacity on a regular basis. You can’t even do it with lead acid batteries, you are going to start seeing lithium batteries move into. Those are either grid applications, energy source for backup power, energy source for alternative energy are the biggest opportunities.

Sam Bergman - Bayberry Asset Management

When do you foresee that kind of move?

John Kavazanjian

I think we have been pretty clear that this is the year where we get some trials in the lowend to backup power. 2011 is where we think it’ll start to see revenue from it. And 2012 are beyond where you really see it deployed in large energy surge applications, it just takes that long.

Sam Bergman - Bayberry Asset Management

Are you doing anything currently on projects, lithium products for the automobile industry?

John Kavazanjian

No we are doing nothing there.

Sam Bergman - Bayberry Asset Management

And in the future, you are not expecting to do any?

John Kavazanjian

No, we don’t think that the value that you can get from that, if you are not making your own sell, the value that you can get from that is not worth it for somebody like us.

Sam Bergman - Bayberry Asset Management

In terms of the guidance, there is a delay in the defense department with orders, basically orders were filled in September-October and nothing has come through since then. Have you had any communication that something will take place this year or not at all?

John Kavazanjian

All I can tell you is we’ve had communications, but right now we are backing out of our plans and the assumption of volume there. If it comes in, we will be more than happy.

Sam Bergman - Bayberry Asset Management

John had mentioned I guess some business internationally or several countries were looking at your batteries internationally. How far along in the process has gone where we should or shouldn’t expect some type of order maybe in the fourth quarter or the first quarter 2011?

John Kavazanjian

I think that 2011 place in some cases, we are talking about what contract terms would be. In some cases, we are talking about what development would be because everybody wants this adopted in some way. So there will be some development required. So, I think a fair assumption is 2011, when we have some definitive, we will let you know.

Operator

We will take our next question from Jim Mcillree of Merriman

Jim Mcllree - Merriman

Can you help me understand the delivery schedule of the $21 million Satellite-On-The-Move, that kind of equally divided between Q3 and Q4 towards one of the quarters?

John Kavazanjian

Right now the plan is that we will have a little bit more out in Q3 and finish it off in Q4, but I have to caution you. It’s highly variable because like us and keeping inventories lean, the government is keeping inventories lean and so we have kind of a perspective schedule, but we thought we will ship some in the last week of June and we didn’t because we got held off and it shipped in the first week of July.

So I don’t want to get into that same kind of productivity in the second, try to project what's going to happen in the second half of September, but right now it’s a little more weighted towards the third quarter. But that’s just what the plans are now, in worst case it will be 50-50, but we may ship a little more in the third quarter depending on as they firm up their schedule and how they want them?

James Mcllree - Merriman

Are you shipping that to the truckmaker or to the government in South Carolina or to theater?

John Kavazanjian

I believe these go to South Carolina. The other issue with schedule also and I know it sounds kind of funny, is our fiscal quarter ends on September 24th and the government is driven and our customer is driven by September 30, so, sometimes we get into that a little bit too, but these are going to South Carolina.

Operator

(Operator Instructions). And at this time there are no other questions in the queue, I will turn the call back over to John Kavazanjian for any additional or closing comments.

John Kavazanjian

Well thank you. We would like to thank all of you for joining us again today and we look forward to sharing our progress, I think we are going to have a real good second half of the year and we will talk to you again next quarter. Thank you.

Operator

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

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