Ultralife Corporation
Q3 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to this Ultralife Corporation Third Quarter 2016 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Heilshorn with LHA. Please go ahead.
- John Heilshorn:
- Thank you. Good morning, everyone. This is John Heilshorn of LHA. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the third quarter of fiscal 2016. With us on today's call are Mike Popielec, Ultralife's President and CEO; and Phil Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the Company's website, ultralifecorp.com, where you'll find the release under the Investor News in the Investor Relations section. Before turning the call over to management, I would 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 potential reductions in U.S. military spending, uncertain global economic conditions and acceptance of the Company's new products on a global basis. The Company cautions investors not to place undue reliance on forward-looking statements, which reflects 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. Further information on these factors and other factors that could affect Ultralife's financial results is included in Ultralife's filings with the Securities and Exchange Commission filings, including the latest Annual Report on Form 10-K. 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 the corresponding GAAP figures. With that, I would like to turn the call over to Mike. Good morning, Mike.
- Mike Popielec:
- Good morning, John and thank you everyone for joining the call this morning. Today, I'll start by making some overall comments about our Q3 2016 operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2016 revenue initiatives, then open it up for questions. For Q3 of 2016, we were pleased to deliver our eighth consecutive quarter of total company profitability and positive EPS, generating an operating profit of $1.1 million on revenues of $19.6 million for an operating margin of 5.8%. Operating profit was more than double than what was reported in the second quarter due to a 150 basis points gross margin improvement and a 10% reduction in run rate expenses. Q3 revenue was up $0.6 million or 3.1% year-over-year, resulting primarily from a strong increase in communication systems. Battery and energy products Q3 revenues were $14.9 million, down 9% from the prior year and including the Accutronics acquisition, which again delivered $2.5 million in revenue. An increase in B&E's commercial revenue business of 14% and a favorable increase in our international government defense business were more than offset by 35% decrease in our U.S. government defense business, primarily from a large OEM prime customer. Softness also continues in our 9-Volt demand due to excess channel inventory from last year's 9-Volt surge. For our Communication Systems business, third quarter revenues were $4.7 million up 77% year-over-year, another three-year high quarterly revenue mark, driven by deliveries under the vehicle installed Power Enhanced Riflemen Appliqué or Viper large program contract announced last year. So though three quarters year-to-date, revenue was up 6%. We're seeing this favorable benefit of the cost reductions taken in the first half hit the ledger in the back half to improve quarterly profitability and our new acquisition is performing to expectations. We continue to see some sluggishness in some of our legacy market segments in both business units, however our broad business model driven cost realignment as well as revenue diversification activities are helping us mitigate the impact. In a few minutes I'll give you an update on our revenue initiatives for 2016, but first I would like to ask Ultralife's CFO, Phil Fain to take you through additional details of the third quarter 2016 financial performance. Phil?
- Phil Fain:
- Thank you, Mike and good morning, everyone. Earlier this morning, we released our third-quarter results and Form 10-Q for the period ended September 25, 2016. Consolidated revenues for the third quarter totaled $19.6 million representing a $0.6 million or 3.1% increase from the $19.0 million for the third quarter of 2015. Revenues from our battery and energy products segment were $14.9 million, a decrease of $1.4 million or 8.8% from last year. For the third quarter, a $2.5 million revenue contribution from Accutronics and a 6% increase in shipments to medical customers were offset by lower sales to a large U.S. prime defense supplier, the 2015 spike in 9-Volt batteries sales to large global smoke detector OEMs in response to legislation passed in the European Union country and lower shipments of batteries to service the metering and toll pass industries in China. Commercial revenues for the third quarter of 2016 increased 14.1% over the prior year, reflecting an increase in sales to medical customers, including the contribution from Accutronics. Government and defense sales decreased 35.1% from the 2015 period due to lower battery and charger sales to a large U.S. defense supplier and lower sales of primary batteries to the US Department of Defense, partially offset by a large charger shipments to a non-US defense contractor. As a result, battery and energy product sales were split 67-33 between commercial and government and defense compared to 53-47 for the 2015 period. Communications Systems sales of $4.7 million increased by $2.0 million or 76.6% from the prior year. This increase is attributable to shipments of Viper system. Our consolidated gross profit was $6.0 million compared to $5.9 million for the 2015 period, an increase of 1.6%. As a percentage of total revenues, consolidated gross margin was 30.5% versus 31.0% for last year's third quarter. The 50 basis point reduction in gross margin resulted from the sales mix of products for our communication systems business, which offset an increase in gross margin for our battery and energy products business. Gross profit for our battery and energy products business decreased from $4.8 million in 2015 to $4.5 million, a reduction of 5.5% reflecting the decrease in government and defense sales, partially offset by the addition of Accutronics. Gross margin was 30.3%, a 120 basis point increase from the 29.1% reported last year, due primarily to favorable sales mix, including the contribution of Accutronics and other medical sales and disciplined manufacturing performance. For our Communication Systems segment, gross profit was $1.5 million a $0.3 million or 30.9% increase from the year earlier period. Gross margin was 31.4% compared to 42.4% reported for last year's third quarter, due to sales mix, including the waiting of the Viper program. Operating expenses totaled $4.859 million compared to $4.727 million last year, an increase of $0.1 million or 2.8%. The increase reflects the acquisition of Accutronics, which added operating expenses of $0.7 million including $0.1 million of intangible asset amortization. Excluding Accutronics, operating expenses decreased $0.5 million or 11% reflecting the cost reduction actions completed earlier in the year and continued strict control over discretionary spending. The operating expenses associated with Accutronics have now been virtually offset on a consolidated basis by the cost reduction actions taken in the first three quarters throughout the company in line with our acquisition integration strategy Further highlighting the impact of these cost reduction actions is the sequential decrease in operating expenses by $0.5 million or 10% from the second quarter. As a percentage of revenue, operating expenses represented 24.8% identical to that reported for the year earlier period. Operating income for the third quarter of 2016 was $1.138 million compared to $1.173 million for the 2015 period. The slight year-over-year decrease in operating income resulted from the 50 basis point decline in gross margin in the 2016 period. The operating profit generated in the third quarter exceeded the operating profit reported in the first half 2016 by over 15%. Operating margin with 5.8% for the 2016 period, compared to 6.2% for the third quarter of 2015. Third quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses, amounted to $0.9 million equivalent to that for the year earlier period. This brings us to adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense of $2.046 million or 10.4% of sales versus $2.055 million or 10.8% for the third quarter of 2015. For the trailing 12-month period, we have generated $6.7 million of adjusted EBITDA or 8.3%. Other expenses primarily comprised of interest expense and foreign currency transactions totaled $30,000 versus $5,000 of income in 2015. During the third quarter of 2016, we continue to convert U.S. dollars generated from our Accutronics business in the U.K. into Pound Sterling at favorable rates, thereby providing foreign currency income, which offset a large portion of our interest expense. For the year earlier period, we converted Pound Sterling and Euros to U.S. dollars to lock in foreign currency gains at opportune times and our tax provision was $92,000, primarily reflecting income taxes for our China and U.K. operations as well as the timing of deferred taxes. Our tax provision was $130,000 for the 2015 third quarter. Net income was $1.019 million or $0.07 per share compared to $1.047 million or $0.07 per share for the same period last year. Accutronics contributed $0.01 per share in the third quarter. The company's liquidity remained solid with cash on hand of $6.7 million, no debt, working capital of $35.7 million in a current ratio of 4.1. By comparison cash, net of revolver draws for the second quarter was $2.3 million and the cash on hand at year-end was $14.5 million. The use of cash since year-end 2015, primarily reflects the acquisition of Accutronics, the repurchase of shares and strategic capital spending to automate certain of our production lines, consistent with our capital allocation plan of balancing longer-term investments and revenue growth, including new product development and acquisitions with enhancing shareholder returns in the near-term. During the third quarter of 2016, we generated $4.4 million of operating cash flow though our operating results in a $1.7 million or 6.3% reduction in inventory. In summary, the actions we have taken in 2016 to further strengthen our business model while executing our capital allocation plan through our strategic investments are demonstrated with our eighth consecutive profitable quarter, our replenish cash position and strong liquidity. Our intent remains on driving volume and sales through organic and synergistic initiatives to unleash the full leverage potential of our business model. I will now turn it back to Mike.
- Mike Popielec:
- Thanks Phil. For 2016, our focus on revenue growth has remained on three elements, expanding our market and sales reach, new product development and pursuing acquisitions. In the battery and energy products business, for Q3 2016, we continue to make progress in diversifying beyond our core U.S. government defense business by growing in the global commercial and international government defense markets. In Q3 2016, total commercial revenue was up 14% and represented 67% of total B&E sales as compared to 53% in Q3 2015. This net increase in the commercial revenue was driven by the medical market for which the core medical business continue to show momentum by growing 6% year-over-year and up 22% sequentially from Q2. Since 2011, the year we initially launched our commercial diversification strategy, core medical business has grown at a compounded annual growth rate of 40%. Combining core medical revenue and Accutronics, our total medical market revenues now represent approximately 36% of the total B&E quarterly revenues. Progress also continues on Accutronics revenue growth initiatives. Starting with its medical business, they recently won a development contract from an existing customer for a high-end digital x-ray application with shipments expected to begin Q3 2017 and be potentially valued up to $1.5 million. Also completed recently was the designing qualification of a new commercially off the shelf battery product, offering high energy density for high power discharge applications and for use by medical OEMs, desiring reduce time-to-market versus a custom solution. We're also starting to see some new direct commercial 9-Volt business transactions into Europe as well as additional EU Government defense penetration. Most notable however, is Accutronics contribution to the development of a major global medical devices manufacture relationship, that started with an initial ongoing customer contact in Europe who has grown upstream into a technology once-you-learn with over 20 customer participants at a divisional location in the U.S. it is now the basis of seven new development activities and potential transactions with the company's U.S. worldwide headquarters. In our core medical business, we also continue to win business. As an example, we closed transactions with several medical customers, ranging in size from $300,000 to $4.8 million, such as for rechargeable battery packs for a major global medical device OEM with ongoing orders for Q4 and beyond, additional shipments of our medical cart battery systems through our channel partner, continued sales of primary cells for AED applications, and a next 12 month blanket purchase order from another long-term medical device customer. Other commercial activity include brand-new commercial customer receiving orders totaling just under $1 million for its thin cell products produced from our China facility for asset tracking applications, which began shipping in Q3 and will continue into Q4. Also notable for Q3 2016, was a $1.6 million charger award from an international government defense customer for which approximately $1 million was shipped in Q3 and the remainder is to be shipped in Q4. In Q3 total B&E international revenue, consisting of both commercial and government defense business and including Accutronics acquisition was 55% of total B&E sales. Other government defense business included for international government defense customers transaction totaling hundreds of thousands of dollars for shipment of CFX batteries for international apartment events and following battery packs for international defense OEM to be delivered in Q4. And lastly the US government defense through DLA and valued in total over $1 million various orders for land warrior batteries and power supplies, six pay chargers, MIDI batteries and our first initial order for a new product development portable power supply. So collectively through our efforts to diversify our overall revenue by more penetration of our commercial markets, international government defense sales and from a broader range of U.S. government defense customers, we are steadily lessening the impact of fluctuations in demand from our legacy core U.S. government defense customers. In Q3 B&E revenues derived from new products introduced less than or equal to three years ago and including Accutronics were 27% of B&E sales, demonstrating the important of new products are ongoing revenue streams. We continue to collaborate with our customers to develop new products and evolve existing products through multigenerational product plans for MGPP for a number of applications in many of our served markets. New product development and MGPP activity in third quarter included the build of validation units for the new U1 Sealed Lead Acid replacement battery with smart circuit technology for applications including medical carts and uninterruptible power supplies, the certification on two of our 25/90 rechargeable battery products in using commercial applications, the adapting of chemistries as a means of MGPP for some existing products for evaluation in Internet of Things applications, the continued next-generation battery developed for tactical communication applications, the delivering of the first production units of new batteries used with radio systems and the continued MGPP development of our existing medical cart battery system to enable broader customer use. Regarding other evolution of existing products and capabilities we are in the process of developing our next generation 3-Volt lithium metal product lines to support numerous wireless devices for Internet of things applications, as well as next generation smoke alarms, asset tracking devices and metering. We are also taking steps in the product advancement of our existing vinyl chloride cells to better tailor their attractive performance characteristics for serving the above and other identified commercial industrial applications. And finally, we are expanding our rechargeable battery pack design and assembly capability whether it be in the U.K. or in China to be closer to the worldwide supply chain needs of our global customers. Guided by the spending parameters of our business model, new product development and MGPP activity clearly continues to be one of our best opportunities to provide more value for and develop more sticky relationships with our key long-term customers and create new organic revenue growth opportunities. In regards the communication systems business, programs such as the Cellcom family of special operation vehicles and Viper, combined with the continued focus on new product development, remain as the key drivers of the 2016 operational plans. The U.S. family of special operation vehicles program integrates multiple core auto products such as the MRC-UVA vehicle adapter the MRC 83 power supply and 8320 B321 amplifier that result in a steady three quarter performance with follow-on orders anticipated quarterly to meet vehicle demand. We remain active in executing existing requirements and planning for emerging technologies and future vehicle platforms. These products and systems have been adopted by multiple global customers providing current and future growth opportunities and are programmed into the next generation of tactical vehicles for special operations. Regarding the Viper program, the final deliveries of the initial order for over 1,000 units were completed in Q3 in support of a Soldier Radio Waveform radio appliqué requirements through a prime OEM for the U.S. Army. I'm also very happy to advise that a follow-on order for $2.2 million was received in early Q4 with delivery starting in Q4. We're hopeful that this could lead to an ongoing stream of future orders of the Viper product. In Q3 communication systems new-product development provided 83% of sales, double that of the prior year's Q3 new product development sales, demonstrating that new products developed and released over the last three years remain strong and continue to find relevance and acceptance intact with communications markets. Multiple domestic and international programs are evaluating existing products or in discussions for new capabilities to support radio programs with more complex waveforms. Looking forward, new-product development remains a key focus of the communications systems business with special emphasis on emerging radio technical requirements and broad capability set to not only comply with sophisticated wave forms, but also support existing legacy platforms globally and the known tech requirements our core customer base. The communications systems team is in a constant development of new lean forward technologies, revolutionary product concepts to better capabilities for war fighters and unique solution sets to support global OEM. Regarding M&A with Accutronics we have proven our integration template. We remain on track for the acquisitions earnings contribution to be EPS accretive within the first 12 months. From a cost standpoint, through redundancy eliminations and cost reductions in both the core acquisition we have overcome all the initial closing costs, acquisitions where write-ups and intangible asset amortization to the point where we are now delivering accretive quarterly profitability from the acquisition and we remain active in the hunt for the next acquisition. Recently we appointed a senior member of my Executive Team to be dedicated in a full-time basis to developing mergers, acquisitions and strategic partnerships. The goal is to increase the quantity, quality and closure rate of potential acquisition targets such that we can build on the proven operating leverage our business model can deliver, and increase our platform for ongoing organic revenue growth. As a new B&E Accutronics acquisition moves into the post integration phase, focused on several global organic growth initiatives, we look forward to the next and preferably larger target. We are in strategic accretive business addition, either as a standalone company or as a carve out from a larger company, that enables us to more quickly gain scale, particular market access or technology, new products and/or skilled resources and whether they be in existing core or adjacent products or markets and/or vertical integrations. Potential end markets of high interest include but are not limited to medical, Internet of things motive power, facing security, energy storage and oil and gas. In closing, successful execution on the strategy to diversify beyond our core U.S. government defense business while abiding by our business model parameters produced solid third quarter results, whereas the new revenue contribution from diversification, market and sales reach expansion, new product development and acquisitions is undeniable to achieve sustainable net revenue growth it is imperative that we rigorously defend legacy market segments. We have initiatives in place to achieve revenue growth in these segments as well. Overall we remain poised to achieve profitable growth for 2016 and we continue to maintain a solid balance sheet, which supports ongoing investments organic and inorganic growth opportunities. Operator, this concludes my prepared remarks and we'd be happy to open up the call for questions.
- Operator:
- [Operator Instructions] Our first question comes from Gary Siperstein of Eliot Rose Wealth Management. Q - Gary Siperstein Good morning, guys. Nice quarter. Congratulations.
- Mike Popielec:
- Thank you, Gary.
- Gary Siperstein:
- Mike, can you give us a little more color on a couple things. First, you mentioned a follow-on order on the Viper of $2.2 million with some shipments in Q4. So I am assuming that's the same customer or is that a different customer?
- Mike Popielec:
- That's the same customer to the same channel.
- Gary Siperstein:
- Okay. And you mentioned that you're hopeful that that could continue the $2.2 million that could be other quarterly awards, can you just give me a little more color on that? Are they basically creating some inventory or do they have other shipments against their prime contract which is allowing them to buy more than the originally $0.2 million.
- Mike Popielec:
- All the units that were awarded under existing contracts are included in those two tranches we talked about. Initial over 1,000 unit award that we completed shipping in Q3 and then the subsequent award that is starting to ship in Q4. What's driving the overall demand is the feeling of the Rifleman Radio and what's unknown at this point as to what extent do they continue to feel that Rifleman Radio in the marketplace. What we do know from independent third-party information is that the end-users are receiving the product well and to the extent that there was an initial tranche of awards shipped and then there was a follow-on award, I think that was a very positive indicator. And then depending on how many units of the initial Rifleman Radio are actually fielded, they would go to be an ongoing demand for additional life. So we just hope this is the beginning of a long-term type of the commitment and fielding of units, but looking to the budgets we're trying to gain as much information as we can about what could potentially be budgeted and we see some interest, but we don't know how those final budgets will fall out. So that's what I mean of those comments is that there could be an ongoing tail to that initial Viper award.
- Gary Siperstein:
- And do you expect full $2.2 million to ship between Q4 and Q1?
- Mike Popielec:
- Yes.
- Gary Siperstein:
- Okay. And in terms of, so that you said you won that $2.2 million early in Q4, but you didn't announce that at the news release. Did you feel that $2.2 million wasn't material.
- Mike Popielec:
- I think Gary it's in case of some of our other business as well. Whenever there is something new and strategic of a large size, we're trying to announce those kinds of things, but follow-on of orders like this which are smaller than the initial award, I didn't feel overly compelled to announce this. I knew I would mention it during this call.
- Gary Siperstein:
- Okay. That's fair enough. You also on Accutronics I guess I wasn't expecting it to be accretive and so Q4 you did a quarter earlier than I thought, was that due to the cost reductions you made there or are they seeing some improvement in revenue?
- Mike Popielec:
- I think the revenue or ad expectations and we made some adjustments in our cost structure both here and there and that was completely consistent with our original integration plan. We didn't disclose when we expected to crossover profitability, but we are very pleased that it occurred in Q3.
- Gary Siperstein:
- And do you expect to at least continue with it being accretive going forward A; and B, based on the their RSPs and backlog, do you think they could get to $0.02 a quarter sometime next year in terms of accretion?
- Mike Popielec:
- We would certainly hope so.
- Gary Siperstein:
- Okay, and you mentioned I guess on the company's domestic medical orders, I think you mentioned one is if I understood you correctly, was as high as $4.8 million on one particular contract.
- Mike Popielec:
- Yes that was for an ongoing blanket for an existing ongoing customer and that's why it wasn't mentioned as a specific press release.
- Gary Siperstein:
- Okay. You anticipated my question. All right. I am trying to get a sense of materiality you announced the $8.2 million you didn't announce the $2.2 million and then I heard a $4.8 million, so that you didn't announce that not a question of materiality but because it was ongoing.
- Mike Popielec:
- That's correct.
- Gary Siperstein:
- Okay. And is there a timetable on that $4.8 million, can that ship within the next 12 months?
- Mike Popielec:
- Yes.
- Gary Siperstein:
- And can you just tell me what that was, what was the particular use for that contract what's the product?
- Mike Popielec:
- I'm trying to maintain the confidentiality of the customer, but it's a rechargeable battery pack.
- Gary Siperstein:
- Okay and it's a medical OEM.
- Mike Popielec:
- That's correct.
- Gary Siperstein:
- And can you tell us, so you can't without mentioning customer name you can tell us what the battery pack is for?
- Mike Popielec:
- It's for a breeding type device generically.
- Gary Siperstein:
- Okay. And so it's not a new customer, it's someone who has previously done business with.
- Mike Popielec:
- That's correct.
- Gary Siperstein:
- And had we done business with them before on a breeding type of device or is this a new application.
- Mike Popielec:
- We have ongoing relationships with multiple globally OEMs for breathing type devices and this is one of those.
- Gary Siperstein:
- Okay. Super and in terms of the inventory reduction year-over-year, so that you highlighted is that on a gross basis or is that apples and apples pulling out the inventory from Accutronics?
- Mike Popielec:
- Well I'll be perfectly specific on that, that is when -- it's apples and apples. If you look at the inventory number that we reported, that all you have to do is take the let's call it $2 million of the Accutronics inventory off of that and you'll see that overall, the core inventory excluding Accutronics is down and that certainly is in line with our goal because we consider inventory reduction the cheapest form of financing available to us.
- Gary Siperstein:
- Okay. And hasn’t that been one of the larger decreases in inventory over the past 12 months and if that's the case with revenues on the flattish side, how do you do that and why did that happen?
- Mike Popielec:
- Well that's just part of our overall this is not only in generating cash and I guess the important message is that we're not sitting idly around in any manner especially when it comes to inventory and we have a full-court press on to reduce inventory to build up the cash position, to be a very valuable resource as we continue to pursue acquisitions and that is a very, very conscious effort throughout the company on a worldwide basis. So that's the advice from my end.
- Gary Siperstein:
- Okay. And can we expect that maybe not at that level, but can we expect that to continue on the inventory reduction or was that just a blip for this quarter?
- Mike Popielec:
- I certainly expect that but I also have to take into account of fulfilling some orders in buying larger quantities of product to fulfill larger orders to get the economies of scale on the buy side. So you may see some of that going on and I could certainly call that out in the future, but my expectation is that we're going to continue to reduce the inventory -- the core inventory and get the benefits from that.
- Gary Siperstein:
- Okay. Super and so EBITDA was excellent for the trailing 12, but I think you called out cash flow in the quarter positive of over $4 million that was extraordinary and I guess after having spent the $11 million on Accutronics last year and buy back, the fact that you get cash back up over $6 million is very positive. So I am not expecting you to annualize that cash flow going forward but do you still think you'll be able to continue to elevate it quarter by quarter not greater than the $4 million but a strong elevated level.
- Mike Popielec:
- Well that certainly is my own expectation and certainly my own plan because when all is said and done, the first thing I look at is cash, every morning when I come in and our evening when I leave.
- Gary Siperstein:
- Okay. And Mike back to Viper, so that's great that we're getting follow-on from the original customer, but you've talked in prior calls and on the PowerPoint about a $300 million communications opportunity and I think the original Viper $8.2 million was awarded August 2015. So it's then 15 months and we haven't had any new orders from different customers. Can you tell us what's going on with that pipeline?
- Mike Popielec:
- It's still very active Gary. We're also looking for the next one as well as we look into 2017, we get updated on a regular basis, as a matter of fact weekly on the large transactions, the overall opportunity basket still remains and we make selective decisions as to which ones we continue to support with new product development versus other ones that may seem a little more flaky that we can't support. But generally speaking, that's a core part of our overall strategy for communications systems is to pursue not only core ongoing business activity in the products that we develop over the last couple years, but to put a top hat on if you will with the next program. So it's in the middle of everybody's focus. If there is something that comes up that's significant, we would certainly make a announcement about it.
- Gary Siperstein:
- Okay. And then you mentioned you called out putting someone on your executive team, I guess with an additional or more focused on the M&A. Can you just give us a little more color on that? You didn't have him before and you got Accutronics. Is it that there are more opportunities or you just moving that up in terms of priority. So you're giving someone more responsibility with that, can you just give us a little more color on why?
- Mike Popielec:
- Absolutely as a small company the good thing about doing acquisitions is that you have all the principles involved in due diligence such that when you look at what you have and you make a business case to do the deal, everybody knows what they need to do to make it successful and I think it demonstrates that in Accutronics. When it comes across finding these acquisitions, that takes a little bit of the skill as well and as a matter of fact, we did some management changes here where the person that was involved in initially locating Accutronics and making those initial contacts and recognizing it as a solid acquisition candidate, we decided to give him that as his full-time job. And he happens to be a battery expert, has very good global relationships and ongoing networks in the community and so we're very excited about to have someone of his stature dedicated to an activity.
- Gary Siperstein:
- Super, Okay, guys thanks very much.
- Mike Popielec:
- Okay. Thank you, Gary.
- Operator:
- [Operator Instructions] And we'll go next to Sam Bergman of Bayberry Asset Management.
- Sam Bergman:
- Good morning, gentlemen. Nice quarter.
- Mike Popielec:
- Thank you, Sam.
- Sam Bergman:
- Couple questions. Can you tell me beginning of the year versus now what has been if any increase in R&D employees or R&D dollars?
- Mike Popielec:
- Our business model is talked about in previous calls would say that no matter what our revenue conditions are we want to spend at least 5% to sales on new product development technology R&D etcetera. I can tell you quantitatively that in both of our businesses we're spending more than that percent to sales amount. In terms of additional resources, the biggest addition of additional resources that joined our team in 2016 was in the acquisition of Accutronics. That's what a delight about bringing on another company like this as we get the instant benefit of all that experience and technical capabilities. So in my prepared remarks I talk about design capability and assembly capability rechargeable battery packs and I alluded to the fact that we're looking at doing that more in U.K. That's obviously specifically related to the acquisition as well as trying to be more using of our resources that we have in China. So net, net, there is an ad of technical resources net, net, for spending a higher than targeted amount in terms of new product development as a percent of sales and at the same time, we're trying not to overspend.
- Sam Bergman:
- I am not saying you're not trying to overspend but my concern is the commercial medical market is so vast and you have been talking about that market for the last several years and it has not been that much of an increase other than the Accutronics acquisition in terms of revenue growth. So am wondering if it does make more sense to add some people in R&D in the United States precisely Accutronics division to shore up the R&D department, so these products come out quicker, the opportunities and much, much larger going forward.
- Mike Popielec:
- Yeah I think that's a great point and what we've done is whereas we continually bring in new talent there is always attrition, there is always people deciding to different things. We haven't had any major changes there, but what we have done and I personally monitored it was that at one time we'll spent about 100% of our engineering resources on U.S. government defense business and nothing on commercial or new product development and other kinds of things. We've completely turned that on its head such that the majority of our existing resources our focus on medical devices and other commercial type activities. So I think you're correct that perhaps in an absolute sense or hasn’t been a lot of ads in that area, but certainly how we've allocated their time has changed dramatically, but we're continuing to look for new talent and we find superstars out there, our engineering team and our new product development team knows that any superstar talent they come across they should always be recruiting.
- Sam Bergman:
- Yes, can you give us a number of new commercial wins in the medical space for the quarter? Is that something you give us a metric or not?
- Mike Popielec:
- I know that there is several, but it would just be a wild guess and it would inappropriate to try to just spot a number.
- Sam Bergman:
- Can you give us the highest revenue amount in terms of what's the lowest?
- Mike Popielec:
- The lowest could be just insignificant. I tried in my comments that the ones that I've mentioned between $300,000 and $4.8 million with the $4.8 million being the largest that was an ongoing existing customer relationship and the smaller ones are around $300,000 range.
- Sam Bergman:
- So any other new relationships that precisely the $4.8 million that a new relationships over $1 million.
- Mike Popielec:
- Absolutely and that's what I mentioned in the anecdote about one of the things that Accutronics is bringing is developing a major global customer in the United States that we got in through sort of a side door relationships we had over in Europe. So yes indeed.
- Sam Bergman:
- Along with that relationship, Mike to development of something concrete.
- Mike Popielec:
- It depends after using existing products or if it's a brand new development. If it's an existing product, it usually takes about 12 months or if it's a brand-new product, it could be a couple years. I should also mention Sam that we talked a little bit in the past about my personal involvement in visiting customers. We did 13 additional customer base in the third quarter and I would say a disproportionate number of those were with medical customers I had never met before at their headquarters, at least three.
- Sam Bergman:
- That's a big plus, that's very good. And the only other question in terms of the M&A, is there anything on the table right now that you're looking at or is it -- or you just hide this new advisor from within the company and he's beginning to look or should we expect something in 2017.
- Mike Popielec:
- I think we would be certainly disappointed if we didn't accomplish something in 2017. I think we have a pretty good and list of different targets. Lots of times you end up expressing interest in because everybody is spamming for acquisitions right now. You have to develop a relationship with a potential acquisition to create the understanding of it being a soft landing, usually for their legacy and life's work. It takes time to develop those relationships. So there's multiple companies on that list, there is multiple dialogues underway, impossible to tell when someone is going to say it's time for me to divest, but certainly we're looking to try to do something in calendar years 2017.
- Sam Bergman:
- Okay. Thank you very much.
- Mike Popielec:
- Welcome Sam. Thank you for the questions.
- Operator:
- [Operator Instructions] And at this time, we have no further questions in queue. So I would like to turn the call back over to management for any additional or closing remarks.
- Mike Popielec:
- Great. Thank you, everybody for joining us again for our third-quarter 2016 earnings call. Certainly look forward to sharing with our quarterly progress on each quarter's conference call in the future. I would also like to mention that we launched an update to our website last week. So please check it out. Everybody have a nice day. Thank you.
- Operator:
- And that does conclude today's conference ladies and gentlemen. We appreciate everyone's participation today.
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