Ultralife Corporation
Q1 2009 Earnings Call Transcript
Published:
- Operator:
- Good day and welcome to this Ultralife Corporation First Quarter Earnings Release 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.
- Jody Burfening:
- Thank you, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you all for joining us this morning for Ultralife Corporation's earnings conference call for the first quarter of fiscal 2009. 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.ulbi.com where you will find the release under Investor News in the Investor Relations section. A replay of today’s call will be made available starting at 1 o’clock today through 1 p.m. on May 7. To access the replay, please dial 800-203-1112 pass code 2784675. In a minute, I'll turn the call over to John Kavazanjian, Ultralife's President and CEO, who along with Bob Fishback, Ultralife's Chief Financial Officer, will provide their formal remarks. Before turning the call over to John, 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 ending December 31, 2008. 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. Good morning, John.
- John Kavazanjian:
- Thank you, Jody. Good morning and welcome to the Ultralife Corporation conference call for the first quarter of 2009. I have joining me today Bob Fishback, our Chief Financial Officer; Julius Cirin, our Vice President of Corporate Marketing and Technology; and Bill Schmitz, our Chief Operating Officer. Today, we reported revenue of $39.8 million for the first quarter of 2009 and an operating loss of $2.3 million. Compared to last year when we were starting to fill more than $100 million in advanced communications systems, revenue declined. Revenue was also lower than the fourth quarter due to continued delays in contracting associated with funded government programs. Additionally, revenues in Non-Rechargeable Products was down from last quarter. Significant decrease in revenue in Communications Systems had a negative effect on operating income and was the primary cause of the quarter’s operating loss. In Communications Systems, we still expect the award of significant business particularly in the area of SATCOM-On-The-Move systems. Updating of the DoD fleet replenishment of worn-out vehicle, and deployment of new platforms is budgeted and proceeding. These vehicles systems are all planned with SATCOM communication. A severe shortage of contracting officers combined with high level of new activity and new working relationships with new civilian leadership has caused a delay in the issuance of contract. We expect this situation to improve, but cannot count on the delays to be caught up by year’s end. We do expect that one of the remedies for this will be more multi-year contracts eliminating the need for annual renewals. Although our other business segments are relatively stable, in the context of a weakened economy, inventory corrections are restricting growth. In our standby power business in particular, price erosion in component parts driven by inventory liquidations by our competitors had a negative effect on margin. In the Design and Installation Services segment, which is primarily driven by standby power, gross margin was 8%. While we have continued investment and expenses related to our expansion to a National Organization, severe price competition in component parts led to this compressed margin. During the quarter, we made progress towards our model of integrated sales and design installation and maintenance packages, and we expect to ameliorate a good deal of this in the second quarter. Non-rechargeable products continued to show strong demand, despite a small drop in our 9-volt business and continued weakness in automotive telematics due to lower vehicle demand. Telematics revenue was down from the previous quarter because of the extended shutdown of production at the beginning of the year. We have started shipments again and the lower level of production has been factored into our guidance. Although we had a slight drop in revenue of certain military products, this was based on timing of production lot releases, and bookings are strong with almost two full quarters of backlog. Last Friday, we were notified that as a result of a competitive procurement, we have been selected as the new battery supplier of the main communication system used by the UK Ministry of Defense. This involves chargers as well as multiple battery types, and we will commence shipments in the third quarter. Program is managed by a prime contractor and orders will come through that contractor. Rechargeable product sales were still strong at almost $40 million fuelled by strong demand for handheld radio batteries, and from an order for Land Warrior batteries and chargers. With the award of the communications battery business from the UK MoD, we expect continued growth of our rechargeable segment this year. As we look forward, we expect that rechargeable products will be an area of considerable growth. The economic stimulus package passed by Congress, a considerable way to alternative energy with R&D support, implementation funding and tax credits. Much of this represents an opportunity for our standby power product and services, but it's tremendously enhanced our ability to design and deploy advanced lithium ion rechargeable batteries in place of traditional lead-acid batteries. For example, in rural broadband expansion, lithium ion can backup infrastructure in remote installations for longer life, remote monitoring, high-temperature resilience, and a smaller footprint will make an economic difference. Along with solar generation and standby power installations, lithium ion batteries can store energy and deliver it back when needed over deep discharge cycles, 100 times better than lead acid batteries, without the cost of air-conditioning. While we got off to an exceptionally slow start to the year in our Communications Systems business, we took further steps to grow our capability. We acquired the assets of the tactical communications products business of SAIC, headquartered in Virginia Beach, Virginia and producing under the brand name of AMTI. This business designs, develops and manufactures amplifiers and accessories targeted at the handheld radio business. Its customers include militaries, law enforcement, and the ISR, that is Intelligence, Surveillance & Reconnaissance community worldwide. This business gives us a more complete product line with which to address the handheld radio market, which is the mainstay of many of the international military organizations with whom we work. For 2009, we are adjusting our revenue guidance to $230 million in recognition of the contracting delays that we are assuming will not be totally recovered this year. We still expect contract awards to be made this quarter. We are also adjusting our operating profit number to $30 million in recognition of the slow start that we’ve had in Q1. We are still confident in the strength of demand in our markets and the business model of our company. Now, I'd like to turn it over to Bob, after which we will open it up for questions.
- Bob Fishback:
- Thank you, John, and good morning everyone. Earlier this morning, we released our first quarter results for the fiscal period ended March 29, 2009. Consolidated revenues totaled 39.8 million for the first quarter, a 20% decline over the 49.6 million of revenue reported in the same period a year ago. The $9.8 million decrease resulted primarily from lower Communication Systems sales versus last year's results, which were driven by three large orders we received in latter part of 2007 for SATCOM-On-The-Move and other advanced communication systems. Offsetting the $19.8 million decrease in Communication Systems, in part was $7.1 million increase in rechargeable product revenues due to strong demand for batteries and charging systems from US defense customers. Non-rechargeable revenues rose $1 million as a result of higher shipments in BA-5390 batteries, offset in part by a decline in sales to automotive telematics customers, most notably General Motors. Revenue in our Design and Installation Services segment rose $2 million, mainly driven by the added revenue base provided from the acquisition of US Energy Systems in the fourth quarter of 2008. Gross profit amounted to $7.8 million in the first quarter of ‘09, a decrease of 3.1 million from 2008, primarily related to the decrease in consolidated revenue. As a percentage of total revenue, consolidated gross margins were approximately 20% in Q1 2009 compared with 22% in last year's first quarter. While quarterly margins improved in our rechargeable product segment from 18% last year to 25% in 2009 as a result of higher sales volumes and favorable product mix, margins in our other three segments declined. Non-rechargeable gross margins declined from 20% to 18% do generally to lower production volumes that resulted in unfavorable overhead absorption. Our Communications Systems margins for the first quarter of ’09 were 25%, down slightly from 26% last year mainly related to the decrease in sales in this segment. And margins in the Design and Installation Services segment were 8%, down from 12% last year and well below where we had been anticipating. This segment’s margins were weaker than expected due to price competition with component suppliers, relatively low margin jobs that carried over from year-end and ongoing integration efforts related to the US Energy acquisition. We expect to be able to significantly improve margins in this segment over the next quarter or two as we focus on selling the value we provide to our customers encompassing not only the products we sell, but also the service component that is so critical to the end users. Operating expenses for the quarter totaled $10 million compared with 8.5 million in 2008, an increase of 1.5 million. This increase was mainly attributable to higher R&D cost associated with the development of new products, higher selling and marketing expenses related to the development of the standby power business and generally higher administrative costs. Overall, we reported an operating loss of $2.3 million for the first quarter of ‘09 compared with operating income of 2.4 million in 2008. Below operating earnings, net interest expense for the quarter was $200,000, a decrease from 300,000 year ago due to lower levels of debt and lower interest rates. Our first quarter income tax provision was nominal amounting to $100,000 in deferred taxes, as we continue to carry a full evaluation allowance against our net deferred tax asset in accordance with GAAP. We reported a net loss for the quarter of $2.5 million or $0.15 per common share compared with net income of 2.4 million or $0.14 per share last year. Average diluted shares outstanding were 17.1 million shares, down slightly from 17.4 million shares a year ago due to the share repurchase program that we initiated six months ago. Moving over to cash flows, adjusted EBITDA, defined as EBITDA excluding non-cash stock-based compensation expense, amounted to a negative $400,000 for the first quarter. Included in EBITDA was $900,000 of non-cash expenses related to intangible asset amortization and stock compensation expenses, in addition to $900,000 for depreciation. Changes in working capital resulted in a use of cash of approximately $6.3 million mainly due to the buildup of inventory as we prepared to deliver on anticipated contract awards. As a result, our working capital metrics experienced declines as inventory turnover amounted to 2.6 turns for the first quarter versus an average of 4.6 turns for all of 2008. And our DSOs were 63 days for the first quarter compared with 53 days for the full year of '08 as we have seen a slowdown of payments from customers due to the general economic conditions. With respect to our investing activities during the first quarter, we spent $5.7 million in cash for the assets associated with the AMTI brand that we acquired from SAIC in late March. In addition, we spent $1 million related to the final incentive earn out payment tied to the performance of RedBlack Communications, and approximately $400,000 for capital expenditures. Our financing activities included an outflow of $3.3 million for cash used to repurchase 416,000 shares of our common stock in connection with our share repurchase program that was authorized by our Board from October 2008 through the end of April 2009. In total, during the six-month period we have spent $5.1 million to buy back a total of 628,000 shares of our stock at an average price of about $8.15 per share. In addition, financing activities during the quarter included $600,000 of payments to reduce outstanding debt offset in part by $200,000 of cash received from exercises of stock options and warrants. Overall, we borrowed $16.6 million from our revolving credit facility during the quarter to finance our overall cash needs. As debt is relatively inexpensive when compared with the cost of equity, we believe that incurring debt in the short-term is a prudent approach to financing our goals at the present time. As a result, our cash balance at the end of March was $900,000 compared to 1.9 million at the end of December. As we progress into the second quarter of 2009, we are lowering our full year guidance for consolidated revenue from 250 million to approximately 230 million due to the delays in government contracting in the first quarter. We expect that our consolidated gross margins will improve throughout the year as sales volume rise and we are able to take advantage of sales of higher margin products as well as improving margins through better manufacturing efficiencies and procurement opportunities. We are working diligently to control spending across the board. However, operating expenses are currently projected to increase somewhat over the Q1 level as we observe the operations of AMTI. As a result of the foregoing, we have revised our outlook for full year 2009 operating income to be approximately $13 million, down from our previous guidance of $20 million. As we have addressed in the past, our involvement in the government defense business subjects us to revenue and earnings fluctuations from quarter to quarter. This first quarter was clear evidence of this and we worked with our customers every day to anticipate their needs and to put ourselves in a position to maintain a competitive advantage by being able to deliver our products and services to meet stringent delivery schedules. In spite of the short-term setback we saw with order delays in Q1 however, we remain optimistic about our prospects for the remainder of 2009 and beyond. That concludes my remarks and I will turn it back to John.
- John Kavazanjian:
- Thank you, Bob. Now, I would like to turn back to Ben [ph] and ask him to open it up for questions.
- Operator:
- Thank you. (Operator instructions) And we will take our first question from Steve Sanders with Stephens Inc.
- Trey Grooms:
- This is Trey for Steve. Good morning.
- John Kavazanjian:
- Good morning, Trey.
- Trey Grooms:
- I was hoping you could help us connect the dots on the revised 230 million in revenue guidance coming off the $40 million quarter. How does that growth come in in the various segments and what visibility do you have on that?
- John Kavazanjian:
- It is pretty straightforward, Trey. We expected this year to be around $60 million in SATCOM systems, and that came out about $15 million a quarter and it didn't happen. It didn't happen because of delays, it’s still budgeted plan, we have – it's a little frustrating in terms of control over it, because we do this through a prime, and the prime has got to get the contract award in place of the government before we just start shipping the product. So we've had a couple of false starts here. We did not want to get our supply lines messed up. We had problems last year and we got some relatively large orders, and it took us a good six months to get supply lines in shape. So we have kind of absorbed that – the shock to our supply lines by continuing to supply. But I think it's pretty straightforward, as we contribute about 15 million of that, we were down a couple of million dollars in delays because the slow startup of the auto industry. And then we had a couple of timing issues in terms of lot acceptance on shipments. 9-Volt was a little lower maybe $0.5 million lower, so that is the best I can bridge it. I will also say that we were – in terms of the UK MoD program, we were probably a quarter later than we were told that was going to happen also. That solicitation was done in the fall. It was supposed to have awarded in January. So that was a good three or four months behind.
- Trey Grooms:
- Okay. And then, I guess assuming that sales are going to tend up in some steady level for the remainder of the year, could you talk about how you see revenue margins in 2Q versus 1Q or second-half versus first-half?
- Bob Fishback:
- I think last year, we went to annual revenue guidance clearly for this reason. If we get contract issues in place for the SATCOM systems depending on when they get in place and the ability of ourselves to get these things out QA'ed [ph] and shipped – because there are government QA requirements to any shipments. Same thing even in battery shipments. I mean one of the reasons we are down a little bit because we do lot acceptance and if the full lot is not ready to be tested by the government, then it spills over to next quarter. So we believe we will do at under $19 million over the next three quarters. It won't necessarily be total level, but our assumptions are its reasonable level and the fluctuations are going to be more from timing than anything.
- Trey Grooms:
- Okay. And then on the spares order then, kind of relating to your commentary there, is that something that I guess there wouldn't be delay or lag to ship out once that finally goes through whatever the process is?
- John Kavazanjian:
- The government contracting office made a decision back in the fall to instead of placing a separate order for the spares to put that under a total multi-year contract. And that's what we have to wait for and again that's not with us, that's a contract between the government and the prime, who is managing the program for them and we have to wait for that to happen. So that's all under the same multi-year IDIQ contract.
- Trey Grooms:
- Okay. And then just to clarify the comment in the releases on the call around component suppliers, you're talking about your actual competition and not the components that you use. So does – that would be a little counterintuitive if obviously your suppliers are having competition, you would think that that would drive price down, and therefore it would benefit your margins.
- John Kavazanjian:
- Yes, it's been our – it's been in our competition. When we go into semi-power installations, part components of those is anywhere from 50 – they could be as high as 75%, if it is just a plain battery swap out, of the initial installation work. And everybody is getting compressed in cash flows from suppliers to distributors to the installers themselves who may hold some inventory, and we saw a tremendous flushing of inventories. People selling – we have people selling batteries that we buy from other suppliers – known suppliers, they are selling them below our cost. And sometimes we think below their own cost, purely to get cash. It can't go on forever but it's just something we face out there in the marketplace. And we have moved more to a model of not selling parts, but selling parts bundled with service. And as we do that, we are able to handle that a lot better over time and we embarked on that program sometime in February and March when it became apparent to (inaudible) going on, it's a little early but April results have shown a market improvement just because of the way we package things for people, the things that we can do for those who can't, which is bundling services together with our products.
- Trey Grooms:
- Okay.
- John Kavazanjian:
- It’s going to help, but until this stops – there are still people with inventory out there who need to get into cash who are pushing it through. And this is, like I said manufacturers, distributors everybody in the chain.
- Trey Grooms:
- Okay. That was helpful. Thanks guys.
- Operator:
- And our next question comes from Ted Kundtz with Needham.
- Ted Kundtz:
- Yes. Hello John and Bob. Could you just go back over, John, you said the SATCOM was really – it was no basis in the quarter for that, you were expecting 15 million and you got nothing?
- John Kavazanjian:
- It was zero.
- Ted Kundtz:
- Zero. Okay. And I guess the question really is sort of a follow-up on the prior one discussion, what's your confidence level of that really kind of ramping back up in this quarter and or is everything just kept kind of get pushed out?
- John Kavazanjian:
- What we have done, Ted, is assume everything gets pushed out. And all I can tell you – I don't know what the production levels on existing contracts are. I can tell you a few things first. We have an IDIQ contract in place like we do for certain of the battery types. We get good predictable flow of orders. We can plan them. We can do them. Last year, in the SATCOM systems, we got one big order that we scrambled to get done first and it was done as sole source procurement, urgent need, go get it. Now they are trying to put in place a multi-year contract vehicle. So we don't have that happen again. But on the front end of it, it is just taken an extraordinarily long time for the government and the prime to get this put in place. And I can't even speculate about what it takes. I know the pressures though that are on contracting officers, both internally and just plain old workload, that is pushing this. But this is one of these things that we've been kind of on the edge of our seats day-to-day ready to move on since – literally since the fourth quarter, because we know the demand is there, because we know the Command – people who are assembling parts need what we have. But you also see some of the other programs sliding. There is a program that hasn’t been awarded yet for the MATV, they are calling it. It had a protest, it's been delayed, things are getting delayed because there's a little – there is a contracting bottle that going on in the military right now that, again, I can't speculate as why, except to say I think there is a heavy load and I know that they are down significant number of contract officers right now.
- Bob Fishback:
- So the reason we adjusted our guidance is not because we don't believe we are going to get an order, but we think – I can tell you, if we get an order we can catch up the rest of the year. That is not the issue. The issue now is – some of the vehicle programs move it a little slower, because it is affecting us, it's affecting others. We talk to others in the industry. We go to industry consortia and stuff. Nobody is confused about the budget, nobody is confused about the needs, but things are taken longer.
- Trey Grooms:
- Okay. I guess the risk is that, this doesn't come in in this quarter and it just gets delayed into – and there is another shortfall in the second quarter because it gets pushed over into third quarter – so that is a possibility. Because you don't have the order yet and you don't really know when it is coming. So–
- John Kavazanjian:
- It’s always a possibility until we get it.
- Trey Grooms:
- Right.
- John Kavazanjian:
- We are confident cognizant of it. All I can tell you is, we know what the demand from the Command is for this, and it’s becoming reasonably urgent. So – all we can hope is that, that spurs people to come together and get this done faster. To some extent, and again I don't know what the loads on particular individual people in the contracting community are, but I know across the board they are heavy. And to some extent, they have to rise to an urgent need to become the priority for the contracting group. I don't know because – unfortunately, we have to work through the prime on this, this is the way we do it, this is the way we've run this business and we have to wait for them to get through that. So it's always a possibility, it's not our belief that it will take that long, but it's always a possibility.
- Trey Grooms:
- Okay. And that is the biggest risk to the balance of the year it sounds like. The other things you feel like you're fairly comfortable with all the other programs that the UK, the international business as well.
- John Kavazanjian:
- Yes. The rest of our business is really doing pretty well. I mean again we’ve seen some softness in businesses like 9-Volt. We really believe that is – and that's a small, that's about 10% of our business. We believe that people are cutting their inventories down. There's no question about it. We know that some of their shortfall in telematics is that the auto manufacturers have cut their inventories down. They don't have the luxury of having any buffer stock anymore, because cash is very dear out there in the market. So that's happening. It can happen for ever, right, I mean you can’t take your – you can't get negative inventory, but we are seeing that. But despite that, we still see pretty strong demand out there for what we are doing and nothing strange [ph].
- Trey Grooms:
- Okay. Now, you make a press release when you do get the SATCOM business, hardly able to do that?
- John Kavazanjian:
- Yes, we will.
- Trey Grooms:
- Okay.
- John Kavazanjian:
- We believe it will be of magnitude that it will be – and it is certainly important enough that we would do that.
- Trey Grooms:
- Right. It seems that a lot of the – is really contingent on that if it's that much business out there $60 million of business. And the other thing is, could you just remind us what the – you had talked about pricing in standby power, how difficult that is and the lot of the excess inventories – or the selling going on there. How big a business is that for you right now? What was that in the quarter? It's not a huge business right now.
- John Kavazanjian:
- Design and Installation Services were about $6 million and the majority 90% of that was standby power.
- Trey Grooms:
- Okay. 90%. Okay. Does that situation, sounds like that could extend for a bit as well the pressure there?
- John Kavazanjian:
- Yes. I mean our goal has been to get that to a 30% margin. We think we can, but right now, our near-term goal is to pick up another – there is 10 points to be had by just getting ourselves in shape to sell product in a bundled way. And we think we are on a path to do that. That’s $0.5 million right there just on the volume we have. But it may take a little longer to get to the 30% as long as this extreme price pressure is there. It can't be there forever.
- Trey Grooms:
- Just looking at – you talk about your goals for the operating income and just kind of backing into it on the back of the envelope thing, it seemed like the margins have to average like 24% in the year – gross margins. That is quite a big increase to kind of expect in the balance of the year. Does that sound pretty – how do you plan to get there, if that number is correct.
- John Kavazanjian:
- You have to understand that the business that has been delayed is pretty much 25% of our business is our systems business, which really pulls the best margins. That business is a minimum 30% gross margin business. And when you start looking at how much overhead it pulls, on an incremental basis it’s 35% to 40% on an incremental basis. So if you do the math of a shortfall, it holds – we triangulate this five different ways just to make sure that we have our model all right. It really does hold together.
- Trey Grooms:
- Yes. Okay.
- John Kavazanjian:
- Okay. Thanks a lot.
- Operator:
- And our next question comes from James McIlree with Collins Stewart.
- James McIlree:
- Thanks. Good morning.
- John Kavazanjian:
- Good morning, Jim.
- James McIlree:
- John and Bob, can you tell me kind of rough numbers how you get to the 230 for the year, if you broke that down into the major – into the four major reporting categories, how would you roughly get to the 230?
- Bob Fishback:
- I think it's fairly simple. If you look at where our businesses right now Jim, without any Communication Systems product was $40 million a quarter and that's with historically low numbers – recently historically low numbers of 9-Volt communications accessories and automotive. What we would consider a bottom. That is about $120 million minimum for the next three quarters. We are short, if there is about $60 million in Communication Systems to go and with growth in some of the businesses and new business that we’ve won overseas in the UK and that easily makes another 10 million of that.
- James McIlree:
- Okay. So it's really hinging on the comp system orders?
- Bob Fishback:
- Oh, yes. I mean that was $110 million of our revenue last year, SATCOM. It has been assumed to be in the 50 to 60 range, probably about 60 this year, because that is – we know that’s there.
- James McIlree:
- And the spares order, I guess I'm a little bit confused by the difference between the 60 comp systems total and then the spares order that you spoke about last quarter. I thought that was more like a 10 to 15 million-ish kind of number.
- Bob Fishback:
- Yes. It’s about 15 systems and about 10 in spares.
- James McIlree:
- Okay. And so the 15 systems would be for the variety of vehicle programs out there like Humvees, MATV, possibly MRAP spares or replacements things like that.
- John Kavazanjian:
- Humvees and MRAP. There is still MRAPs being produced.
- James McIlree:
- Okay. And is the spares business, is that part of the same IDIQ that you referred to or is that something different?
- John Kavazanjian:
- The issue we ran into the fall was that decision was made instead of making that a separate order under the previous vehicle which was a self sourced procurement. I believe the new administration is not thrilled with sole source procurements. It wants to be as competitive as possible and asked if that will be put into the new IDIQ contract. And that’s a guess on my part, but pretty good one. And so that decision was made to do that and that’s part of that.
- James McIlree:
- So the IDIQ itself has not been let, is that correct?
- John Kavazanjian:
- That’s correct.
- James McIlree:
- Okay. So the first step is going to be you are going to get to be part of the IDIQ and then the past quarters under it.
- John Kavazanjian:
- The prime will get the IDIQ contract, which then will allow the programs to order again.
- James McIlree:
- Okay.
- John Kavazanjian:
- So all we know Jim is what the prime tells us, number one. Number two, what we could ask for price quotes is to be able to put into that contract. And then third, what we know from the programs asking us we are in a position to deliver when the contract vehicle gets put in place.
- James McIlree:
- I hate to be a pest about it. So the IDIQ relates to the prime’s IDIQ and then they are – as part of that, then they are tasking you to supply to that.
- John Kavazanjian:
- Exactly.
- James McIlree:
- Okay, great.
- John Kavazanjian:
- And the IDIQ is done by the Central Command, ECOM.
- James McIlree:
- Right.
- John Kavazanjian:
- And then the orders against that get placed by the programs.
- James McIlree:
- Right. Okay, great. I will circle back. Thank you very much.
- Operator:
- (Operator instructions) And we will take our next question from Richard Baxter with Ardour Capital.
- Richard Baxter:
- Thank you. I guess just to continue on with the pricing pressure question. Are you seeing sort of pricing pressures in both the batteries and the power electronics for this or just namely the batteries or
- John Kavazanjian:
- We’ve seen some in power electronics, but it is mainly in the battery area.
- Richard Baxter:
- Okay. And then I guess first on something different, can you talk a little bit about integrating the AMTI into your communication business.
- John Kavazanjian:
- Rich, I just want to – we were to talk about – in standby power?
- Richard Baxter:
- Correct.
- John Kavazanjian:
- And AMTI will be rolled into our communications business. We already have an amplifier part of that business, the small group that we acquired a couple of years ago in Seattle. They do more of the amplifiers for the higher end systems. AMTI gives us the handheld radio smaller portable systems component of that.
- Richard Baxter:
- Now the amplifiers some of the more higher margin components of these things that you are going for?
- John Kavazanjian:
- Yes. Amplifiers are higher margin components because there is a whole lot more engineering work that goes into them. They are multiband amplifiers to enable frequency hopping. And they have very uniform performance across those bands. They have to manage sheet and there is a fair amount of software in them as well that they handle it different way.
- Richard Baxter:
- Okay, great. Thank you.
- Operator:
- And our next question comes from James McIlree with Collins Stewart.
- James McIlree:
- Yes. Thanks again. Just on the gross margin side. For the non-rechargeable batteries, you had a pretty good gross margin improvement quarter-to-quarter, excuse me, for the rechargeable batteries, a pretty good gross margin improvement, is that a sustainable level going forward?
- John Kavazanjian:
- Yes. Really – in the rechargeable battery area, we were hurt last year by cell pricing. We couldn’t reprice our contracts, and cell pricing went up significantly. There was a shortage out there, there were couple of fires, we started recovering that. We had to work through some old inventory. We got through most of it last year. We got some of it this year. But the answer is, yes, it’s sustainable as we move forward. The other is, as we deploy more programs there, we get a better mix of both smart batteries which are – with our smart circuit capability, which have a lot more value, we get a better margin on and chargers, smart chargers and chargers, which also do better for us. Yes, I think it is very sustainable.
- James McIlree:
- And I think a few years ago, you got – you’ve almost hit 30% gross margin in that business. Is that possible again?
- John Kavazanjian:
- I think we said 25% to 30% is what we like to be in gross margin. We may top above that time to time, but because of mix and stuff, but 25 to 30 is where we are heading.
- James McIlree:
- And then on the non-rechargeables, it seems to be flattish quarter-to-quarter, and I think you also want to be 25%, 30% there right?
- Bob Fishback:
- I would say, we are going to be about 25%, mid-20s and the issue there is that, with our 9-Volt product which is the big chunk of that, we compete against fairly commoditized alkaline and other products there. So there is only, while we believe we create a lot of value, it’s pretty hard to capture a lot of it in consumer markets. So we have markets to compete with the consumer type of product. So that’s why that pulls us down a little bit.
- James McIlree:
- So better margins would await either a mix shift and or your better economy. So you don’t have the pricing pressures? Is that a fair enough assumption?
- John Kavazanjian:
- That’s a very fair assumption.
- James McIlree:
- Okay.
- John Kavazanjian:
- And certainly volume helps in that area because we have a lot of our depreciation and overhead equipment is tied up in that area.
- James McIlree:
- Right. Great. Thanks again.
- Operator:
- And our next question comes from Jill Mastoloni [ph] of Catapult Capital.
- Jill Mastoloni:
- Hi, guys. Thank you for opening the call up. Can you go through your line of credit and any debt covenants that you may have and your balance sheet is a little bit worrisome sort of where you stand regarding potentially raising cash and if the buyback is potentially or if anything is remaining if that would be put on hold given the balance sheet concerns.
- Bob Fishback:
- First, I’ll tell you that the buyback expired on the 30 of April.
- Jill Mastoloni:
- Okay.
- Bob Fishback:
- That program is over. So we are done with that at the moment. On the debt covenant question, we have two debt covenants, two financial covenants that we need to comply with, one is debt to EBITDA covenant and one is a fixed charge coverage ratio that we’re in compliance with at the end of the quarter.
- Jill Mastoloni:
- And what are those – what is the debt to EBITDA and fixed charge coverage ratios?
- Bob Fishback:
- What are the ratios themselves or numbers?
- Jill Mastoloni:
- Yes.
- Bob Fishback:
- I don’t have them right of the top of my head, but we are – the part of the document – the document itself as far as the credit facility is filed. We don’t disclose the calculations on what we provide to the banks. We are within the numbers that are always in our covenant.
- John Kavazanjian:
- The other thing I would mention to you is, we’ve got about $7 million in inventory right now tied up from awaiting these orders, so that we can execute on that program. We probably have another couple of million dollars in inventory, because we’ve started increasing our production of non-rechargeable because we are quoting lead-times kind of six months now on some of our military and non-rechargeable batteries, which we think is unacceptable. On top of that, we acquired significant set of inventory with the AMTI acquisition probably a couple of – $2 million or $3 million worth of inventory there that was too much, but they only had two sales people. Now we have a whole sales force selling it. So just inventory alone, we will probably have about $10 million that we would hope to turn into receivable in the next quarter or two.
- Jill Mastoloni:
- Okay. It sounds like you are fairly comfortable with the balance sheet at this point with the ability to turn the inventory over.
- Bob Fishback:
- Yes. We are comfortable with it.
- Jill Mastoloni:
- Okay. Thank you guys.
- John Kavazanjian:
- Significant conversation (inaudible) when we embarked on the buyback and I think we are comfortable with it.
- Jill Mastoloni:
- Okay. Thank you very much.
- Operator:
- (Operator instructions) And there appear to be no further questions at this time. I would like to turn the conference back over to John Kavazanjian for any closing or additional comments.
- John Kavazanjian:
- Thank you, Ben. Thanks everybody for participating. We still have a fundamentally very strong business or we certainly would have liked to had a stronger start to the year. We see continued demand in the defense business. And we are going to get through these contracting delays. Our commercial business, though, slightly affected by some of the conditions we’ve talked about, really does have extending opportunities, because of the new value we are bring in the applications that we participate, and really through some of the new initiatives in alternative energy and energy storage. We really do look forward to updating you again our progress next quarter and thank you all for participating.
- Operator:
- This concludes today's conference. Thank you for joining us and have a wonderful day.
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