Ultralife Corporation
Q4 2014 Earnings Call Transcript

Published: 12 Feb 2015

[Operator:]

Welcome to Ultralife Corporation Fourth Quarter 2014 Earnings Release Conference Call. At this time for opening remarks and introduction, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

[Jody Burfening:]

Thank you, Joey and good morning everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for the Ultralife Corporation’s earnings conference call for the fourth quarter of fiscal 2014. 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 and if anyone has not yet received a copy, I invite you to visit the company’s website www.ultralifecorp.com, where you’ll find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone 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 potential reductions in the 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 the Ultralife's filings with the Securities and Exchange Commission 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 considered 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 Mike. Good morning Mike.

[Mike Popielec:]

Good morning, Jody and thank you everyone for joining the call this morning. Today I will start by making some overall comments about our fourth quarter and total year 2014 operating performance and then I will turn the call over to Phil who will take you through the detailed financial results. After Phil is finished I will provide an update on the progress against our 2014 revenue initiatives and then talk about focus areas for 2015 before opening up for questions. For the fourth quarter of 2014 we were pleased to report the total company to quarterly profitability and generate an operating profit of $1 million on revenues of $19.9 million for an operating margin of 5%. Continuing the trend from the third quarter, commercial revenues for our battery and energy products business increased 47% year-over-year driven in large part by battery pack sales to global manufacturers of medical devices for respiratory applications of medical carts and for nine volt sales to manufacturers of safety and security devices such as smoke detectors. This more than offset a 24% decline in B&E government defense revenues and led to year-over-year B&E quarterly revenue growth of 6%. In our communication systems business slower demand for amplifiers for government defense tactical communications drove revenues down 26% year-over-year which led to a total company revenue decline of approximately 1% year-over-year. Also noteworthy in Q4, 2014 was a solid increase in gross margins of each business. Driven by a higher mix of commercial products and overall volume leverage for our B&E segment and a favorable mix of new products for our communication systems unit, the total company gross margins improved 400 basis points year-over-year to 31.7%. Looking at the total year, we demonstrated the solid operating leverage potential to be realized with even modest top line growth. Our battery and energy products investments in new products aimed at diversifying the customer base more into commercial and international markets, enable the business unit to be profitable for the year. Total year commercial revenues were up 32% year-over-year and represent approximately 62% of total B&E 2014 revenues versus 47% in 2013. Total B&E international revenues were up 10% year-over-year and represent approximately 46% of total B&E 2014 revenues versus 41% in 2013 and by adhering to the guidelines set by our established 35, five, five, ten equals ten business model the revenue generated from the new product and market development led to favorable mix and operational leverage that helped the B&E team increase gross margins for the total year by 220 basis points. For our communication systems business, in 2014 we continued to solidify our opportunity pipeline with the heavy focus on U.S. [inaudible] and our OEM customers. The product development activity was primarily associated with integrated tactical communication systems including but not limited to amplifier and vehicle adapter products. Once again a substantial amount of engineering and new product development expense has been incurred ahead of future potential revenue streams. That said, over 40% of the communication systems 2014 revenue received came from products less than or equal to three years old and this helped drive a total year gross margin improvement of a 130 basis points year-over-year. Now I would like to ask Ultralife, CFO, Phil Fain to take you through additional details of a fourth quarter and total year 2014 financial performance. Phil?

[Phil Fain:]

Thank you, Mike and good morning everyone. Earlier this morning we released our fourth quarter results for the period ended December 31, 2014. Consolidated revenues for the fourth quarter totaled 19.9 million representing a 0.2 million or 1% decline from the 20.2 million for the fourth quarter of 2013. And this 24% sequential increase over our third quarter. Revenues from our battery and energy product segment were 16.8 million, an increase of 0.9 million or 6% from last year. The year-over-year growth was fully attributable to an increase in commercial sales which exceeded the decrease in government and defense sales. Commercial sales increased $3.1 million or 47% over the fourth quarter of 2013 primarily driven by shipments of new products including those specifically designed for medical devices in carts as well as higher demand for our nine volt batteries. This marks the fourth consecutive quarter of double digit commercial sales gains and brings the 2014 annual increase to 32%. Sales to government and defense customers declined 2.2 million or 24% from the fourth quarter of 2013. As a result the mix of commercial sales increased from 42% to 58%, in government and defense sales fell from 58% to 42% versus last year. Communication system sales of 3.2 million decreased by 1.1 million or 26% from the prior year. Continuing the trend that started in the second quarter of 2013, we experienced slowness in the daily order flow of amplifiers for U.S. department of defense tactical radios and delays in the final sign-off and purchase order issuance of several large projects. Our consolidated gross profit was 6.3 million compared to 5.6 million for the 2013 period, an increase of 13%. As a percentage of total revenues consolidated gross margin was 31.7% versus 27.7% for last year's fourth quarter, a 400 basis point increase. The improvement in overall gross margin highlights the continued penetration of commercial markets for our battery business, the introduction of higher margin new products for our communication systems business and increased factory throughput driving absorption as well as our lean productivity improvement. Gross margin for our battery and energy product segment was 30.0% up 390 basis point increase from the 26.1% reported last year. The year-over-year increase primarily reflects the higher gross margins associated with the 47% growth in commercial sales in the favorable overhead absorption resulting from higher production volumes and more favorable production mix. Including the resumption [ph] of primary battery shipments to the U.S. Department of Defense. For our communication system segment gross margin was 40.6% representing a 710 basis point improvement from the 33.5% reported last year. This increase resulted from the higher mix of new products. Operating expenses totaled 5.3 million which was slightly below the 5.4 million reported for the 2013 fourth quarter. The 2014 operating expenses reflect our continued efforts to reduce discretionary spending while continuing our investment in new product development. As a percentage of revenue, operating expenses represented 26.5% compared to 26.6% for the year earlier period. Operating profit was 1.0 million representing a fivefold increase over the 0.2 million reported for the fourth quarter of 2013. Despite the slightly lower sales in 2014. Operating margin improved by 410 basis points from 1.1% in the fourth quarter of 2013, to 5.2% for 2014. The 2014 results demonstrate the leverage in our business model highlighting the impact of volume increases in the more favorable mix and our gross margin structure. Fourth quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to 1.1 million compared to 1.2 million for the year earlier period. This brings us to adjusted EBITDA defined as EBITDA including non-cash stock based compensation expense of 2.1 million or 10.4% of sales versus 1.2 million or 6.9% of sales for the fourth quarter of 2013. Other expenses primarily comprised of foreign currency translation in interest expense netted to 90,000 versus 22,000 in 2013 primarily reflecting strengthening of the U.S. dollars to pound sterling and our tax provision was 91,000 primarily reflecting income taxes for our profitable China operation and the timing of deferred taxes. Our tax provision was 104,000 for the 2013 fourth quarter. Net income was 0.9 million or $0.05 per share compared to 1.1 million or $0.01 per share for the same period last year. The company's liquidity remains solid. With cash on hand of 17.9 million, no debt, working capital of 45.6 million in the current ratio of 5.1. By comparison the cash on hand at the end of the fourth quarter of 2013 was 16.5 million. Our accounts receivable day sales outstanding metrics continued with very favorable levels and inventory decreased by over 2 million or 7% from our third quarter. Our strong balance sheet continues to provide us with flexibility and evaluating and executing our strategic capital allocation plans. As disclosed during our first quarter earnings release and investors call. Our Board of Director's authorized the repurchase of upto 1.8 million shares of our common stock by May 1st 2015. During the fourth quarter we repurchased 56,197 shares bringing the total number of shares repurchased to 216,754 shares at an average price of $3.30. We remain committed to the share repurchase program as a key element of our capital allocation policy in which we’re balancing long term investments in revenue growth including new product development and acquisitions with enhancing shareholder returns in the near term. In summary the actions we’ve taken to strengthen our business model while preserving our strategic investments in building a strong balance sheet are demonstrated in our fourth quarter results. While we’re pleased with the continued growth and commercial sales for our battery and energy products business, and the resulting profitability now generated by that segment, we continue to focus on growth opportunities for communication systems and productivity initiatives to optimize our gross margin while maintaining strict controls over discretionary spending. This will help ensure greater leverage to our business model and profitability when the results of our efforts to grow the consolidated top line both organic and through acquisitions are more fully realized. I will now turn it back to Mike.

[Mike Popielec:]

Thank you, Phil. As you may recall we entered 2014 with improving value propositions leading to higher gross margins, a business model to fund new product development and sales reach expansion as a function of revenue level, a strong balance sheet and liquidity and we were diversifying our customer base to grow our opportunity pipeline and return to revenue growth. For the battery and energy products business, we carry their momentum of 2014 forward into 2015 to try to capitalize on several newly developed revenue streams to fully offset the government defense decline and obtain total revenue growth. For the communication systems business, after a few years of new product development and testing for several larger projects and for larger we mean individual transaction sizes ranging anywhere from several million dollars to 10s of millions of dollars. Our focus in 2015 is to continue to move towards actually capturing these larger contracts and realizing revenue. Operationally in 2015 both businesses will continue to aggressively pursue variable and base cost productivity building on gains mainly in 2014. Therefore our investor earnings call commentary for 2015 will again be focused on revenue growth initiatives and consistent three core elements. Expanding our market and sales reach, new product development and pursuing acquisitions. In our battery and energy products business to expand our market and sales reach, we will continue to focus on diversifying our customer base outside of our core U.S. government defense market by growing our commercial and international revenue. The inflection point of when the increase of the commercial business and international business overcame the decrease in U.S. government and defense business to deliver total net revenue growth occurred in the third quarter of 2014 was validated in the fourth quarter and is viewed as a key revenue growth indicator for B&E as we head into 2015. In our core U.S. government defense business, B&E continues to deliver against and receive new releases for our 5390 batteries under a five year IDIQ DLA contract which is maintaining our backlog in excess of $2 million. We also recently received the national stock number for the commercial version of our 5368 military battery which is used in night vision equipment and chemical detection equipment and with ongoing shipments for both military and commercial solutions expected throughout 2015. For new product development in battery and energy products, investment continues consistent with our targeted 355 10 equals 10 business model with those ratios falling close into line as we grow revenues while reducing run-rate cost. Revenues derived from introduced less than are equal to three years ago represented more than 56% of our sales in Q4 and grew year-over-year every quarter in 2014. New product development is a fundamental part of our growth strategy as the introduction of new products as well as the continual multi-generational product planning of that product ensures the product line vitality necessary to maintain and grow competitive advantage for us as well as our customers. In the fourth quarter we completed the shipments for an order of several 100 units of a multi-kilowatt module [inaudible] new product development to support silent watch on border security and we’re working with the same customer on a multi-generational product plan for their next generation systems. We have also recently completed a MGPP upgrade for a large Tier 1 military radio supplier for their vehicle monocharging system and received a development contract from a separate radio OEM for an uplift of their small handheld radio battery and charger system. On other fronts we have received very positive feedback from a G&D prime contractors as part of their evaluation process to use our new high capacity CFx cathode cells for battery powered surveillance system. We continue to add to our new line of lead acids, replacement lithium batteries to see very good traction across several commercial markets and applications. And we have completed a range extension of battery powered test to measurement equipment for our Dow Jones Industrial Company. At communication systems, domestically the business has continued to nurture and grow relationships with top customers. Our team has become deeply embedded in major developing and ongoing U.S. DoD programs where our products and technical expertise are helping to shape platform capabilities, increase communications consistency, eliminate desperate [ph] and legacy equipment and programs by providing radio agnostic cost effective solutions. These relationships continue to drive our new product development process, push our team to develop new creative ways of solving emerging mission critical needs and offer our analogy and insight into integrating both our own and other manufacturers technologies in a cohesive and simple manner. The scope and breadth of the work has driven our business to develop partner relationships with both smaller companies with new cutting edge technologies as well as with the largest established OEMs that offer mission specific hardware and software to the war fighter. Our team has been able to architect holistic solutions that positively and dramatically increase the communications capabilities at the furthest edges of the tactical battle space and give our nations soldiers increased situational and awareness and network access that is unprecedented to-date. As these technologies converge and program specifics mature our engineering team is fully engaged in the development of tightly integrated solutions. Internationally the communication system team continues to identify that and mature multiple large global program opportunities. As this activity outside of the U.S. is increasing as part of our expanding, our market and sales reach in 2015 we plan to expand our global development business team to increase the customer interaction frequency and to capture more revenue. While most of our international work to-date has been direct to a specific country's military, we have grown our global OEM relationships substantially and qualified our popular 21 amplifier line with the OEM radios expanding our market reach into areas that we were previously unable to touch. We’re also seeing an increasing demand on a global scale to augment previously fielded radios where a complete replacement program is not economically feasible. These opportunities add value to our customers by allowing them for instance to upgrade their capability by doubling their communications range while eliminating the training time to adapt to and fill [ph] new hardware. This continues to be a trend globally as communications become increasingly vital in both tactical and urban scenarios. Looking at communication system new product development, as in the last several customers, comm systems revenue mix continues to be made up of new products less than or equal to three years old. In Q4 they represented 41% of sales and were driven largely by product such as our A-301-150 satellite radio combiner and our MRC-UVA handheld radio power supply. In-line with our past practice we will continue to collaborate with customers to launch a number of new products to expand our portfolio throughout 2015. We have tactically chosen the quite a few new product development efforts for 2015 based on a wide market survey, customer interaction and identify industry capability gaps. This targeted approach has led to a consistent quarterly sales mix of 40% or more from the new products. As the business development engineering teams have worked to capture the ways of the customer, collaborate with them to refine requirements and improve our execution for new product development. We also continue to expand our capabilities for both design and manufacturing by adding new talent, technology and improved processes. Our posture for 2015 is stronger than ever and we’re excited to continue to launch new products in support of our customers and end user service men and women. In closing by ending on a strong note for the second half of 2014 we have validated that our strategy, business model and operational execution are heading in the right direction and combining to delivery profitability and the underpinnings for top line revenue growth. The battery and energy products business is capitalizing on new revenue streams from new products, customers, markets, geographies and globalization to diversify and fully offset the government defense revenue decline to achieve revenue growth. With a growing commercial business and expanding and evolving product lines for medical devices in carts, higher capacity, core rechargeable battery and chargeable products, new primary batteries, various portable and standby power battery solutions and recent uplifts of our government defense product portfolio. We’re excited about the opportunity to achieve revenue growth in 2015. At communication systems, given the high level of customer interest and project activity for our communication systems products we continue to invest in both our people and the new product development of next generation technologies. As stated earlier for communication systems 2015 is all about beginning to capture of some of the larger projects that had been under-development over the last few years and to start realizing an initial revenue from the numerous multi-year opportunities in the pipeline that now aggregate in value to several $100 million. Activity level is clearly increasing and centered on integrated vehicle solutions, amplifier upgrade programs and initial new radio fielding. Predicting the timing of converting opportunities into sales revenue remains our biggest challenge. Given our strong presence with the global special operations forces, our OEM customers and current world events remain optimistic about the revenue growth prospects for our communication systems business. In terms of acquisitions, we will also continue to pursue an accretive business addition for either of our segments in 2015 to enable us to more quickly gain scale particularly market assess or technology, new products and/or skilled resources as the case maybe. Operationally as each of the business teams continue to improve gross margins, lower operating costs and improved profitability, we very much look forward to the operating leverage and accelerated earnings growth that increase revenue that potential acquisitions will bring. As the company maintains it's solid balance sheet and liquidity, we have a flexibility to create more organic revenue growth opportunities through new product development and market reach expansion, seek out and integrate bolt-on acquisitions and enhance shareholders return through stock repurchases. Operator this concludes my prepared remarks and we will be happy to open the call for questions.

[Operator:]

[Operator Instructions]. And we will take our first question from Sam Bergman with Bayberry Asset Management.

[Sam Bergman:]

Couple of questions, first of all in couple of defense contracts that get delayed and pushed into the first quarter or pushed in 2015. Have any of those being signed off at this point now that we’re six weeks into the quarter?

[Mike Popielec:]

No anytime that we receive a formal contract of any material magnitude, we will let you guys know that.

[Sam Bergman:]

Okay, and can you talk about R&D what you expect R&D to look like in 2015? It's running like roughly 1.4 million a quarter if you go by the fourth quarter. What do you expect it to be in 2015?

[Phil Fain:]

Sam, I expect it to be a very similar to that and the reason why I say that is because new product development is such a critical part of our overall strategic plan it's not something that we would say that once a product has launched we’re going to turn it off. It's going to continue to be I would say at the level that you’re seeing in Q4 and the only change hopefully will be the continued recognition of what happens with the successful launch both in terms of the business that we’re seeing as well as the major project win associated with those.

[Sam Bergman:]

Okay and in terms of newly developed revenue streams, can you talk about those and can you tell us if you got any estimates on how large these revenues could grow to in 2015?

[Mike Popielec:]

The revenue streams that we referred to, we talk about new revenue streams. The medical cart revenue stream that it has taken a couple of years for us to develop. There are some ongoing other medical device revenue streams that are coming on. They are not huge individually but in aggregate they sum to where we are actually seeing overall top line growth for battery and energy products business. The other area is I mentioned a little bit in the prepared remarks about some of the portable power solutions which essentially we’re providing a large format battery to an OEM who is developing a product and we’re getting some positive feedback about making it through what has been quite frankly a rather lengthy testing and evaluation process. So we know that that will spiral into other opportunities as the few major installations are more well-known. The China product line, we had some products in China where we were providing those products for sale into China pretty much exclusively into China and we’re really trying to drive some of those products which have held the same quality and performance standards as any of our products and take some of those products overseas and to globalize that product line by taking into for instance European or South American market. So it's hard to comment on what the specific magnitude of each of those individual markets would actually be, and what the potential could be but on a collective basis those are the revenue streams that I tend to refer in the prepared remarks.

[Sam Bergman:]

Which one is the largest opportunity?

[Mike Popielec:]

I would say the medical space just demographically is extremely attractive to us. It's attractive to us because not only of aging populations and for people wanting to be continue to be active and [inaudible] to carry their devices with them. But also it's very consistent with our core customer base and that been sort of our history being in the military area where the product just absolutely has to work and be reliable, I think it's a very good fit to branch off in some of these commercial markets where we have that same type of high level conservatism and needing for the product to preform so I think that the medical space is a very attractive one for us and ultimately I believe you know the portable power solutions can be a very large market but there is a lot of rhetoric about battery solutions and their different applications around the globe and what we have been trying to do is just keep our head down and get some really strong install base references so we can grow that business, but those two could be quite attractive for the long term.

[Sam Bergman:]

And last question is management blacked out on buying stock because of M&A activities or do you expect management to or insiders to buy stock after the earnings report?

[Mike Popielec:]

Let me answer that on two levels, there is an overall black out that is customary for the management team, many of the management team members over the last two weeks of the quarter and all the way through till roughly 24 hours after we announced earnings. There is also a small subset of that group that are involved in the stock buyback decisions and those the members of that subset are unable to trade it all.

[Operator:]

Our next question comes from Gary Siperstein with Eliot Rose Asset Management.

[Gary Siperstein:]

I just wanted to start off with -- you mentioned these new areas that we’re going into in the commercial side and had some traction on the medical side with carts and other products. Can you give me a little more color on what some of the uses are for some of the other medical products in that space?

[Mike Popielec:]

Sure. I mean some of the more common ones are a the infusion pump applications for pain management, diabetes, other kinds of things. There is also portable battery packs for respiration devices, CPAPs and things like that.

[Gary Siperstein:]

Is this trend towards battery powered? What's the rationale behind that? Is it -- in case they lose power, I mean most hospital have backup generators, a lot of redundancy. Can you just give me some color on the rationale?

[Mike Popielec:]

You know [inaudible] certainly an expert on the medical side of it but what we have been led to believe by our OEMs and some of our value added resellers is that it's all about mobility. People don’t want to be tethered to an outlet and whether that’s in hospital for a nurse or staff member implementing data per employee record, it could not be stocked to a certain room to be able to use the medical cart wherever they need to be able to type information in or if it's too the vital signs, the statistics to not be tethered to a single room. Those are the kinds of things from some of the devices perspective that drive the demand for more mobile products and then as we said some of the quality of life issues relative to infusion pumps and other kind of personal medical devices.

[Gary Siperstein:]

Mike, you mentioned other commercial products in the border security area, testing measurements and surveillance. Can you give me some color on what the actual products are and what they are going to do in each segment there?

[Mike Popielec:]

Number of the border security, other of things are very confidential and secretive so I really can't give you a lot of commentary on that. But essentially just about all the applications, as the name of the product suggest it's for very remote locations, places which are difficult to get to maintain battery say for instance versus lead acid solution places where you may have a really wide temperature range which ends us up to lithium-ion solution to having a high number of cycles and not have to replace the batteries. I mean those are some of the attributes that are associated with some of those products but a lot of them as you may would think they would be either for temporary power in many cases or they are in remote locations where they are likely to be hidden and not many people know they are actually there. So that’s sort of a represented view of where some of those applications without revealing more than I'm able to review.

[Gary Siperstein:]

And testing and measurement side?

[Mike Popielec:]

The applications that we’re looking at is, there is some inspection equipment for operating machinery where the devices, a lot of this testing and measurement equipment are you know involves using batteries, they are portable type devices and we’ve one customer in particular that has worked over several years with us to develop a lithium-ion solution for one of their inspection devices and that’s starting to take off.

[Gary Siperstein:]

And you mentioned surveillance, what was surveillance using prior to investigation batteries with you guys?

[Mike Popielec:]

Can you repeat that question Gary?

[Gary Siperstein:]

On the surveillance side you mentioned some stuff going on, I'm just curious what the power supply of surveillance were you using prior that looking at batteries or external energy?

[Mike Popielec:]

You know sometimes they would use, like I said lead acid solution or they would use earlier generation lithium batteries.

[Gary Siperstein:]

Okay, and you talked about communications system. It's low for a couple of years. In terms of your pipeline had there been any awards to competitors, is just that awards hadn't been I guess awarded or is it with lost some of those opportunities to competitors?

[Mike Popielec:]

No we’re not aware of any of those major contracts being lost.

[Gary Siperstein:]

Okay and what did you a sense of movement in that area now that another 12 months has gone by nothing material?

[Mike Popielec:]

Well as I said in my comments I mean there, a lot of these activities are maturing. They take a couple of years, there are multiple opportunities being pursued simultaneously where I would say 2 or 3 years ago it was a small number of opportunities being pursued at any given time. Some of the military stuff that obviously we’re talking about has to go through NEI type testing and validation. So we now have the benefit of knowing that a lot of our equipment has made it through those test, we know the good, bad, ugly of those devices and products in those applications and what the feedback is and I’ve had a chance to fix anything we need to. So it just all sums up to being a maturing of some of these ongoing opportunities. The hardest thing I know is and we’re trying to understand it better with both internal and external resources is the timing and with the lot of the budget activity that has caused us to take a cautious approach to the actual timing of activity even though from a demand and requirement perspective it would seem on the surface that these opportunities are just right around the corner and so that’s why we have been a little more cautious in how we have described what we see for 2015, that being said the spending levels that we have now sort of migrated towards are encouraging and as much as we’re continuing to be able to invest in new products and the people in these margin re-expansion activities and at the same time show profit. Whereas it was more difficult about a year ago or so where we knew we had to make the spending for some of the new product development and market reach expansions and we didn’t have any revenue against the liquidated and our results showed some losses. I'm not looking at spending a lot more than we are currently spending at this time to pursue those new opportunities but as I said I think a couple of times in my prepared remarks, we’re looking for at least some of that to start happening in 2015.

[Gary Siperstein:]

And Mike in terms of seasonality or exception of seasonality, a lot of on the commercial side of the business a lot of people believe there is a fourth quarter budget wash or they spend a budget spent to empty out the budgets and yet the government's fiscal year is a few months prior on the military side. So I guess what I'm asking is, is it an automatic [ph] that our revenues in Q1 had the decline from Q4 due to that seasonality or is that seasonality a myth?

[Mike Popielec:]

I really would provide individual quarter commentary but if you do look at the last several years and the fourth quarter it's been sort a high watermark for revenue. That’s been the empirical experience but I don’t think there is any fundamental market drivers that would suggest that the first quarter has to be lower than the fourth quarter. The U.S. government defense business particularly gets smaller and smaller by design as a percent of our overall revenues. The dynamic of seeing spike I guess in historical years in our third quarter because of that government spending and we haven't seen that in the last couple of years and as military gets smaller I don’t see a big seasonality based on the U.S. government fiscal budget and relative to commercial for whatever reason the fourth quarter seems to be a high watermark but I don’t see any fundamental as I’ve said just couple of things about that, there is no fundamental reason why the first quarter has to be lower. It is what it is based on individual customer projects and demand and where we’re in maturing those opportunities.

[Gary Siperstein:]

And then in terms of the government battery orders, I think that one point I don’t know if this is two quarters ago or even a year ago due to the sequester and all the budget craziness on the military side I think I recall at some point our factory at least domestically was operating four days a week. Has there been a pickup in that from the government starting to replenish inventories on the battery side so that maybe we’re running at 5 or 6 a week now?

[Mike Popielec:]

The comment that we made about having a backlog for everybody to hear is exactly that point. It's not huge, it's not dramatic in terms of volume but it's pretty steady and we have been getting some operational leverage by more consistent volume, you know a little uptick in revenue helps our liquidations of overhead. So I would say that government contract is extremely helpful to help us -- base load our operations.

[Gary Siperstein:]

In terms of -- I think we had a move in the third quarter in China, were all the expenses of that move expensed in the third quarter or was there any carry over into the fourth?

[Phil Fain:]

Well there was carry over into the fourth, Gary and that is now all behind us and I will say when all is said and done recognizing the expenses and getting a negotiating or reimbursement with the local [inaudible] government. It turned out not to have a significant impact on our 2014 results but as of the end of the year the relocation was complete.

[Gary Siperstein:]

So Phil, was there any expense in the fourth quarter or related to that and just quantify it?

[Phil Fain:]

Yes there was but it was offset by reimbursements that we negotiated with the local governments.

[Gary Siperstein:]

And in terms of inventory, I guess we started the year at 26 million, we finished it at 26 million since we saw -- Mike, you called out maybe the bottoming on the military side in Q3 and then we saw more evidence in Q4. So what's an appropriately inventory figure, if we indeed are going to start growing again at least an intent to get an acquisition at least on an organic basis, is that inventory going to trend out as trend up or is it going to work, are we going to be able to make some more progress on that as news turn out.

[Mike Popielec:]

Gary, we’re certainly going to make more progress on that and one of the things that you do see in the 26.1 million that was reported at the end of the year was some safety stock of relating to the China relocation, we didn’t want any drop off in our ability to cover the needs of the customer. So we purposely built up inventory in China to get through the relocation into Q1 as the China New Year is coming up very shortly. But there were some, I would say a good accomplishments in 2014 that really sets the table for us to make some good quantitative progress that you will see that we will all see in 2015.

[Gary Siperstein:]

Can you give me a range? I mean [Technical Difficulty] 22 million, 18 million, 20 million, can you give us some goal?

[Mike Popielec:]

Absolutely Gary, and I look at this as the cheapest form of financing and my personal target is at least in the $3 million to $4 million reduction range and I think that’s a very reasonable.

[Gary Siperstein:]

And then lastly on the buyback there wasn’t a lot of stock in the buyback in the quarter and I know about the restriction in volume and percentage of volume and black out days etcetera and I’ve mentioned on other calls perhaps expanding the program so black out days don’t apply. In light of book value of over $4 working capital almost $3 now over a buck of share in cash, EBITDA positive, you generated 10 million in cash in the quarter on an EBITDA basis. Sequentially cash went up almost 3 million in the quarter. So I guess you know what I'm asking the program is through May, 1.8 million shares with 56,000 a quarter prior to that. So we’re not even denting [ph] the 1.8 million. So I would again you know again within this $3 and working capital that relation is just ridiculously cheap. So I would just ask you guys to look other mechanism to maybe take advantage of the disconnect in the public market price from that you guys have accomplished and it would be extremely accretive going forward if we take out a nice chunk of stock here, that’s tender orders, I forgot what they call them 5B1, or 501 plan whatever they call which has no blackout dates etcetera.

[Mike Popielec:]

Gary, thank you and I can assure you and the other listeners on the call that we continuously review with the different alternatives of repurchasing the shares both internally and with those who are helping us externally with the share repurchase program as well but thank you for your thoughts.

[Gary Siperstein:]

And just last question and I will give someone else a chance. Mike, what's your gross margin target going forward? I know there has been a lot of moving parts commercial military and the sequester and so forth but once you get to the more normalized steady state and some of the confusion comes off the military budget, what sort of are your goal on gross margin?

[Mike Popielec:]

I think we’ve said, our business model is built on sort of as a starting point, the interim target was 30% which were starting to be able to hit. I think the way I look at it is that, the gross margins of comm systems are fully capable in the 40% range, you know B&E gross margins are fully capable to be in the 30% range. I don’t have any theoretical limit. I think as long as we can continue to develop products that are highly valued and the customer really recognizes that and what we’re able to sell in the market place and he gets economic value add. I don’t think there is any theoretical upper limit, but I can say I'm very pleased that we’re starting to hover around the 30% and we just have an all employee meeting this day as well and we still think there is room for improvement, I mean there is so much that we can do to continue to improve efficiency. So I don’t set a target that we just stop at. I'm glad we’re at 30% overall and we will continue to move up forward. You know sometimes we may want to be more optimistic about what margins could be but every now and then you get an opportunity where maybe the price levels have to be a little differently than what they are currently are to help manage our overall business model. So I'm going to maintain some flexibility but I don’t think that we have plateaued in our achievement of gross margin improvement.

[Gary Siperstein:]

Okay, and I lied I got one more question. If you sort of globally like a mile up in a year, now that the Republican, Congress and an election a couple of years from now and even if a democrat were to win it seems like either a republican victory or even the democrat either way can probably be a little more focused than Obama is with the defense budget and Obama just presented a budget which actually broke the deal and the Congressional budget deal with military request in excess of the agreed upon amount. So is there any chatter out there that things might finally in lieu of all that and of course what's going on with special forces and Obama has request the other day to go after ISIL. Is there any chatter that things might be loosening up for us both on battery and energy income?

[Mike Popielec:]

I mean we didn’t hear and see same things you do, I mean our approach has been to hope for the best, prepare for the worst and try to make money and grow our business in any environment.

[Operator:]

[Operator Instructions]. And it appears there are no further questions at this time. So I would like to turn the conference back to Michael for any additional or closing remarks.

[Mike Popielec:]

Great. Well thank you once again everyone for joining us for our fourth quarter 2014 earnings call. We look forward to sharing with your our quarterly progress in each quarter's conference call in the future. Thank you very much for your time today. Bye, bye.

[Operator:]

Thank you for your participation. This does conclude today's call.