Ultralife Corporation
Q3 2015 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to this Ultralife Corporation Third Quarter 2015 Earnings Release Conference Call. At this time, for opening remarks and introductions, I'd like to turn the call to Ms. Jody Burfening. Please go ahead.
- Jody Burfening:
- Thank you, Tim and good morning, everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the third quarter of fiscal 2015. 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 who has not yet received a copy, I invite you to visit the Company’s Web site, at www.ultralifecorporation.com, where you will find the release under 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 may 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 to vary from forward-looking statement as included in 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 considers to be useful metrics that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With those housekeeping matters out of the way, 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'll start off by making some overall comments about our third quarter 2015 operating performance, before turning the call over Phil, who will take you through a detailed financial results. After Phil is finished, I'll provide an update on the progress against our revenue initiatives for 2015 then open it up for questions. For Q3 of 2015 we were very pleased to deliver another quarter of total company profitability and positive EPS generating an operating profit of $1.17 million on revenues of $19 million for an operating margin of 6.2%. This represents a year-over-year improvement in operating profit of $1.23 million on a 19% or $3.0 million increase in revenue, again delivering leveraged earnings growth on solid execution of our business model. Revenues at our battery and energy products business increased by 18% over the prior year driven by a 31% increase in government defense sales primarily to the OEM clients and the DLA and a 9% increase in the commercial market led by sales of rechargeable batteries for medical device applications and 9 volt batteries for smoke detectors. For our communication systems business, revenues were up 23% over last year's third quarter driven by sales of our core power amplifiers, universal radio vehicle adapters and power suppliers. Whereas overall communication system shipment volumes are still challenged by transaction timing and DOD budget constraints. The revenue improvements are derived from a broad range of new products being sold through our OEM channels in a more steady day-to-day flow business. With both businesses achieving of meaningful revenue increases in Q3. Total company revenue grew by 19% year-over-year for the third consecutive quarter of solid double-digit increases bringing revenue growth for the first nine months of the year to 23%. Looking at the quality of earnings in Q3, the total company gross margin rate increased year-over-year by 310 basis points to 31% driven again by favorable mix as well as volume leverage. While continuing to fully fund revenue growth initiatives, we also kept a close sign [ph] operating expenses and with the uptick in revenue we're able to reduce operating expenses as a percent of revenue by 350 basis points year-over-year to 24.8%. So in addition to the revenue growth and increase in operating profit, the quality of earnings also continues to improve. And in Q3 of 2015 our operating margin of 6.2% was the highest it has been in almost three years. We know we have much work to do to realize our ultimate goal of being able to deliver consistent and sustainable top and bottom line growth but we are very encouraged to see that our business model assumptions and the heavy lifting done over the last several years are leading us towards that desired steady state. Now I'd like to ask Ultralife's CFO, Phil Fain to take you through the additional details of our third quarter 2015 financial performance. Phil?
- Phil Fain:
- Thank you Mike and good morning everyone. Earlier this morning we released our third quarter results for the period ended September 27, 2015. Consolidated revenues for the third quarter totaled $19 million representing a $3 million or 19% increase from the $16.1 million for the third quarter of 2014. Revenues from our battery and energy product segment were $16.4 million, an increase of $2.5 million or 18% from last year reflecting growth in both government and defense and commercial sales. Government and defense sales grew 31% and was driven by higher sales of batteries and chargers to a large international prime defense suppliers and shipments of primary batteries to the US government’s defense logistics agency for the fourth consecutive quarter. Commercial sales for the third quarter of 2015 increased 9% over 2014 with higher shipments of batteries and chargers into medical channels and 9 volt batteries to large global smoke detector OEMs. As a result of the higher growth for government and defense sales the split between commercial and government and defense sales shifted to 56-44 compared to 61-39 for the 2014 period. Communication systems sales up $2.7 million increased by $0.5 million or 23% over the 2014 period. Similar to the first two quarters we experienced more broad based sales as well as increases in our order flow reflecting increased demand from system integrators and support of US Department of Defense programs and international projects. On a consolidated basis, the commercial to government and defense split was 48-52 versus 53-47 for the year earlier period. Our consolidated gross profit was $5.9 million compared to $4.5 million for the 2014 period. An increase of 32%. As a percentage of total revenues, consolidated gross margin was 31.0% versus 27.9% for last year's third quarter, up 310 basis point increase. The improvements in overall gross margin highlights to leverage of our underlying business model and the benefits of our strategy of focusing on higher value proposition of new products. In producing a gross margin at or above 30% for the past four quarters we are building a track record of performing to our business model target. Gross profit for our battery and energy products business improved by 25% reflecting the leverage from 18% sales increase for the period gross margin for the segment was 29.1% a 170 basis point increase from the 27.4% reported last year. The improvement reflects the higher production volumes increasing the absorption of our manufacturing overhead, the more favorable margins associated with commercial sales and continued lean productivity gains for the business. For our communication systems segment, gross profit improved 67% over 2014 and gross margin of 42.4% improved by 1100 basis points over the 31.4% reported for last year’s third quarter. This improvement reflects both product mix and higher production volume. Operating expenses represented 24.8% of revenues versus 28.3% for the 2014 period reflecting 350 basis points of leverage. Operating expenses of 4.7 million were sequentially below the 5.2 million and 5.0 million reported in the first and second quarters respectively highlighting our continued efforts to contain discretionary spending while continuing our investments in new product development. A 0.2 million or 4% increase over the 4.5 million reported in the third quarter of 2014 was primarily driven by higher sales commissions and new product development. We expect operating expenses to be slightly higher in the fourth quarter as we transition our recent 8.2 million VIPER award to high production volumes in line with the 2016 shipment schedule. That operating leverage combined with increased revenue resulted in an operating profit of 1.2 million for the 2015 third quarter compared to an operating loss of 55,000 for the 2014 period. The year-over-year improvement in operating profit of 1.2 million consisted of 0.8 million contributions from the 19% increase in sales, and a 0.6 million contributions from the 310 basis point improvement in gross margin partially offset by the 0.2 million increase in operating expenses. Operating margin improved from negative 0.3% in the third quarter of 2014 to positive 6.2% for 2015. Third quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to 0.8 million compared to 1.1 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 10.8% of sales versus 0.9 million or 5.3% for the third quarter of 2014. Our improved operating performance is resulted in the generation of 7.4 million of adjusted EBITDA over the trailing 12-month period representing 9.6% of sales for that period. Other expenses primarily comprised of foreign currency translation and interest expense netted to 3,000 of income versus 208,000 of expense in 2014. The income generated in 2015 resulted from favorable foreign currency fluctuations and our tax provision with 130,000 primarily reflecting income taxes throughout profitable China operation and book tax [ph] timing differences relating to the amortization of intangible assets. Our tax provision was 60,000 for the 2014 third quarter. Driven by solid operating performance net income was 1.0 million or $0.07 per share compared to a net loss of 0.03 million or negative $0.02 per share for the same period last year. Having sustained positive EPS for the past four quarters our improved performance is resulted in earnings per share of $0.20 for the trailing 12-months period. Our weighted average shares outstanding have decreased from 17.49 million shares for the third quarter of 2014 to 15.633 million shares reflecting the repurchase of shares over the past year and waiting the timing of those repurchases. The reduction in average weighted shares outstanding accounted for 0.7 of a cent of the EPS improvement in Q3. During the third quarter we repurchased 748,542 shares and the total number of shares repurchased under our 3.4 million share repurchase program to October 28, 2015 is 2,442,191 shares at an average purchase price of $4.04. Our common shares outstanding are now 15,219,620. The company's liquidity remain solid. With cash on hand of 14.7 million no debt working capital of 40 million in a current ratio of 4.5. By comparison the cash on hand at year end 2014 was 17.9 million. The 3.2 million decrease in cash from year end reflects our 2015 share repurchases of $9.2 million partially offset by positive operating cash flow. In summary, the actions we have taken to optimize our business model while preserving our strategic investments and further strengthening our strong balance sheet are once again demonstrated in our third quarter results. We remain intent on driving sales through organic initiatives and acquisitions to unleash the full leverage potential of our business model. I will now turn it back to Mike.
- Mike Popielec:
- Thanks Phil. With respect to our revenue growth initiatives in 2015 we have remained focused on three core elements. Expanding our market sales reach, new product development and pursuing acquisitions. Commercial diversification of the battery and energy products business continued in Q3, as sales into commercial markets represented 56% of total B&E revenue. Demand for our products serving the medical market was strong and sales were up 59% versus Q3, 2014 and representing 19% of total B&E sales for the quarter. Within the medical market, after working closely with our strategic business partner over the last two years to develop its end user customers. We're beginning to see a steady demand increase for medical card battery and power systems. Shipments through Q3, 2015 have already exceeded those for all of 2014 are more than 50%. Regarding our 9 volt battery, third quarter 2015 volumes remained solid after a very significant increase demand during the first half of 2015 with 9-volt sales in Q3 representing 21% of total B&E revenue and up 5% year-over-year. And lastly, within our China operation, we continue to gain traction from the locally manufactured lithium final core A [ph] primary batteries largely driven by the use of automobile Topaz applications. In our core battery and energy products government defense market both our international and domestic business development activities remain stable. Several of which involve our upgraded military battery and charger solutions. During the third quarter we've received an additional $1.4 million delivery order from the Defense Logistics Agency or DLA for our 53-90 batteries which will be shipped throughout 2016. And we are actively participating in several other DLA multi-year IDIQ solicitation processes for our legacy and new high capacity hybrid lithium batteries for the soldiers and their specialized tactical communications networks. New product development revenue from battery energy products less than are equaled to 3 years old represented 19% of the battery and energy products total Q3 revenue. This is up from 10% of total revenue in Q2, 2015 and demonstrates the ongoing impact of new product development has on our revenue vitality. We continue to develop new products and evolving existing products through multi-generational product planning or MGPP to better meet the needs of our customers medical, asset tracking, OEM device, vehicle and other applications. For example, we have started an MGPP project with our strategic business partner to enhance the diagnostic and display capabilities of our current medical card rechargeable battery and power systems, expected to be completed for sales beginning in 2016. This enhancement will provide customer’s additional battery operating and system status as well usage data to assist fleet managers with the overall management of their battery pool. We also have an ongoing battery development project with a major automated external defibrillator manufacturer utilizing our lithium manganese primarily cells which have exceptional life and storage capability. Likewise to be completed in 2016, this project will result in a customer being able to increase battery life and additional two years over the current offering. In regards to our new product development for energy storage applications shipments continued in the third quarter of 2015 for our multi-kilowatt module MKM large format battery and new MGPP opportunities of this product continue to emerge in both the government defense and commercial market sectors. As an example we have started the development of our new man-portable battery with an energy storage strategic business partner. In support of several government programs including the mobile electric hybrid power system and the ground-based operational surveillance system. Prototype mock-ups were recently introduced at the Joint Services Power Expo in Cincinnati and the defense and security equipment international exhibition in London. This battery serves as a man carry-able power source for either 12 volt or 20 volt applications, that can be parallel connected to increased storage capacity and is suitable for high cycle life expectations of between 1500 and 2000 cycles. The battery in stackable or rackable for using various operational configurations and is initially expected to be manufactured an individual scalable units of 1.3 kilowatt hours each. A subsequent development is also in the works for a higher energy version approaching 3.5 kilowatts hours each which will be developed for applications whether cycle life is more in the 300 to 500 cycle range. Finally, we are also in the early stages of several new product development product for prototype lithium batteries for new commercial applications. Including those that use solar as a primary remote power source. Building off of our expertise in applying and building military grade batteries for performance and reliability we are targeting industrial and commercial opportunities where the operating characteristics and economics of our lithium battery and charger solutions can be fully realized. Thereby making our customers more successful with their customers. In our communication systems business which of late has been driven primarily by Special Forces customers, we were delighted to receive in Q3, 2015, the award in head-to-head competition of an $8.2 million contract for the solider radio wave form, vehicle installed power enhanced rifle and application system for the U.S. Army. Following a terrific effort by our entire communication systems team and extensive collaboration, development and testing with the OEM prime contractor. Our system was selected as a critical component for the U.S. Army's multi-phased honorization program providing enhanced digital voice and data communications to dismounted solider. Initial small quantity deliveries are expected to begin by year end with the remainder to be completed in 2016. This contract illustrates our strategy investing in new product development to broaden our product and customer reach as indicative of the nature of the projects making up from maturing pipeline of opportunities for our communication systems business. As we continue to develop new products across of our business, our amplifier platform provides a technically advanced building block for the increasingly complex secure integrated communication systems required for solider modernization. Our reach into the large OEMs continues to grow as our products become further embedded in extended range communication and integrated seat [ph] for ISR systems globally. The efforts and successes in the U.S. had begun to create a ground to internationally just as we had hoped and further reinforce our position as a global supplier of mission critical communications. Our team recently spend a week in UK at the defense and security equipment international exhibition work in hand-in-hand with one of our UK partners to demonstrate and discuss new capabilities that bridge the communications gap among special forces, conventional forces and natal [ph] forces. The user feedback was resoundedly positive. While the international efforts tend to have lengthy sale cycles, our resource allocation and investments are targeted on prospects showing realistic short and long-term growth potential. In the meantime we continue to support our largest communication system customer U.S. SOCOM with a multitude of core products for various vehicle programs and other applications. For new product development and communication systems in Q3 2015 new products represented over 40% of total communication systems revenue. We continue to see consistent new product development sales of our MRC universal radio vehicle adapter and our legacy 20 watt MGPP amplifier products. Unit sales of our core power amplifier products have increased by over 30% year-to-date year-over-year. As mentioned during our last call, we continue to work closely with our global industry partners to develop in joint display new capabilities. This includes but is not limited to the recently introduced open architecture modular communications product, the MRC MC4, family of radio wave form and bare agnostic communication systems that extend the distribution of voice, video and data communication simultaneously throughout the battlefield. These products address their latest radios, wave forms amplification, mobile ad-hoc networking, ISR, networking, computing and data storage technologies in streamline and integrated flexible packages that can be used in vehicles, forward operating basis, tactical operation centers and base stations. Our customers remain very receptive of these systems and demonstrations are continuing in multiple countries. In closing, our results for Q3 2015 and year-to-date are validating that our strategy business model and operational execution are resulting in a more consistent profitability and positioning us for total year top-line revenue growth. As the company maintains its solid balance sheet and liquidity and improves earnings we are generating the operational cash flow to pursue more organic revenue growth opportunities through new product development and market reach expansion, seek out and integrate bolt-on acquisitions and enhance shareholder return through stock repurchases. Improving operating and financial performance also makes it easier for us to enter into strategic business partnerships for new product development collaboration, market reach and speed and to attract additional high potential talent to support our growth. If we take a step back and look at where our B&E business was a few years ago depended upon demand from the U.S. government defense market and facing a reduction in spending from our core customer base, we can see that today we are well positioned for leveraged earnings growth as government defense revenues slowly recover. Added to some budding demand from government defense customers is a continue diversification of our business into commercial markets which has less interdependency on the U.S. government defense business and provided us more control of our own destiny. Looking ahead, the battery and energy products business continues to diversify and build new revenue streams from new products, customers, market geographies and globalization. In growing the commercial business, we look to continue to expand our penetration to OEM devices for safety and security applications are also growing at medical platform. This will come in the form of new product development geographic expansion as well as capability enhancement and strategic partner relationships. We also expect to grow our presence in energy storage by targeting sticky customer relationships with new niche applications that make sense for our products expertise and value proposition. In battery and energy products core government defense business we remain committed to helping our DOD and global OEM prime customers continue to field our soldiers with the latest and reliable equipment and to that end we continue new product development as a fundamental part of growing our government defense business. This includes new batteries and systems above for OEM device battery packs vehicle on bolt chargers, conformal batteries and new battery chemistry blends. For communication systems in the second-half of 2015, we started to see a small uptick in our flow business activity level such that through three quarters of 2015 com systems revenue is up more than 30% year-over-year. Some of the larger military programs fueling our products appear to be maturing and moving slowly through the procurement process. We're predicting the timing of natural contracting remains challenging. The com systems business model requires that we continue to grow our sales with additional new program revenue streams so that we can continue to find the new product and technology development projects needed for our customer both domestically and internationally. A good example of this phenomena is $8.2 million contract awarded for our VIPER system for the U.S. Army which provides us a new program related revenue stream to layer onto our base of quarterly run rate revenue in 2016. Given our strong presence with the global special operations forces our OEM customers, industry business partners and the current world dynamics, we remain optimistic about the revenue growth prospects for our communication systems business. Operator, this concludes my prepared remarks and we’d be happy to open up the call for questions.
- Operator:
- [Operator Instructions]. And we'll take our first question from Gary Siperstein with Eliot Rose Asset Management.
- Gary Siperstein:
- Hi good morning Mike and Phil. How are you?
- Phil Fain:
- Very good Gary. Thank you.
- Gary Siperstein:
- Congratulations on another great quarter sequential and year-over-year growth. And I guess that's four profitable quarters in a row. So that's a milestone as well. And I believe it gets you to close to $0.20 for the trailing 12 months. So is that correct Phil.
- Phil Fain:
- Yeah that's correct yes.
- Gary Siperstein:
- I also noticed that sequentially inventory was down a bit and yet with that $8.2 million dialup comp system rewards I suspect you're probably buying some inventory to start shipping that. Mike you had mentioned some nominal shipments in the Q4. Is that correct so? And on the inventory and if it is how much of that inventory is for that $8.3 million contract.
- Mike Popielec:
- Well there is a couple of $100,000 Gary that's related to the $8.2 million contract. Inventory as you know, reduction in inventories are cheapest form of financing. So that's one of our top priorities. And whether its dealing with our core business or dealing with major project wins we're very focused in keeping inventory to the lowest levels possible.
- Gary Siperstein:
- And in the quarter Phil you mentioned I believe certain change $1 million EBITDA or cash generation through the three quarters. Was it roughly $2 million in the quarter because it look like cash was just down a $1 million sequentially? And then I'm just trying to quickly do the map on the stock you brought in the quarter you made you probably spend $2 million plus on stock in the quarter or $3 million. So is, does it about $2 million in cash generation.
- Phil Fain:
- Yes you're going to see Gary once you have a change to get into our 10-Q that it's $2.1 million for the quarter 10.8% to sales.
- Gary Siperstein:
- Okay super. And back on the batteries out of com systems, the regular batteries we do for the radios. I believe it was April all that it could be up for month or two that three primes $3.2 billion IDIQ and I think it was General Dynamics and Harris and Talus. And am I correct in understanding that we supply the two out of three of those primes?
- Mike Popielec:
- We supply battery products so I think all of three of those primes in various applications and projects Gary.
- Gary Siperstein:
- Okay I didn't realized we did do some business with General Dynamics? That was a question so we do sell to General Dynamics?
- Mike Popielec:
- Yeah I mean they're not all equal but we do supply batteries and battery products and chargers to all three of those OEM products. And as I mentioned I think are we try to respect the privacy and confidentiality of each of those three primes because they compete head-to-head.
- Gary Siperstein:
- Yeah I understand.
- Mike Popielec:
- We're trying to make sure that we help them win and we work professionally and confidentially with each of those respective parties and their transactions.
- Gary Siperstein:
- Absolutely understandable. I guess I'm trying to might get a sense of even though it’s an IDIQ so I know we don't know for sure and when or how long these contracts will last. But if even if our - even if we sell to three but let's say it just represents half of that award and let's say it's awarded in total. Is there any way to figure out what portion of that is the maximum we could get with batteries? I understand some of the radios take 2 batteries some take 4 batteries. So if our customer supply let's say 1.6 billion of the 3.2 regardless of how many years that's over how much is it per radio and then how much is it per X amount of batteries per radio. In other words what's the maximum opportunity there for us is it $25 million is it a $100 million of the $3.2 billion.
- Mike Popielec:
- Gary I think that's very difficult and then almost impossible to try to predict and in fact a lot of the times when we're getting orders from the OEM primes. We don't really have clear visibility if it's indeed for the US contracts that they\ maybe recently announced or for some international contract. What I step back and take a look at it I'm just really pleased to see that all of our customers are starting to receive more big contracts from the U.S. and that's going to have trickle positive down effect to all this.
- Gary Siperstein:
- Okay. I noticed that as well so after that 3.2 billion was awarded in April, I think in the subsequent six months there has been several $100 million wins for Harris in the - I don't if it's Rifle Man or Falcon but different things like that and of course Talus has had a couple of wins as well. So that was positively surprising to me that awarding 3.2 billion, there was still maybe another half a billion or billion an additional rewards. Mike on the 8.2 million communication system order, you mentioned some nominal shipments in Q4, can you give us a little more color on that as nominal mean less than million or less than half a million?
- Mike Popielec:
- That is small. Definitely less than a million and really just the type of getting the pump wet if you will, getting some initial units out for some initial testing. But nothing material really in the fourth quarter.
- Gary Siperstein:
- Okay. And then you had mentioned I think it was in the news release with that award that most of it will get shipped in the - you mentioned 2016, I thought there was some specificity on the first half of 2016. Is that correct? Could we ship 8 million in the first-half or do you think it will go into Q3?
- Mike Popielec:
- My understanding is that it would go to the first three quarters in next year.
- Gary Siperstein:
- Okay. So roughly 2.5 to 3 million a quarter or do you think a little ramp up?
- Mike Popielec:
- Depending on what the needs of the customers are we'll try to ship as quickly as we possibly can. But we know that it's a pretty substantial order for us and we want to make sure that we have our ducks in [ph] roll there is a highest quality and the supply chain is well balanced. So I think it will be three quarters.
- Gary Siperstein:
- Okay, super. And Phil on the NOL, so a couple quarters ago you had IRS ruling I think increased your NOL to 80 million. What's the accounting treatment? When do the orders allow you to put that tax asset back on the balance sheet? Now that we have 4 quarters in a row of profitability.
- Phil Fain:
- Sure, to put it in plain English. It's demonstration of sustainable profit over a period of time. My interpretation of that is sustained profitability of at least 2 years. So hopefully at this time next year that is one of the accounting matters that we will be dealing with, putting that on the balance sheet.
- Gary Siperstein:
- Okay. Just to check if my math is right. So let's say this time next year we are in this third quarter and order is allow to do the recognize it. So it would everything else being equal, 35% of the 80 million which would equal 28 million divided by roughly 15.5 million shares, so that would be about above the 80 and how does the accounting work, tax asset goes on and then there is a credit net income and then net income frozen to stock holders equity. So would be adding above 80 per share to book, is that correct?
- Phil Fain:
- Gary, that's 100% correct. Very well done.
- Gary Siperstein:
- I'm very infrequently 100% right, Phil. So thank you. I think book now stands a little over 4 in a quarter. So forgetting about what earnings you were in the next 12 months, 4 in a quarter and $1.80 so that gets book north of 6. This time next year if you are allowed to recognize it. Is that correct as well?
- Phil Fain:
- Yes.
- Gary Siperstein:
- Okay. And then speaking about that 80 million, I know you guys have been looking at the M&A side for a couple of years and with an 80 million NOL, Mike, doesn't it make sense since the same amount of work is typically involved in kicking the tires and doing your diligence on a $30 to $40 million business as a kind of $20 million business and later of the size of the NOL doesn't it make sense to maybe buy something a little bigger and a little more profitability and a little higher quality. So you have a significant enough margin of error, in other words if you bought something that's only throwing off a $1 million in profitability that would get shielded by the NOL and something goes wrong because M&A difficult and sometimes it's surprises post-closing. Let's say a $1 million you think it's going to contribute and then it contribute zero, wouldn't they make sense to buy something that maybe is cash 2 or 3 million in profitability and then if we’re million off you still have 1 or 2 million in profitability. So then it could be much more materially accretive. Is that how you guys are thinking of things and looking at things?
- Phil Fain:
- I would love to be able to design an acquisition that would be delightful. When we look at, if I think your logic is exactly correct and at the same time you are looking at actual companies and trying to find out to manage versus liabilities of the companies you potentially could buy. Sometimes you have a really large company that has a significant amount of heavy lifting in integration and consolidation to do. So as the ton of work and realizing the benefits there other times you can have a small company that maybe as just plug and go and continue to drive organic growth. So I think you get the full spectrum. I think you logic is correct and how are you articulated. We have to look at each individual acquisitions on its own merits. And you never get a 100% of what you want, but if we can get add 80% 90% and it can make a strategic addition to our company meaning that post-acquisition and integration and consolidation as a case maybe we continue to grow at a faster rate organically. Obviously there is some pros and cons to the different size of acquisitions. So I think your logic is correct. I don't disagree with you at all, but we're trying to put that to the filter of the actual candidates that we're looking at it.
- Gary Siperstein:
- Okay. That's fair. And at medical you mentioned that the fibrillate opportunity separate from medical cards. Is that something that the FDA is looking at now and you're waiting your partner is waiting for an approval. And is it something that's more of a assuming to get approval by June 30 that's more of a back half opportunity. Can you give anymore color on that?
- Phil Fain:
- Yeah it would look at them as 2016 opportunities, I mean there is a couple of different AB [ph] manufacturers that we're working with. So it's not just one. But yeah I would say it’s can fair to think but really a sort of a back half of 2016 type opportunity.
- Gary Siperstein:
- Okay. And in previous conference calls, I think there was an opportunity both on metering and tolls so I think tolls, for tolls roads or something like that in China. Is there any update in that area?
- Phil Fain:
- No those continue to go well. I mean as you may recall our China strategy is really three pronged. We have manufacturing of our 9 volt battery, a world class 9 volt product and having it really close proximity to the OEM device makers who want to have their supply chain little very close where they build their product for shipping globally. So we exploit that opportunity there in China. We use that sort of benefit of having the capacity and manufacturing capability there and the cost associated with being able to serve that supply chain by going into the in country activity and in country demand for electric metering and toll pass. That business has been stable or we're continuing to get some nice volumes there. But because the overall China market is a little bit slower and a lot of heavy manufacturers are in China watching that really closely, but we don't see any significant negative material impact on the revenue stream, but those applications are still very much in part of our day-to-day. And then third piece that just the completeness is taking both our 9 volt product in our locally manufactured China products and solve those on a global scale which have the full support of our brand, our quality and technology parameters such as we can use it as a launch point to grow our business on a global scale. So of those three really just one third of that is in in-country business of which it's primarily focused on toll pass and electric metering type applications.
- Gary Siperstein:
- Superb okay. And Phil I think with the pickup on the government military side on the batteries. We for the first time I think moved into this year and in spite of building up some a typically some backlog. Can you tell you if the backlog has remained the same from June 30 to September 30 or is it increased or decreased?
- Phil Fain:
- It's approximately the same Gary.
- Gary Siperstein:
- Okay. And then Phil again on I think we've talked earlier about EBITDA or cash flow being roughly $7 million change through the 9 months. So you usually have a little improvement in the fourth quarter versus the third quarter seasonally. I know we've discussed this now before and it just seems to repeat itself. So if I assume a slight improvement in business in Q4 due to the seasonality that would get us close if everything else being equal and apples-versus-apples. It sounds like cash flow could go from $7.5 million to $10 million if we add in the fourth quarter. And $10 million is I guess $0.67 per share on 15 million shares outstanding. Does that sound that right?
- Phil Fain:
- Let me make a correction the 7.4 million of EBITDA is on a trailing 12 month basis.
- Gary Siperstein:
- Okay, that's trailing 12. Okay.
- Phil Fain:
- This seasonality goes. In today's world with the ordering from the government and defense sector, I really discount any seasonality. If you depend on seasonality you are generally depending on hope and we are more focused on the orders and the opportunities at hand.
- Gary Siperstein:
- Okay. I agree with that, but does it happen always - not always, but I thought the last couple of years Q4 was better than Q3. So even though we want to work on orders on hand hasn't attended to be a little better than Q3?
- Phil Fain:
- Last year was, however I can give you 10 different reasons why that was and I don't want to one-offs, because it really isn't such a thing as one-off. But there is multiple opportunities that we are always looking at. Some occur, some go forward rarely do we lose an opportunity. The timing a week difference in shipping or booking or receiving based on the shipping terms does make a difference. So I look at it the backlog in the orders and opportunities that we're currently dealing well.
- Gary Siperstein:
- Okay. So I know you guys don't make give guidance or make earnings projections. But I just want to walk through a scenario, just tell me if my thinking is right, if my assumptions are correct and if they come true. So with $0.14 through nine months and let’s say conservatively Q4 is the same as Q3, that gets us to $0.21 for the year and let's say next year organically we grow our earnings just a penny or two or quarter that gets to $0.26 that's only maybe $0.02 a quarter 300 grand with the NOL that's $0.02. So you sort it can say if we could get $0.02 in organic growth that's another $0.08. So $0.22 and $0.08 get roughly to $0.30 and then if you ship the majority of the $8.2 million contract. First of all should that contract we look it at the normal corporate margin of 30%?
- Phil Fain:
- I prefer not to comment on that. We generally don't disclose the term of a major project award. We simply disclose the sum of all business that is done.
- Gary Siperstein:
- Okay. Well, for my calculation if I assume 30% and again I know you are not commenting and let's say 7.5 million of that ships next calendar year at 30% that's 2.1 million over 15 million shares that's another $0.15 a share protected by the NOL and I was at roughly $0.30 just with the little slight organic growth, so that gets need a $0.45 without an additional comp systems award and without the possibility of accredited acquisition. I'm not asking you to agree or disagree with that as guidance. But if I'm correct is there any holes in my logic on that?
- Phil Fain:
- Gary, as usual your math is very good and I'm not going to comment. I don't want to go out and give any quantitative guidance at this time. But I think as we all know there is always ups and downs and complexities and all sorts of different things that do occur. But if you purely look at it based on a linear quantitative equation I can't argue with anything that you just said. But again it's something we are not going to comment on at this time.
- Gary Siperstein:
- Okay, all right. So just a damn. So just I can hear myself. Thanks. So if I have nominal organic growth plus the 8.2 million contract that you have in hand if that gets me to $0.40 to $0.45 and if in the next 15 months you win just one more com systems order and/or an accretive acquisition and/or organic growth with all your initiatives and medical and tolls and metering et cetera and/or the military increase continues to pace and/or accelerate. If I am correct and I know you're not commenting on that if everything goes well and I'm not trying to nail you down on the quarter but for the calendar year. If that gets me the $0.40 to $0.45 or $0.45 to $0.50 and going from $0.22 this year to $0.45 next year let's say we got to be at happy EPS growth rate that's a 25 being and because commercials coming on strong $0.40 to $0.45 in times of 25. So you could logically make it case for $12 to $15 stock if all it be above came through. Therefore it seems that we're pretty cheap here in the fixed dollar range especially in light of the fact that we're also going to get that and I did include the - that's the one time on the realization of the tax assets those are just operating earnings. But that gets the book up to 6. So basically if I'm right we're a company that year from now could be value today at book value and with the 22, 25 PE selling it double digits. So again with all that in light and all that potential without really reaching for anything above and beyond. Tell me why you guys on now that you got four quarters under your belt, how can you not being more aggressive on the IR front?
- Phil Fain:
- I'm happy to comment on that Gary. First of all, we have seen a pretty significant increase and investor increase and we have certainly taken those calls and responded to those calls. And I would say that the interest in the company has certainly gone up. So that's certainly one arm of the IR strategy and that arm is what we call saido. That is the most important part of the IR strategy. As I'm sure you're very much aware a number of companies go out there. They make a lot of promises without much to show for it. Our strategy has been one of focusing virtually all of our time an internal operations to put in place a business model that's highly leveraged and then execute upon that so that we can build very clearly a sound track record that we call our saido ratio. So at this time, we taken the additional calls and we're certainly looking at its tending our IR program as we go forward and that's not to mean that we're going to go out in front of large groups of people and present and way the pumps and all that. It's really all about meeting with investors more on a one-on-one basis answering the questions with our focus always being on saido first and using that as the most valuable plank in our IR strategy.
- Gary Siperstein:
- Okay I heard you Phil on two things, first saido is not a form of karate right. It's not s-a-I-d-o deal, it's what you say you're going to do than you do it right.
- Phil Fain:
- Absolutely correct.
- Gary Siperstein:
- Okay for those who never goes saido before? And then secondly I hear you and I'm certainly are not asking you to take your eye of the book from an operational point of view. But we are a public company and IR is the part of the responsibility of the public company and we want to get the appropriate valuation for what you've accomplished. So I know every boards different every management is different. But now that you have full quarters into your belt presumably with the good fourth quarter we'll have a year plus under our belt. And as I just highlights things look pretty interesting for next year which is half of the potential bogies come and do. So all I'm saying is there are companies out there earning less than you there are companies not profitable that do some form of investor relations just to make a broader audience so where at the story. So I don't think it's going to kill anyone if you guys attempt one or two or three conferences in a calendar year period looking for sale side coverage and/or instead of waiting for people to come to New York where you go to Chicago or LA or Miami you need some pie-side small value people. Some sort of I do not want to get my - but you certainly have enough evidence of what you are doing and I don’t think three over proactive outgoing IR efforts is going to take your eye off the ball and then obviously you deal easily with reactive ones when people call you and chose to show off at your corporate headquarters. I just want to say that for the record.
- Phil Fain:
- We certainly understand your point of view and Mike and I can assure that we are discussing this topic internally along with most effective approach and timing. Certainly we understand all the dynamics of being a public company we have a lot of experience in this arena and we are using the experience that we have had in the past to go forward with the most valuable with the most optimal value proposition we can to existing and perspective shareholders and I do appreciate your thoughts on it certainly understand your point of view.
- Gary Siperstein:
- All right, guys. Thanks very much and congratulations on again on the great progress.
- Phil Fain:
- Thank you, Gary.
- Operator:
- [Operator Instructions] There appear to be no other question at this time I will turn it back over to Mike for any closing remarks.
- Mike Popielec:
- Great, well thank you once again everyone for joining us today for our Q3 2015 results earnings call. I look forward to sharing with you our quarterly progress on each quarter’s calls in the future. Thank you very much and have a great day.
- Operator:
- And that does conclude today’s conference. We appreciate your participation.
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