Ultralife Corp (ULBI) 2021 Q2 法說會逐字稿

Good day, and welcome to the Ultralife Corporation Second Quarter 2021 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.

Thank you, Sharon, and good morning, everyone. Thank you for joining us this morning for Ultralife Corporation's earnings conference call for the second quarter of fiscal 2021. With us on today's call are Mike Popielec, Ultralife's President and CEO; and Phil Fain, Ultralife's Chief Financial Officer.

The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the company's website, 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 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. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19, potential reductions in revenue from key customers, acceptance of our new products on a global basis and uncertain global economic conditions.

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 information 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 company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K.

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 Mike. Good morning, Mike.

Good morning, Jody, and thank you, everyone, for joining the call. Today, I'll start by making some brief overall comments about our Q2 2021 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. When Phil is finished, I'll provide an update on the progress against our 2021 revenue initiatives, then open it up for questions.

For the second quarter of 2021, the company gained quarter-to-quarter, with sales increasing 3% and operating profit up 14%. Year-over-year, revenues in our oil and gas end markets rebounded, growing 49%. Medical sales abated from last year's COVID-related demand spike, yet were above pre-pandemic levels, and sales from government defense customers were soft relative to last year's strong shipments of vehicle adapter system sales under the U.S. Army's Network Modernization initiatives as well as our 5390 legacy primary batteries. Supply chains and logistics continued to be the source of operational challenges, delaying some shipments and increasing freight costs. Given our solid liquidity position, we increased investment in CapEx and critical engineering resources to support new contracts and completion of transformational new products. Although these incremental costs and investments weighed on operating profit and net income year-over-year comparisons, sequential earnings per share grew 20% on the strength of gains in commercial sales.

In a few minutes, I'll give you further information on our revenue initiatives. But first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the second quarter 2021 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the quarter ended June 30, 2021. We also filed our Form 10-Q with the SEC and have updated our investor presentation, which you can find in the Investor Relations section of our website. I would like to thank all those who helped make this happen.

For the second quarter, consolidated revenues totaled $26.8 million, compared to $28.6 million reported for the second quarter of 2020, a decrease of 6.3%. Commercial sales declined 1.0%, reflecting a rebound in oil & gas and international industrial markets, offset by a reduction in medical sales from the initial surge of batteries for ventilators, respirators and infusion pumps in response to COVID-19 in last year's second quarter. Government defense sales declined 13.2% relative to the completion of contracts in last year's period. We estimate that our second quarter sales were reduced by approximately $1.5 million due to operational challenges associated with supply chains and logistics delaying sales to future periods, most notably in the medical and government defense sectors.

Revenues from our Battery & Energy Products segment were $22.9 million, compared to $24.0 million last year, a decrease of 4.8%, attributable to a 48.6% increase in oil & gas market sales, and a 23.2% increase in 9-volt sales, offset by a 27.9% decrease in medical sales and a 12.7% decline in government defense. The decline in government defense sales resulted from the completion in last year's second quarter of a 5390 battery order placed in December 2019 by the U.S. Department of Defense. The sales split between commercial and government defense for our battery business was 70-30 compared to 67-33 for the 2020 second quarter, and the domestic-to-international split was 52-48 compared to 59-41 last year, both demonstrating the continued success of our global revenue diversification strategy.

Revenues from our Communications Systems segment were $3.9 million, compared to $4.5 million last year, a decrease of 13.9%. The decrease reflects 2020 shipments of vehicle amplifier-adapter systems to support the U.S. Army's Network Modernization initiative, completing the delivery orders announced in October 2018.

On a consolidated basis, the commercial-to-government-defense split was 60-40 versus 57-43 for the year-earlier quarter.

Our consolidated gross profit was $7.3 million, compared to $8.0 million for the 2020 period. As a percentage of total revenues, consolidated gross margin was 27.1% versus 27.9% for last year's second quarter.

Gross profit for our Battery & Energy Products business was $6.0 million, the same as reported last year. Gross margin was 26.3%, an increase of 120 basis points over 25.1% reported last year, reflecting favorable sales product mix and lower scrap and rework on new products transitioning to high-volume production.

For our Communications Systems segment, gross profit was $1.3 million, compared to $1.9 million for the year-earlier period. Gross margin of 32.1% compared to 42.8% last year, primarily reflecting the favorable sales mix in 2020 of the vehicle amplifier-adapter systems for the U.S. Army.

Operating expenses increased $0.5 million, or 9.0%, from $5.7 million last year to $6.2 million. This increase includes our investment in engineering resources for new product development, including resources dedicated to the conformal wearable battery IDIQ contract announced on May 17th. As a percentage of revenues, operating expenses were 23.1%, compared to 19.8% for last year's second quarter.

Operating income for the second quarter of 2021 was $1.1 million, compared to $2.3 million for the 2020 quarter, reflecting our investments in new product development, delayed shipments due to supply chain and logistics challenges, and sales mix. Consequently, operating margin was 4.1% for the 2021 period versus 8.0% last year.

Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, was $2.2 million, or 8.2% of sales, compared to $3.3 million, or 11.6%, for the second quarter of 2020. On a trailing-12-month basis, adjusted EBITDA, inclusive of the $1.6-million proceeds of the class action lawsuit settlement announced in Q4, was $9.7 million, or 9.1% of sales.

Our tax provision for the second quarter was $0.2 million, compared to $0.5 million for the 2020 quarter, computed at statutory rates, while excluding the benefits of our net operating losses and tax credit carryforwards for GAAP reporting purposes. Accordingly, our reported tax provision for the second quarter is based on an effective rate of 23.2%, while utilization of our deferred tax assets will drive the tax provision down to only $71,000, or 6.6%, when we pay our taxes. We expect that the net operating losses and tax credits included in our deferred taxes will offset all U.S. taxes for the foreseeable future.

Using the 23.2% statutory tax rate, net income was $0.8 million or $0.05 per share on a diluted basis for the 2021 second quarter. This compares to net income of $1.7 million or $0.10 per share on a diluted basis for the 2020 quarter.

We utilize adjusted EPS to reflect actual taxes paid or to be paid and define adjusted EPS as EPS excluding the provision for noncash U.S. taxes expected to be fully offset by our net operating loss carryforwards and other tax credits. As noted in the supplementary table in our earnings release, adjusted EPS on a diluted basis was $0.06 per share for the 2021 second quarter compared to $0.13 for the 2020 second quarter.

We estimate that the delayed shipments resulting from supply chain and logistics challenges and our investment in new product development resources adversely impacted EPS for the 2021 second quarter by approximately $0.05 per share.

Ultralife further strengthened its balance sheet and liquidity in the second quarter, with cash on hand increasing 16% to $15.8 million and debt decreasing 37% to $0.7 million from the first quarter. We ended the 2021 second quarter with working capital of $48.8 million and a current ratio of 4.1%, compared to $45.8 million and 3.4% for year-end 2020.

As a result, we remain well positioned to fund organic growth initiatives, including new product development and strategic capital expenditures, while expediting our organic growth through accretive M&A.

Going forward, with our resilient business model, ample liquidity, diversified end markets and growth initiatives, we remain steadfastly focused on realizing the full leverage potential of our business model. I will now turn it back to Mike.

Thank you, Phil. During the quarter, we continued to advance our revenue growth strategy, consisting of: market and sales reach expansion, primarily through diversification; new product development, with strategic CapEx when appropriate to drive competitive advantage; and a disciplined approach to acquisitions, to quickly gain [additional skilled] (added by company after the call) resources, scale, market access, technology and new products.

At our Battery & Energy Products business, market and sales reach expansion has been about diversifying more into the global commercial and international government defense markets to lessen our revenue fluctuation as a result of lumpiness in our core U.S. government and defense business.

Medical has been a key target area. And for Q2 2021, overall global Battery & Energy Products medical revenue represented approximately 29% of total B&E sales. Demand from existing customers was strong in applications for ventilators, respirators, infusion pumps, digital x-ray and surgical robots. We also received over $8 million in delivery orders from existing medical customer blanket and/or multiyear agreements.

With respect to our oil and gas and subsea electrification commercial revenue, our SWE team provided approximately 20% of total Battery & Energy Products sales. Though overall SWE revenues were down slightly year-over-year due to the nonrecurrence of a short-cycle medical product build last year to support the COVID response, we continue to see encouraging signs of improvement in SWE's core oil and gas end markets as revenues to these end markets in Q2 were up at a strong double-digit rate year-over-year.

For B&E's U.S. government defense business, which represented approximately 28% of total B&E Products sales, shipments were primarily for radio battery and chargers to OEM Primes. In Q2, revenue was down year-over-year, as stated earlier. However, the highlights of the quarter actually came from 2 noteworthy opportunities that we have been developing for some time.

First of all, our first article testing for the next-generation BA-5390 primary battery was finally completed and approved in Q2, a key milestone in the development cycle for U.S. government defense products. Once the DoD wraps up 2 remaining reports and approvals of their own, we will be eligible for delivery orders and the potential revenue streams they bring. Though by nature, with IDIQ government contracts, there are no guarantees of any future orders, the historical revenue average over the last 11 or so years has been about $3.5 million per year, with revenues in any given year ranging from the hundreds of thousands of dollars up to almost $10 million.

Secondly, regarding an exciting new opportunity for on-soldier power capability, on May 17, we were very pleased to announce that we were one of 4 companies awarded an IDIQ contract under the U.S. Army's $1.25-billion conformal wearable battery program. Our potential contract is not to exceed $168 million during the 3-year base award period with the potential for up to an additional $350 million should the 6 one-year option periods all be exercised. As is the case in any indefinite delivery indefinite quantity IDIQ contract, the timing of deliveries and quantities are at the discretion of the U.S. Army and include successful completion of first article testing, demonstrating full compliance with the contractual product specification and program requirements. We are currently aggressively pursuing the development and sourcing phase of the process, the additional engineering and Cap-Ex resource investment to meet an ambitious FAT schedule that is expected to finish in early 2022, with potential production awards thereafter.

As just illustrated, new product development remains a fundamental part of our organic growth strategy. In addition to the new product development associated with the next-generation 5390 battery and the new conformal wearable battery, we advanced several other multi-year transformational projects during the quarter.

Regarding our next-generation hot-swappable medical cart battery, we are in the process of completing certification testing of key components and plan to have demo units at an international location within the next few weeks to support targeted customer transactions for a strategic channel partner, and we are also showing prototypes of this new product in August at a major trade show in the United States. Also, volume production manufacturing continues in support of existing customers for our recently completed new Smart U1 battery. In addition, we have roughly a dozen or so new customers currently evaluating our version of this workhorse form factor product, serving numerous applications under consideration in markets such as medical cart, automated guided vehicles and robotics.

Regarding the new 5790 and XR123A CFx blend primary batteries, we are currently targeting completion of the 5790 FAT testing later this year and have a specific customer project evaluating the new XR123A battery pack for a medical application. These new CFx-blend products remain on our and our customers' priority list given their higher energy and longer run time. We also continue to mature opportunities with our OEM public safety radio batteries and next-generation ruggedized modular large-format energy storage batteries.

Regarding efforts to expand our competitive differentiation, we continue to invest in strategic Cap-Ex.

The new manufacturing line at our Newark, New York, facility for our new premium lithium manganese dioxide 3-volt cell is now fulfilling initial customer orders. We have also received our first large OEM order from a major illumination customer for 500,000 pieces to be shipped throughout the balance of this year and are currently in negotiation for potential volumes in 2022 and beyond. Discussions continue while testing and product valuations are under way with approximately 20 to 30 customers with approximate individual lot sizes ranging from 300,000 to 3 million units per year. Initial voice-of-the-customer feedback shows positive responses for our products' power, safety and contribution to the OEM devices' competitive differentiation.

In China, the performance attributes expected from the completion of the first phase of our project to upgrade our thionyl chloride ER cell are now being confirmed by customer testing. This is exciting as to date, we have approximately 15 to 20 customers in various stages of product evaluation and commercialization as we ramp up production, representing roughly $8 million to $10 million of opportunity over the next 1 to 3 years. As you may recall, this overall project involves several steps of product and process improvement, which will help us multiply by several-fold our total available market with newly identified commercial and industrial applications.

Another area where we are seeing clear revenue growth opportunities emerge is in the application of our Thin Cell battery for wearable products and vital-sign-monitoring applications. Also, medical and other industrial customers continue to tap into our China operations for supply of battery pack solutions, not just our cells, which is growing our value proposition. In Q2, our total China operations revenue was up sequentially from Q1 by over 49%, an indicator of growing global demand for our China capability.

Our goal remains to produce the highest value proposition, best quality and safest products, in whichever one of our global locations best serves the supply chain of the particular end market and/or OEM customer.

Looking at Communication Systems, Q2 new product development revenue from products less than or equal to 3 years old represented approximately 13% of Communication Systems revenues. Communication Systems completed initial orders for radio mount deliveries in Q2 in support of our previously mentioned new handheld radio, which enables its installation onto multiple mobility platforms to include ground vehicles, fixed-wing and helicopters. Follow-on awards are anticipated as early as Q3 2021 and throughout the next 3 years.

Regarding the U.S. Army's Nandheld, Manpack, Small Form Fit and Leader Radio programs, we are awaiting the potential for a next round of awards for the Leader program later this year, with deliveries possible in 2022. As radios are a critical driver of the Communication Systems business, the team is continually focused on technology innovations, market trends and customer requirements to position us for future business supporting both Handheld and Manpack radios and integrated systems.

The impact of COVID-19 continues to be felt within global military sales, lowering the volume of sales and delaying program awards. Additionally, supply chain issues continue to impact electronic component availability, resulting in extended material lead times, manufacturing timelines, and clouding revenue forecasting. For supply chain components that are available, the shortage of global transport resources is causing delayed deliveries, often compounded with increased transportation and logistics costs. Our teams are working closely with suppliers to actively manage sales and operations planning protocols to mitigate supply chain and manufacturing impact to the extent possible.

Communication Systems has been working to expand into the commercial market with multiple system integration product initiatives with several key customers. We are pleased to have been recently selected for the development and production of a mobile data cart that will enable analysis of autonomous vehicle data during testing and manufacturing of the vehicle. If successful, this would be one of the first, purely commercial product offerings from Communication Systems. Initial prototypes are in development for delivery in Q3 with potential production orders to follow close behind to meet customer program requirements. Separately, we are also in the prototype phase for a virtualized radio access network enclosure supporting 5G network deployments worldwide. This is our second all-commercial business opportunity, and we anticipate first low-volume orders in the fall of 2021 and production volumes to pick up in 2022 and beyond.

The expansion by Communication Systems into commercial products and integration opens the door to solid global growth opportunities in broader applications, leveraging our engineering expertise and experience with system integration of sophisticated communications equipment components used by government defense customers in difficult environments. This diversification into commercial products, combined with our participation in ongoing military radio program, rounds our optimism about the long-term growth of the Communication Systems business.

In closing, for the second quarter of 2021, although some of the year-over-year comparables were difficult, we were pleased to see revenue and earnings gains quarter-to-quarter throughout the company. While overcoming some expected nonrecurring year-over-year revenues, navigating timing and cost impacts from supply chain and logistics challenges, and stepping up Cap-Ex and technical resource investments in new products and new contracts, we maintained total company profitability, positive cashflow and a solid balance sheet.

Our top priority is to continue to move forward on revenue realization from our transformational projects, delivering new meaningful, sustainable annual revenue streams in attractive growth markets from new competitively differentiated products. At Communication Systems, these projects include potential Leader Radio follow-on awards, new OEM Manpack radio ancillaries, integrated computing solutions and next-generation 20-watt amplifiers. At B&E, our transformation project list includes the new 3-volt product line, the new ER product line, the Smart U1 battery product line, the 5790 and XR123A CFx-blend primary batteries and several other new public safety, ThinCell, medical and subsea electrification battery packs. Our strong balance sheet, solid cash flow from operations and disciplined execution of our business model afford us the opportunity to simultaneously pursue organic revenue growth through our transformational projects, invest in new product development and strategic Cap-Ex for competitive advantage, and seek out impactful acquisitions, all with the aim of growing the business with profitable revenues each and every year.

Operator, this concludes my prepared remarks, and we'd be happy to open up the call for questions.

(Operator Instructions)

We will now take our first question from Mr. Gary Siperstein from Eliot Rose Wealth Management.

First of all, congratulations on that conformal battery win. $500 million over 10 years is a pretty sweet deal to win. I know it's an IDIQ, I know it's not guaranteed, but that's pretty intriguing. And then if you look at the $168 million over 3 years, that also averages over $50 million per year. So if they exercise all of it, it's $500 million over 10 years. If they do the 3 years, it's $50 million over those 3 years, if they do the maximum. So that's a wonderful coup, and I just wanted to start out by congratulating you on that.

My first question is going to the basic business, starting with medical. So you had the surge last year for COVID, which made it a tough comparison. But then you mentioned in the release that medical still, even though it was down because of that tough comparison, was still increased from pre-COVID levels. So that's encouraging. And I guess my question is, are you seeing any more of the COVID-type orders come in now with the Delta variant and the hospitalizations increasing? And then secondly, if not, or not yet, do you feel the overall strength so that it's surpassing pre-COVID levels is due to the fact that with vaccines and people getting sort of back to normal despite the Delta variant, elective procedures are increasing?

Yes. I mean, there's a couple of pieces there, Gary. In terms of the salient impact on our revenue and earnings relative to the medical demand, I think the biggest impact we're seeing either way has been in some of the supply chain challenges where some of the components are more difficult to get, and there's been some delays, not only from the standpoint of our ability to provide for our customers, but our customer being able to provide for their customers. And so there's somewhat of a cascading effect where some of the demand has been pushed out a little bit.

By the same token, we also knew that there were some early parts of the year where we had some very high year-over-year comparables to overcome. And we were actually delighted in Q2 to get a number of new orders from long-standing customers that aggregated close to $8 million, over $8 million, as I mentioned in my prepared remarks, which if you may recall from previous earnings calls in prepared remarks, it's about double what we typically see in a quarter. So obviously, disappointed that things get deferred, and the revenue doesn't necessarily come in the time frame we'd like it to in the earnings results, but I'm very pleased to see that those customers haven't gone away, and they're still placing orders, and we'll make it through the supply chain challenges and get back to normal, hopefully sooner than later.

But we're -- we don't know what we don't know relative to the latest round of the variants of COVID. But what we can say is that through this experience, whether it be the increased demand for products over the last year or so or working through some of the challenges of supply chain and logistics that we've gotten very close to our key customers. And that's probably the biggest benefit and silver lining in this whole thing, is we've gotten very close to our key customers, and I'm confident that will yield dividends as we go forward.

Mike, so that $8 million in blanket orders, is that for 1 to 3 years?

No. That's a much shorter time frame. Those tend to be more over the next 12 months or so.

Oh, wonderful. Okay. And that's up 100% from previous blanket orders.

Yes.

My second question deals with SWE. So a 49% increase as rig count came back. I think rig count now -- and maybe I'm off on this, but last I looked -- was double from the COVID March 2020 lows. I don't know, you might have something new on that, that's different. But I saw it double. So the improvement in SWE on the oil and gas side, not the subsea side, is that mostly due to the increase in rig count and oil staying at about $70 a barrel? And is that at a level that was pre-COVID or is that -- still has a ways to go?

Gary, we look at a number of variables and the variables we look at are not just the domestic rig count, but we look at the Canada rig count, the international rig count. They're all up from when COVID started. And we then break down our SWE business into, really, 5 components. We break it down into downhole drilling, pipeline inspection, subsea, platform products, and we break it down into the great medical work that they've done. And where we're seeing, in Q2, the orders come from, it's all downhole drilling. And that's -- it's price, it's rig count. And one thing we're seeing is that the demand is more global. So we're really seeing a 50-50 split in the SWE business between international and U.S. So it's a pretty favorable trend that we experienced in Q2.

Thank you, Phil. Is it -- I don't think any of us expected to necessarily get back to where it was years ago in light of the new environmentalism out there, but do you expect it to maybe get to 75% of prior levels? And if that's the case, whatever level you expected to get it to, is that where it's at now? Or does it still have to go up another 50% or so?

Well, I can respond to that, Gary. I think we had a very solid second quarter. And the question being, what are the next couple of quarters going to be looking like? Is Q2 a catch-up blip, or what are we going to see in the remaining literally 3 or 4 quarters going forward? There certainly is the increase in WTI. When we bought SWE, WTI was $62; it's $72.50 right now. As Mike mentioned in his remarks, there is not a lot of forward visibility with the major customers that we deal with. You get a call, you get a PO, they want it as soon as possible. But with increased travel and the increased usage of oil and gas, hopefully, in a post-COVID period, the trend should be favorable.

Now to answer your original question, we were trending -- and this was all disclosed in our Ks and our Qs and all that -- we were trending around $7 million a quarter for SWE when we initially bought them. I would say, right now, we're probably 70% of the running rate of where we were. So certainly, a ways to go. But then again, we have improved our business model as well, as we talked about in past calls.

Yes. Okay. That's good color. Mike, on the 3-volt opportunity with remote sensors and other Internet of Things opportunities, do you see that, the 3-volt, as you mentioned various China orders, and you mentioned various customers looking for tens of thousands, hundreds of thousands or million-plus units, does that represent ultimately a $3-million to $5-million annual run rate opportunity? Or what would be a fair number?

A number of the transformational projects tend to fall in the $8-million to $10-million range, so to be transformational, we want them to have a meaningful impact on our overall revenue trajectory. And so when we look at the investment that was made for the 3-volt in Newark, and we look at what the capacity is expected to be, we expect the capacity to be more of the 9 million to 10 million units a year, which would say that the revenue is higher, closer to $10 million potentially per year than some of the numbers that you've just mentioned.

Oh, wonderful. Okay. Gee, that's like almost triple what I thought the potential was. That's great. Secondly --

In my prepared remarks, I -- I'm sorry, Gary, I apologize for interrupting. The number of different opportunities that we have range in various sizes. So we don't want to do 100% of the volume with a real low-price-type customer. We want to have a nice mix and blend of various different customers so we don't have all our eggs in their own basket in a single basket. We have the XR123A product line that we could build on the same line as well. So we're looking at lot sizes from $0.3 million to $3 million per year for a single customer, but with multiple customers providing a nice blended mix from a delivery timing standpoint as well as from a margin opportunity as well.

Understood. Wonderful, $8 million to $10 million, that's super. You mentioned this new emerging opportunity in Comm Systems on the commercial side. With the mobile data cart, 5G opportunities, et cetera, where you might start getting some production orders before the end of the year and count and then follow-on for calendar '22. Is that considered a transformational opportunity like the 3-volt where it's $8 million to $10 million? Or is that a $3-million to $5-million opportunity?

Certainly, we take liberties in what we call transformational or not. But when I look at this, it's transformational in a number of different ways. When you think back, and you've been with this stock since I've been here, at least, I remember, where we were pretty much a component manufacturer in comm systems, high-end and very sophisticated component, but never as a component manufacturer. And we've gone into new platforms where we had integrated-type solutions. And I look at this next potential step -- and we're still not there yet, but the indications are favorable -- this next big step is then taken even further and taking an integrated system type of capability and putting it into a brand-new end market. I mean, a new platform is the way I would look at it. So it's transformational in terms of broadening the lanes of which the Communication Systems business gets to play. It's transformational because it's an integrated solution versus just a single component. And from the economic rewards of being a key supplier in that area. I think some of the biggest contracts that we've announced over the last couple of years have been in the area of integrated solutions.

So I guess to sum up, I would say, it's transformational both in its diversification of the end markets for Communication Systems as well as a potential impact on revenue.

Okay. That's wonderful as well. Moving to the previously awarded $80-million IDIQx, I guess they were spread between the 5390 and the 5790. You mentioned that 5390 has completed final testing and you're just awaiting orders. And then 5790 later this year might complete testing. Do you think you'll get any orders this calendar year on the 5790 if it completes testing October, November, maybe a little revenue at year-end? Or is it all 2022 revenue on the 5790?

We're really trying to focus on completing the testing, and we know that the revenue opportunities are there. And I wouldn't want to jinx myself or get ahead of ourselves talking about specific revenue until that testing is done. We know that these are long and lengthy tests. And that's why, frankly, we're making the additional investment in the conformal first article testing opportunity because we know how difficult they can be and how demanding the end-user customers can be. And so I think it's inappropriate, really, to comment on potential revenue from 5790 at this point.

Okay. And the $80-million IDIQ, again, is 8 to 10 years, so I guess the combined 5390-5790 is an $8-million to $10-million annual revenue opportunity. So it fits into your transformational revenue range.

That moves me on to another revenue stream. So the ER product line and the Smart U1 battery, is that considered transformation? Is that $8 million to $10 million? Or is that smaller, more of a $3-million to $5-million opportunity?

No, I think that certainly, the ER product line, this has all been about doubling and tripling and quadrupling the overall available market, but we definitely believe that that has an opportunity to be in the $8-million to $10-million revenue range over the next 1 to 3 years.

Okay. That's great, too. All right. Moving to radios. So originally, the contract was $2.3 billion over 10 years to Harris, L3Harris now, Harris Communications, and Thales. So we thought it was down the middle, so I guess $1 million -- $1 billion, $150 million each over 10 years, et cetera. So I guess my first question is, is -- and my understanding as I was -- I read the transcript for the first quarter conference call that L3Harris gave, and in that conference call, they mentioned that they had completed testing, final testing and final LRIP production on handheld Manpack, I believe, Handheld, and then they expected, I think it was Leader, shortly. And then on June 10, just last month, Harris Global Communications was awarded a $3.3-billion contracts for radios, communications spare parts, et cetera. Completion date of 2026, so $3.3 billion over the next 5 years.

So I'm a little confused. So is that $2.3 billion over 10 years, as far as you understand, still the main modernization, radio modernization contract, and the $3.3 billion is something else? Or is the $3.3 billion that was awarded exclusively to Harris just the updated version of the $2.3 billion, where they increased it by $1 billion and gave it all to Harris? And then I haven't seen an announcement from Thales, so I don't know if I missed it or it's not public, but is Thales still involved? So I guess I'm asking you just to clarify me on the $2.3-billion original contract, the recent $3.3 billion from Harris and where does Thales stand in the mix as far as you know?

Yes, Gary, I could take that. The original Leader Radio contract has not been modified, has not been modified at all. Anything that you may have heard or read subsequent to that point in time is likely another project, another radio. There's a lot happening in radio communications, without a doubt. But there has been no change in, at least thus far, in what we have been made aware of as to -- regarding who is going to get the future Leader Radio awards in the original $2.3-billion announcement. It was said it would initially be 50-50, and then it would be competitively bid. So we sharpen our pencil and refine our product along with our radio partner nonstop.

So -- and you may have seen several awards announced by Harris, a couple of awards. It doesn't mean that Thales didn't get the awards; it would mean that Thales likely serviced those awards through existing inventory. So as it exists right now, it's right down the middle. It's fair game going forward with no changes that at least we're aware of.

Okay. So you sell batteries to Harris and amplifiers and other accessories, VIPER, et cetera, to Thales. So you remain designed into both those products that just -- both those companies' products that, based on Harris' statements, have basically finished testing, so they're going into a full rate -- full-run production, low rate -- I mean, full-rate production from low-rate initial production. And maybe that June 10 award, the $3.3 billion, is the government's recognition that they completed testing, and these are the full-rate production orders that are coming now. So I guess my question is, in terms of batteries to Harris and amplifiers to Thales, do you guys represent, in the final price of these radios, do you represent 5% of the business or 10%? I mean, the (inaudible).

Gary, I don't think it would be appropriate to even try to speculate what that is. We're not -- we don't have access to any potential OEM's final pricing. And what I will say about these overall contracts is that it's extremely difficult being once or twice removed from the U.S. Army in many of these cases, working through the OEM, to get a really clear picture exactly what contract is a current contract that people happen to be talking about on a given day. We've seen even in the batteries for soldiers that we're directly involved with, over the course of an IDIQ, there could be multiple direct spot buys and other delivery awards and subsequent IDIQs that are sort of nested within the time period you would think that another IDQ was in play. And I would imagine that the radios are not too much different, and maybe even more complicated.

So it's really difficult to speculate as to what is the current contract that's being let and who's getting what piece, and then how do we extrapolate to our piece? What we do try to do is that we try to stay extremely close with our customers. We try to support them in any way we possibly can. We valiantly protect their confidential information and make sure that we're the best supplier to these OEMs and that we put them in the best position to win whatever product we serve. But I think it would be almost impossible to try to talk about what percentage of the overall cost our product represents. And I hope you'd understand that that's -- I think it's a fair way to look at it.

Yes, yes. I got you. But certainly, whatever level of business we've been doing with both of them up till now seems like it should increase everything else. I'm not asking you to say yes or no, but -- to comment on it, but based on the Harris conference call saying they completed testing and are going into full-rate production and the evidence of that $3.3-billion new contract, it seems like both companies should be moving into full production, and that should bode well for us because we're designed in. So if they're going to increase their shipments to the government, presumably there's going to be more batteries and more amplifiers for us.

And let me just ask the last question there. So Phil, you mentioned, and we talked about it -- you talked about it a couple of times in your script about the final shipments in the June quarter of last year, 2020, of amplifiers to Thales on the previously awarded contract. I think you said October 2018 or something like that. So it's been a long time, October '18 to now. So it's been almost 3 years without out any follow-up orders. So I'm guessing they've been -- as you just mentioned, Phil, they were shipping from inventory. But as they start to go into production along with Harris, is there an expectation that you're going to be having some new amplifier orders coming over the next 6 to 12 months?

Yes. That's the only answer I can give you, Gary. That's my personal expectation. And it may seem like a long time between the time the order was placed in the development period and the testing period. The big variable here was the timing of the field test. It seemed like it took an eternity, but for a radio, the most complicated radio, military radio, in existence to date, the tests are very, very extensive, and they were complicated by all the factors that we've talked about in the past resulting from COVID. So it may seem like an extended period of time, but for such a complex opportunity, it's, I guess, not too unexpected from our part with our experience.

Okay. Yes, I just wanted to make sure that, because we haven't gotten any follow-ons, that they didn't replace our amplifiers with someone else's or we lost them as a customer. So it's just they work down inventory. We're already designed in and would be getting orders as that moves into full production from LRIP production. And then we had that evidenced by the Harris conference call, by the Harris $3.3-billion award. And then I think some preliminary numbers came out for the next U.S. defense department budget, which shows shipments up 50% or more on radios.

Gary, the definitive answer is, we'll knew when the order is issued, when the next order is issued. That's reality -- I could be optimistic, I could be pessimistic, but until that order is placed, we're fighting as hard as we possibly can to be in as competitive a position as we possibly can be, and that's how we play.

Yes. Understood. Moving on to conformal battery, the wearable. Mike, you mentioned in the script, early '22, you could be -- have finished testing. That seems pretty fast. I mean, when we look at the testing for the $80-million IDIQ, the 5390, 5790, and then we -- as we just discussed, the testing on the radios, understandably, the radios are many factors more complex than body -- wearable body batteries. Is that the reason why testing could be done so quickly? You mentioned early '22 and maybe starting to get some production orders for the balance of '22.

Yes. I think you heard it correctly in the prepared remarks. We talked about it being a very ambitious schedule. And that's one of the reasons why we've elevated our investment in Cap-Ex and in resources to try to position ourselves as best as possible. We've known those development cycles and those bad testing cycles in other products and you've heard about it in multiple earnings calls. So yes, it's a fast schedule. We're confident about it. We have -- it's not our first rodeo. We've done similar type batteries and actually sort of prototypes of the type of battery we're talking about here. But we know how rigorous the testing can be and how demanding the end-user customer can be. And so we know it's an ambitious schedule.

So we sort of pride ourselves in trying to maximize the top and the bottom line every single quarter, year-over-year and even quarter-to-quarter. And that's why we made a big deal about the additional investment that we took this quarter to make sure that we're positioned as best as possible to meet the requirements of the customer, and that's a pretty quick FAT cycle.

Okay. So when I look forward to the next 3 to 4 years and going forward from here sequentially, if oil stays firm with an economic recovery and SWE seems like it's positioned to continue to do well; medical, you had a tough year-over-year comparison with the first COVID quarter of last year, but medical has been a perennial gainer; and the demographics and the CAGR on medical seems pretty strong and elected procedure is coming back as vaccinations take hold; and then I look at the new 6 or 7 revenue streams, new revenue streams, the $8 million to $10 million you mentioned in 3-volt, IoT and remote sensors, the $8-million to $10-million commercial opportunity in comm systems, the $8 million to $10 million on the $80 million IDIQ for 5390s, 5790s, the $8 million to $10 million in Smart UI batteries, the ER product line rollout radios, we just talked about ManTech, Leader, handheld, VIPER, with Thales and Harris going into production, we've gotten some evidence on the $3.3-billion contract that Harris just won plus some preliminary budget estimates on that.

So I don't know if that's $8 million to $10 million like everything else or that's a factor higher because it's such a big contract. And then finally, conformal battery, which could scale up to $50 million a year, if you look at the total exercising of all the options, $500 million over 10 years, or if you look at the first 3 years, as you just mentioned, the government is very ambitious to get this conformal battery and $168 million over 3 years is over $50 million a year.

So when I add it all up, I come to, conservatively, $50 million to $100 million in annual incremental potential business. They're all IDIQs, and you don't know until you know. But even if that plays out over the next 1, 2 or 3 years and you do spike to $50 million in incremental revenue, whether it's $20 million, $50 million, $80 million or $30 million, $60 million, $90 million, whatever it is, when I do my math, even discounting your gross margin to the low 20s from where it's historically been, and I know your target is 30%, I come to -- again, I don't know if it's a year from now or 3 years from now, but I come to $1 to $1.50 in earnings per share, totally shielded with the NOL carryforward.

Now when we look at the last 3 years, when you guys -- the last time you guys put 3 years or 4 years of good earnings together, so if you go back the last 3 or 4 years, you've been flat between $0.35 and $0.40, but prior to that, you had 3 or 4 years when you went from breakeven to $0.07 to $0.18 to $0.27 to $0.39 or something like that -- when you put together 4 years in a row of increasing revenue and increasing earnings, the stock peaked at about 11.5% on the $0.40. So you had north of a 25 P/E. So if I'm right -- again, we don't know if it's a year, 2, 3 or 4, and you do $1 to $1.50, I come up with 25 P/E, you have a $25 to $40 stock price.

So with that potential possibility -- and again, I'm not asking you to comment on that or et cetera -- my question is as follows: to do everything, you're talking about despite having $50 million in working capital and $15 million in cash, no debt and $50 million to $100 million in your line of credit, to do all that, to fund all those new lines of business and the potential to go from $100-million business, $200-million business over the next 2, 3, 4, 5 years, you're going to need a lot of working capital and a lot of liquidity.

So I guess what I'm saying is maybe instead of -- since the potential is so significant to get a $25 to $40 stock price on $1-plus in earnings, maybe it's worth considering when the stock -- if and when the stock gets to the teens, instead of using your first opportunity to do a secondary or an equity deal in terms of dilution for the current patient, long-term shareholders, maybe you do a convertible debt deal, and then as all these projects go to full production, and what I just said starts to transpire and the stock does go into the 20s, then maybe you do a secondary of just stock to raise working capital and to pay off the convertible debt. Is that something you would consider?

Well, I'll just say this Gary. We consider all the different options, those that you mentioned, some that you haven't mentioned. And I think an overriding factor, you mentioned the word dilution -- well, 38%, 38.5% of Ultralife is owned by insiders. So we're all aligned. Management is 100% aligned with the shareholders, as we should be, of course, as we should be. So it puts us in a position where we look at all the different opportunities, including, most importantly, cash generated from our own operations, cash generated from [working capital management] (added by company after the call) efforts, the daily efforts that we're putting into reducing inventory, and then from there, we look outwards, and we have a great relationship with our primary lender, great opportunities going forward.

So everything is game and including some of the things that you mentioned, but I will say that diluting the shareholders, unless it's for incredibly accretive reasons, wouldn't necessarily be at the very top of the list, and I'll leave it at that.

Okay. That's fair, Phil. I guess my original scenarios was, hey, if we could get to $130 million, $140 million in business, would have a stock in the teens, and then maybe you do a secondary. But in light of the conform award, which a lot of us weren't aware of, and the size of all these transformational opportunities, it seems like the potential is much more significant than any of us thought before. And again, granted, it has to come to pass, you have to get the orders, their IDIQs, et cetera. But that's pretty true for every other public company and nonpublic company. They have to get the orders and they have to execute.

So -- but I guess in light of the recent developments and the $100-million -- $50-million to $100-million annual incremental revenue potential, which would double the size of the company, it seems like my old target of $15 is low. And if it's $25 to $40, what I'm talking about, again, whether it's 2, 3, 4 years, it seems like you might be able to use some additional tools instead of just a regular equity deal.

And that gets me to my second question. Now that you're through the difficult annual year-over-year earnings comparisons with those final shipments in the June 2020 quarter from the amplifiers, it seems like we're generally speaking on the -- with all these revenue lines coming to fruition, et cetera, and the year-over-year comparisons getting easier, we're on the verge of maybe multiple quarters of positive sales and earnings comparisons. And with all that potential we just discussed, it seems like now would be the time to, on the IR front, to maybe do something that you haven't done before, which would be to start attending conferences. There's probably 25 small-cap brokers out there to do conferences. You know about Roth and Sidoti and B. Riley, Stifel, et cetera, et cetera. And most of them are done virtual, so it's not a big deal for you guys to sit down an hour at your conference room and do a Zoom conference.

It seems to make sense to plant the seeds now before it's self-evident and in the face of investors. That way, if you do have the $0.15-- and you've done $0.12, $0.13 quarters before -- so as these new revenue streams come on and you do $0.15, $0.20, $0.25 quarters, you already planted a lot of seeds with investors. Again, it's been 10 years, and you've only gotten one analyst report. So -- and you haven't done conferences.

So on the verge of positive earnings comparisons, on the verge of some explosive revenue opportunities, it seems now would be the time to go plant the seeds. And then as you start delivering these double-digit quarters and people see a $0.15 quarter, they see a $0.20 quarter, they see a $0.25 quarter, investors will be able to take advantage of that. Because it doesn't make sense to me for the stock to be at $8, which was at before you got the conformal award, and you have 2x or 3x the earnings potential that you did the last -- you earned $0.40, and the stock had gotten to $11. So to me, the stock seems excessively cheap. You have a $7.50 book value, you had cash, no debt, your enterprise value is less than 1x. And you have this spectacular potential revenue and earnings in front of you. So would you consider doing some of the enhanced IR to plant the seeds for the company?

Gary, thank you for your thoughts on that.

Okay. And last question. Since you're full with these 7 revenue stream opportunities, is it correct that you're not really focusing on M&A now and you're going to use your working capital cash line of credit to fund all these developments? Or do you feel you can do both at the same time?

Gary, it's not correct that we haven't been focused on M&A. At any given time, we have both internal and external resources talking to multiple companies. It's just we haven't talked about it. We haven't announced anything, and when something that develops into something that is something we'd want to disclose, we will definitely disclose it.

So it's not off the table, even though you're really full with opportunity here?

No.

(Operator Instructions)

It appears that there are no further questions at this time. I would like to turn the conference back to Mr. Popielec for any additional or closing remarks.

Great, thank you very much again for joining us for the second quarter 2021 earnings call. We look forward to sharing with you on our quarterly progress calls in the future the status of some of the things we talked about today. I'd also like to note, as Phil mentioned, we updated our investor presentation on the website, so please check it out. Everybody have a great day. Thanks very much for participating. Bye-bye.

That concludes today's conference. Thank you, everyone, for your participation.