Ultralife Corp (ULBI) 2020 Q3 法說會逐字稿

Good day and welcome to this Ultralife Corporation Third Quarter 2020 Earnings Release Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, John, and good morning everyone and thank you for joining us this morning for Ultralife Corporation's conference call for the third quarter of fiscal 2020. 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 issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the company's website www.ultralifecorp.com, where you'll find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call will 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 revenues from key customers, uncertain global economic conditions and acceptance of new products on a global basis.

The company cautions investors not to place undue reliance on forward-looking statements which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these and other factors that could affect Ultralife's financial results is included in Ultralife's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K and the latest quarterly report on form 10-Q. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics and 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 Q3 2020 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 2020 revenue initiatives, then open it up for questions.

For Q3 of 2020, our Battery & Energy Products core business once again delivered strong double-digit organic growth with revenues up 22% year-over-year driven by medical and government defense sales and despite ongoing supply chain, logistics and operational challenges due to the pandemic. Oil and gas markets demand remained weak, impacting our SWE revenues, and our Communications Systems revenues were also lower primarily due to as of yet nonrecurring prior year vehicle adapter and mounted power amplifier sales under the U.S. Army's network modernization initiatives.

As a result, total company revenue was off prior year by 11%. Disciplined cost control drove operating expenses also down 11%, preserving a quarterly EPS profitability of $0.03. And with focused working capital management, we further strengthened our balance sheet with a $7 million reduction in debt. In a few minutes, I'll give you a further update on our revenue initiatives. But first, I'd like to ask Ultralife's CFO Phil Fain to take you through additional details of the Q3 2020 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter ended September 30, 2020. We also filed our Form 10-Q and Form 8-K with the SEC this morning 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 that helped make this happen.

For the third quarter, consolidated revenues of $24.4 million decreased $3.1 million or 11.4% from the $27.5 million reported for the third quarter of 2019. The year-over-year variance reflects a significant increase in battery sales to our medical and government defense customers, which was offset by lower oil and gas market and Communication Systems sales. We estimate that approximately $2 million of the year-over-year variance is due to demand impacts associated with COVID-19, with a substantial increase in sales of medical batteries, especially those used in ventilators, respirators and infusion pumps, more than offset by weakness in the oil and gas and international industrial markets. In addition, third-party logistics disruptions arising from the pandemic resulted in shipment delays that pushed approximately $1 million in revenue into the fourth quarter.

Revenues from our Battery & Energy Products segment were $21.8 million, a decrease of 3.4% from last year; attributable to a 102.1% increase in medical battery sales and a 23.4% increase in government defense sales, offset by a 68.7% decline in oil and gas market sales. Medical sales for the third quarter were at the highest quarterly level in our history and comprised 47.7% of total sales for this segment. The sales split between commercial and government defense was 72-28 compared to 71-29 for the 2019 third quarter, and the domestic to international split was 50-50 compared to 51-49 last year.

Revenues from our Communications Systems segment were $2.5 million, a decrease of 48.3% from last year. The decrease reflects 2019 shipments of vehicle amplifier adapter systems to support the U.S. Army's network modernization initiatives under delivery orders announced in October 2018. These orders were completed in the second quarter of 2020.

On a consolidated basis, commercial sales and government defense sales decreased 10.8% and 12.5%, respectively, from the 2019 period. The commercial-to-government defense sales split was 65-35 versus 64-36 for the year earlier period.

Our consolidated gross profit was $6.5 million compared to $7.9 million for the 2019 period. As a percentage of total revenues, consolidated gross margin was 26.7% versus 28.6% for last year's third quarter.

Gross profit for our Battery & Energy Products business decreased to $5.7 million from $6.1 million. Gross margin was 26.0%, a decrease of 110 basis points from 27.1% reported last year, reflecting the product mix of lower oil and gas market sales and incremental costs in 2020 associated with the transition of a multitude of new products to higher volume production.

For our Communications Systems segment, gross profit was $0.8 million compared to $1.7 million for the year earlier period. Gross margin of 32.8% decreased 270 basis points from 35.5% last year, primarily due to sales mix and lower factory throughput in the 2020 period.

Operating expenses decreased $0.8 million from $6.6 million last year to $5.8 million. The decrease was consistent with the overall percentage reduction in revenues and attributable to certain headcount reductions, minimal travel and strict control over all discretionary spending. As a percentage of revenues, operating expenses were 23.8% for both the 2020 and 2019 periods.

Operating income for the third quarter of 2020 was $0.7 million compared to $1.3 million for the 2019 period, reflecting the net financial impact of COVID-19 and lower year-over-year sales for Communication Systems. And operating margin was 2.9% for the 2020 period versus 4.8% last year, driven by the lower gross margins.

Our tax provision for the third quarter was $192,000 compared to $225,000 for the 2019 period 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 third quarter is based on an effective rate of 29.4%, while utilization of our deferred tax assets will drive the tax provision down to only $4,000 or 0.6% when we actually 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 29.4% statutory tax rate, net income was $0.4 million or $0.03 per share on a diluted basis for the 2020 third quarter. This compares to net income of $0.9 million or $0.06 per share on a diluted basis for 2019. We utilize adjusted EPS to reflect actual cash 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 $0.04 per share for the 2020 third quarter compared to $0.07 for the 2019 third quarter. We estimate that the adverse impact of COVID-19 to our adjusted EPS was $0.06 per share.

Ultralife ended the quarter with a strengthened balance sheet and enhanced liquidity with cash on hand of $13.8 million, working capital of $45 million and a current ratio of 3.6. During the quarter, we utilized cash generated from operations and accounts receivable collections to further reduce our debt by $7.1 million while increasing our cash on hand by $5.4 million since the end of the second quarter. Since the beginning of the year, we have reduced the debt related to our acquisition of SWE by 78% from $17.3 to $3.9 million, while increasing our cash on hand by 86% from $7.4 to $13.8 million.

Through continued careful management of our liquidity, we are able to fund organic new product development, strategic capital expenditures and M&A, while eliminating our debt.

As a result, we remain well positioned to invest in growth initiatives and staying focused on releasing the full leverage potential of our business model during these challenging times.

I will now turn it back to Mike.

Thank you, Phil. For 2020, we continue to focus on driving revenue growth by market and sales reach expansion, primarily through diversification, new product development and strategic Cap-Ex for competitive advantage and accretive acquisitions.

For the Battery & Energy Products business, the strategy for market and sales reach expansion is about diversifying more into the global commercial markets and international government defense markets to lessen our historical concentration in the U.S. government defense market.

One of our most successful commercial diversification focus areas has been in medical. And in Q3 2020, medical revenue was up 102% year-over-year, accelerated by the current pandemic, and it represented approximately 48% of our total Battery & Energy Product sales. We saw strong demand from existing customers with applications for ventilators, respirators, infusion pumps, digital X-ray and surgical robots. We also received delivery orders for existing customer blanket and/or multiyear agreements, which totaled $2.75 million.

At Southwest Electronic Energy Corporation or SWE which we acquired in May of 2019, in addition to shipping its core oil and gas and subsea electrification products, during Q3 the SWE team successfully completed a short-cycle turnaround contract in medical battery packs for a respirator application serving the COVID-19 response. In Q3, SWE provided 14% of total B&E product sales.

For B&E's Q3 2020 U.S. government defense customers, revenue was up 36% year-over-year and represented approximately 25% of total B&E product sales. This includes radio battery shipments to OEM primes as well as continued shipments under the recent $4.8 million 5390 DLA spot buy award, with the balance expected to ship throughout Q4.

Regarding Battery & Energy products new product development, in Q3 2020, 14% of revenues were from products introduced less than or equal to 3 years ago. During the third quarter of 2020, continued progress was made on several projects, including but not limited to, OEM public safety radio batteries, a new digital X-ray battery, a next-generation medical cart battery, a next-generation ruggedized modular large-format energy storage battery and a new military conformal battery. New product development and multigenerational product planning not only keeps our products current with market needs, but also gives us the opportunity to collaborate, remain close with and provide value to our key customers.

Regarding deploying strategic Cap-Ex to bolster our competitive differentiation, our goal is to produce the highest value proposition, best quality and safest products, in which every one of our global locations best serves the supply chain of the particular end market and/or OEM customer. In our Newark, New York USA facility, we are currently undergoing a $4.3 million capital investment for automated manufacturing of a new premium 3-volt battery that will serve the rapidly growing IoT wireless devices market as well as next-generation 3-volt smoke alarms, asset tracking devices and metering. Initial customer orders are now beginning delivery, while numerous other customers continue product evaluation testing in parallel to our ramp-up of production, where we are aggressively pursuing volume throughput and cost targets to meet the needs of several very interested customers. This new product provides customers with world-class product performance, safety and a competitive price value proposition as well as the supply chain proximity and quality of being made in U.S.A.

In China, we continue to make progress on our final chloride ER cell upgrade project involving extensive process improvements, which will help us expand our total available market with newly identified commercial and industrial applications. Samples of the newly formulated and designed ER high-rate products continue to shift throughout Q3, with the ER low-rate cell design completed and in validation at the end of Q3. We are now expected to start sampling the low-rate ER products in mid Q4. What's exciting about participating in the sampling phase is that we received great "voice of the customer" feedback, which helps us to continue to enhance our cell and battery pack products as well as new revenue prospects.

And at SWE, located in the Houston, Texas area, while Q3 was a struggle from an oil and gas market perspective, new product development continued, and SWE delivered new custom designs for our customers' rotary steerable drilling innovations. SWE also provided its SeaSafe subsea battery products to support customers' new efficient technology for subsea intervention and workover control systems and, autonomous underwater vehicles for state-of-the-art oceanography.

At Communications Systems in Q3 2020, new product development revenue from products less than or equal to 3 years old represented approximately 37% of Communication Systems revenues. Q3 was a challenging quarter as our global military sales remained impacted by COVID-19, resulting in delays of both programs and smaller purchases. While some key product deliveries continued due to previously awarded IDIQ contracts and their follow-on delivery orders, it was well below expectations.

In regards to the U.S. Army's Handheld ManTech model form fit and Leader Radio programs, follow-on contract opportunities are anticipated later in 2020 and/or into 2021, after operational tests and evaluations are conducted by the U.S. Army HMS program office. Overall, Communication Systems remains well positioned for future opportunities within the domestic and military radio market with proven products supporting both single and 2-channel, Handheld and ManTech ancillaries and integrated state-of-the-art solutions.

With respect to the system integration of cutting-edge service technology discussed during the last few earnings calls, Communications Systems has continued the development and fielding of 3 variants to support a broad range of operational requirements from small tactical team support to full command center integration. New customer opportunities for further utilization of these products are undergoing customer evaluation with overall demands expected to increase in early 2021. Our progress on the dismounted configuration continues and is now in design activities with early prototypes expected by the end of 2020. This dismounted solution has also gained considerable traction with the stakeholders and has strong potential for a broad array of industrial and government applications.

Regarding new initiatives in system integration, Communication Systems is in the early phases of development for another commercial application, which leverages our experience and past performance with G&D system integration into a new market with considerable opportunity for growth globally. We look forward to reporting progress on this key initiative as we go forward. Communication Systems remains optimistic in this emerging growth area and further expansion of this key OEM relationship as expected demands materialize into 2021.

In closing, for the third quarter 2020, we were highly appreciative of the efforts made by all of our team members to maximize our response to our medical customers' demand increases and achieve strong organic revenue growth where possible, particularly in the Battery & Energy Products core businesses. We were equally thankful of the efforts made by our teams to minimize the impact of negative market and tough year-over-year comparables, exacerbated by COVID, as noted in the SWE oil and gas and Communication Systems businesses. Their focused and combined efforts helped us sustain profitability, generating positive cash flow for the quarter and strengthen our balance sheet.

As we approach the end of 2020 and head into 2021, we will continue to optimize our financial performance through year-end, striving for total year revenue growth and profitability. While we will continue to navigate the challenges of a pandemic, it is imperative that we stay keenly focused on completing our current multiyear transformational projects in order to unleash the new revenue streams each will bring. At B&E, these include but are not limited to, the new 3-volt product line, the new ER product line, the Smart U1 battery product, the 5790 CFX blend primary battery and several other new public safety, ThinCell, medical and subsea electrification application battery packs. Also, we have over $85 million in untapped DLA IDIQs, including the $21 million next-gen 5390 and the $49 million 5790 primary battery awards, both of which are now in final first article testing. We expect to be finished with development and testing in the Q4-Q1 time frame.

At Communication Systems, as we await possible follow-on orders under the next phases of the U.S. Army's network monetization initiatives after the end user OT&Es, the Communications Systems team is focused on new active OEM ManTech radio projects, a number of smaller transactions including international, several integrated computing solution opportunities in commercial markets as well as developing next-generation amplifier prototypes. OEM engagement still remains the highest priority for Communication Systems and continues to be strong and productive, providing ample new product development initiatives for integrated systems and amplifier platforms, product support for fielded products and new business development to meet emerging radio capabilities being fielded globally.

The fundamental nature of the main industries we serve: military defense, energy and medical, provide us with a level of durability and resiliency to ride out the current economic headwinds. We will continue to focus and overweight our time and effort on completing our transformational projects, as we believe these are the elements which are most under our control to improve our revenue growth rate and revenue and EPS consistency. And we will continue to pursue acquisitions where we can quickly gain scale and achieve further operating leverage. Our strong balance sheet, solid cash flow from operations, proven integration methodology and disciplined adherence to our business model, give us this flexibility.

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

(Operator Instructions) We'll move onto our first question from Gary Siperstein of Eliot Rose Wealth Management.

So first, I want to congratulate you on maintaining profitability. I think we all knew that with the contract -- that large contract finished shipping in Q2, coupled with the obvious headwinds in oil and gas, that it was going to be challenging. So I think you did an amazing job on that. And I was really impressed with what you've done since the beginning of the year in terms of debt paydown. As Phil pointed out, cash almost doubled from $6 million to $13 million or $14 million, and debt went from $17 million down to like $3 million. So that's a $20 million swing in 9 months. That's just amazing. I mean you cleaned up the balance sheet and you're locked and loaded for either buybacks or new M&A. So congratulations on that. Mike, I just want to drill down a little bit on the growth going forward. And you sort of crawled that out in your summary earlier. So first, for the CapEx growth that you've done in Newark for the IoT effort, is the spend on that expected to be completed by year-end? And then is the IoT exclusively 3-volt and what would be an expectation going forward? Is that a million a year in business you expect from IoT or is it $3 million to $5 million? Can you give us a little more color on that?

Sure. We're definitely in the final throes of the investment. From the standpoint of execution where we are is you can do -- and I've heard other people say on similar calls in the battery business that the easy part is making the product work in the laboratory. Where the real challenge comes in is putting it into a highly-automated high-speed line and getting the same performance, and quality and durability as you know is capable of that product. And so that's where we've been sort of struggling to do with that transition. We're at the point right now where we're providing very high-quality, high-performing products. We want to make sure we get it right, so that when they run at the very highest speeds that the capability of the machines are able to do that we have that same level of performance and quality. From an overall standpoint of what the opportunity represents, we've been saying for several quarters and probably longer that there's a certain amount of market we think we can carve out just from the overall growth rate. But then when I just look down at the individual transactions, and we review this on a regular basis with our senior executives, when we consider the 3-volt products, the new ER product and some of the Smart U1 and medical cart battery opportunities, we have literally tens of millions of dollars in our opportunity funnel over the next couple years. And we just can't get these products out there fast enough, because we're so excited about what the revenue could possibly become forward with them. But we're trying to make sure that we get it right, that the quality is there, the performance is there and that once we start we don't have a bunch of restarts. So we're very excited about the 3-volt product line, the ER product line. It's for IoT. It's for metering. It's for smoke detectors. It's for a lot of different products. The Smart U1 battery looks like it's in great alignment with some medical cart opportunities. We're coming out with some of our own brand new medical cart batteries as well. So I think the revenue prospects are extremely strong. We just got to get the projects done and I think people understand that pretty well.

Okay, that's great. That sounds like millions of dollars of opportunities. I didn't realize it was that big. So that's wonderful. Is anything going on -- you mentioned that it was in smoke detectors. Is that all out of China, or it that part of the domestic CapEx with the 3-volt domestically and would that be depending on the customer which manufacturing plant you make it in? Or is that all out of China?

No, that's exactly right. I mean our 9-volt is produced in China. But as we mentioned earlier, due to the electronic evolution and maturity of designs, a lot of the smoke detectors are moving to the 3-volt product. We have a 3-volt product that we produce in China. We have a 3-volt product that we'll be producing in the United States. And our goal is to be the best supply chain player with our key OEM customers. And so there are smoke detectors, a lot of smoke detectors and other devices like that, that are made in China, which would make it difficult for us to ship a product from the United States into China, reassemble that device and then ship back to the global world and still be competitive. So we will ship the product from whichever one of the locations makes most sense from a supply chain perspective and serving the particular OEM's need.

Okay. That makes sense. You touched on the IDIQs north of $85 million. How many products does that represent? And are they -- or is it 3-products? Is it 2 products, 3 or 4? And are they all still -- you mentioned some testing would get completed in Q4-Q1. Are they all in testing? Or hypothetically, if there's 4 products, are 2 completed and ready to ship, depending on getting the POs? Or are they all in various stages of testing?

2 of the 3 are in final stages of first article testing, and those are the 2 that I referenced, the $21 million one and the $49 million for those 2 specific products. There's another third product that's a little bit further behind, a little smaller award. I think it was around $14 million or so. But collectively, there's 3 different products. The big 2 are the ones that are nearing completion. We're getting our work done. It's an iterative process with our customer. We believe we're on the final throes of the testing and tweaking of designing things, and we expect that to be done from our perspective between Q4 and Q1, and we're just going to be encouraging and optimistic that our customer can work quickly to get those things finalized as well because we're anxious to get the revenue potential that's associated with each of those IDIQs.

And I think if I recall, they are 5-year IDIQs. So the $35 million, I know it's at the discretion of the government. But even if they run out over 10 years and get about $8 million a year ratably, obviously, that would be nice incremental business. Is there any color at all on the cadence of the potential revenue?

Not really yet. I mean, in the one case, the 5390, we've been continuing to provide a legacy product, and that rate has been several million dollars a year. I think you just referenced our most recent award was at the end of the prior year that we executed on all in 2020. That was worth around $4.8 million. We've had other years where it's been less than that as well. So it can go from zero to $4 million or $5 million a year, it seems, depending on the consumption and shelf life and other factors. But we really don't have a clear view of what the potential rate could be until it gets done. And at this point, we're just trying to control things we can and get it done so that we're positioned for whatever volume is potentially needed.

Okay. And then moving on to the next-generation radio, whether it's Leader or ManTech. I know it's a multibillion-dollar award to 2 prime contractors. The last I saw was one firm contractor. I think they get a $90 million, $95 million LRIP on it. So it seems like it's getting closer to regular run rate production from low run rate. Is there any color on that as well? And is that also going through final testing or is it sort of ready to go?

The products that we've provided to the various players in the space are loaded and ready to go. What has to happen next, and we referenced in the prepared remarks, is there's operational testing and evaluations done with the user. We expect that to be taking place during the beginning of the year. And at that point, hopefully, we'll get better visibility to how they're going to go about and deploy the basis of issuing Handheld versus ManTech, whose product. Right now, it's probably 3 equations and 3 unknowns. But we know that the next milestone event that we're aware of, trying stay in close contact with our OEM partners is that there's this OT&E activity in the early part of next year and that potentially by next spring perhaps we get better visibility as to the go-forward.

Is there any way to get a guestimate on their revenue, the annual revenue potential to us once it does get all the approvals and goes into full production with both primes? I mean is it $5 million a year in business? Is it $10 million a year in business?

We have what the original programs were planned to do. It's public information and various reports have it. If you look at those numbers, you get very starry-eyed. But we also know that things change. And so we're trying to be cautiously optimistic about the long-term revenue potential, continue to invest in the product, continue to invest in our business, and we're well positioned for the future, but not get over our skis. Our visions are grander until we actually get an actual award and start executing.

Right. That still makes sense. But just for me to be a able to get a sense of the potential, what was the figure that made you starry-eyed?

100,000 radios, Gary, and 22% of those radios having what we offer. And when you look at the ASP on those 22,000 radios, it's one of those "oh my god" moments. Is this fantasy land or is this reality? So I think that's just a little color behind the comment. And that's from a September 2018 U.S. Army press release.

Okay. Okay, and Mike, so for the last few years, as you've talked on the conference calls, plus it's been highlighted strongly in the investor PowerPoint on the website about leveraged earnings growth. And we saw revenues from 2016 go from $82 million to $106 million last year, and yet earnings only went -- from 2017 went from $85 million to $106 million, so 20%, 25% revenue growth. And yet earnings only went from $0.37 to $0.41. So earnings were only up 10%, even though there was 25% revenue growth. So can you talk to that? And what were really -- so it didn't happen basically. We didn't get the leveraged earnings growth. What's going to allow us to get the leveraged earnings growth going forward? And why didn't we get it when we went from $85 million to $106 million.

Gary, it's Phil here. I'll jump on that a little bit and then turn it back to Mike. One of the reasons why we didn't see it was because the last -- I would say, the last 18 to 24 months were huge, huge investment years in our new, what we call, transformational products. And those were the list of 5 or 6 items that Mike went through at the end of his script, for Battery & Energy Products and numerous ones for Communication Systems. Now this was twofold. This was the development cost, people, time, external testing that went into it. And one of the things that we're still going through right now is once it's, quote-unquote been "complete and ready for high volume production," you go through the transition process where you incur incremental costs as you're debugging it. And for the last 2 years for Ultralife, it's all about, from my standpoint, putting in a record number, the highest number ever of new products that we consider transformational to our business.

Okay. That's fair. So for the last 5 years, I mean, the company, during Mike's management has done a great job because sales have gone up from 2019 in the last 5 to 6 years. Sales have gone up every year. Income has gone up every year. Earnings per share have gone up every year. EBITDA has gone up every year. And yet, because of what you just said, so getting ready for the next wave of growth, earnings flattened out. So we -- the stock price, obviously, is in the penalty box in the $5 range. Because the $0.18 that went to $0.23 that went to $0.37, that went to $0.41; that earnings per share growth flattened out and stopped. So when we got a P/E of 25 and a couple of years ago when we first hit $0.37 to $0.40 in earnings, the stock went to 11.5. And then as earnings stop growing, we saw the compression in the P/E. And now we had this COVID transition year plus the headwinds from energy. So this year, let's say, on an adjusted basis, we finished around $0.30 or so. So I guess what I'm asking is, over the next few years, if like the last year, we can grow revenue 20%, 25% and go from $100 million to $125 million. If those investments in those new products, like Phil you just mentioned, which kept earnings down. As those free up and all these things go into production, the IoT effort, the 3-volt effort and (inaudible) and smoke detectors, the continued growth in medical, the IDIQs of $85 million finishing their testing and going into production, the Leader Radio that creates some starry-eyed potential as that goes into production; it seems to me there's the possibility you can then get back to $0.40 and $0.50 and $0.60 in earnings. And then that would imply at least 25% EPS growth going from $0.30 to $0.40, $0.40 to $0.50. And obviously, we can all do the math, 25 P/E, 25 EPS growth percentage on $0.60 is a $15 stock. So it seems like you have the potential to triple the price of the stock, if we can execute; if we can get the increased revenues and the transitional investment phase goes into production and we deliver. So can you tell us why that has a likelihood to happen? In other words, what's the investment case for Ultralife from here going forward? And then obviously, post COVID, once there was a vaccine, we could get more of a normalized recovery. So maybe we get some rebound on the energy piece with SWE, coupled with all these military and commercial with medical going into full production. So if you can you talk about that investment, the investment case for buying the stock here in the $5, if that $0.60 is a profitability in the next few years?

Gary, this is Mike. As we go through where we've been in the last couple of years, and obviously, we look at it very closely, and we also have internal employee meetings every quarter as well. And we have a very close look at what's working and what do we need to do better on. And even in the information that's part of our investor presentation on our website, the area that we're really zeroed in on is gross margin. And when I say that, when you look at it from a standpoint of, okay, gross margin, there's been a little bit of degradation in the gross margin. Is that due to the value proposition, as I mean we're getting price pressure, we don't have the differentiation and so forth and so on? Or is it an internal execution type of things, which don't mean that people are screwing off or doing bad things. It's just that in the execution phase of the cycle, there's some inefficiencies that we've introduced as it relates to some of the new products and the scrap and rework and things like that, that's penalizing us at the gross margin level. So when we look at it, we're seeing no, it's not necessarily a price issue. It's not necessarily a horrific mix issue. It's just that we have a number of very exciting new products that are taking a long time to get to the finish line, quite frankly. So we need to get those over the finish line. We have to get through the learning curve. Something I learned a long time ago, you can have the best engineers, the best simulations and the best testing in the world, but until gets in the marketplace and it experiences true life and operational challenges, do you really know how it performs? And we work very closely with our customers to bring in new products, to do rework, to work with them to figure out who pays for what, but that does have an impact on our gross margin. So the good news is I don't believe it's fundamentally an issue on the value proposition whatsoever. And as we get up the learning curve and we get through the execution of some of these start-up projects, we are in no way conceding the gross margins that we've hit in the past. As a matter of fact, we've added more resources in this regard. We've hired some outside subject matter experts in this regard. It's something we go through on a very regular basis at the highest levels in the company. And the good news is, I think it's within our control. So that and the combination of acquisitions where I think we've demonstrated a very strong ability to integrate. I mean, yes, we're picky. And perhaps the speed of new acquisitions doesn't come as quickly as all of us potentially like, but we feel very strongly about the ones we've done so far. They've been very successful on a return basis. And so we think the combination of fixing and getting better on the efficiency side of our internal execution on some of our new product development stuff as well as the opportunity to continue to get top and bottom line leverage from acquisitions, we're very optimistic of what the next couple of years could bring.

Okay. That's great. And I know all the insiders are very bullish because in the last 12 months, we've seen the Chairman buy over 150,000 shares in the open market, and I think you paid as high as $8.38. And why do you have to buy 150,000 shares when you already own over 5 million shares. So I think that was a big vote of confidence. And that was followed up by, I think, Phil, you exercised some options in the $7 range and (inaudible) the stock and I think we had an outside director buy some stock.

That was a share purchase.

A share purchase? Okay And then we had a director -- an outside director buy stock, too. So obviously, everyone internally sees the potential. So just finishing up with M&A, so I guess you remain confident about the SWE acquisition, even though it's been a tough year for oil and gas. But as we've said earlier, perhaps there is some rebound after a vaccine and life gets back to normal. I'm not saying oil goes to $80 a barrel, but maybe it goes to the $40-50 range and there's some back recovery. So if you look at other acquisitions, it's a 2-part question. So the first part is, in light of the possibility of Joe Biden winning and capital gains taxes going up, is there any pressure maybe and puts you in a good position to perhaps buy something by year-end because the seller might want to lock in a lower capital gains tax rate?

We would never try to time an acquisition for some type of a short-term kind of play at that. We would always do the acquisition based on its long-term fundamentals. And we've said previously that those fundamentals include that they're strategic, meaning that after the day of the acquisition, they can continue to grow organically, that our peak revenue is the day we closed the deal. Secondly, that there's clear visibility to their earnings potential in the form of operating margin and are they able to get -- we're able to get back to our going-in operating margin with the new acquisition and all dilutive effects short-term of an acquisition within 18 months. We make sure that we have good visibility for EPS accretion within 12 months. So sort of a "do no harm" to the rest of the EPS equation while we're doing that first year of integration, and then a reasonable rate of return on our investment. So I mean, those are the fundamentals that we always look at. And I don't think if there was something that was imminent and it happened to do -- have a better treatment based on something in the calendar, it would be just serendipitous. That's not what goes into our decision process, the speed at which we do acquisitions.

No, no, no. I know all that, Mike. I was just saying, perhaps the seller wants to -- it's going to sell anyways, and maybe he wants to get the deal done by year-end to take advantage of the lower capital gains tax rate, so maybe that puts you guys, if there's anything that you guys have been negotiating over the past 3-6 months, maybe that puts you in a slightly favorable position. But I understand everything you just said, which obviously makes total sense. So one more question. In terms of -- so you spent $30 million, $35 million on SWE. In light of everything that we just discussed, it seems like this huge investment period is over, the product -- the new product transitions and the expenses of the new product have hurt and held down earnings and we're potentially about to go into huge revenue opportunities on multiple products that might start getting revealed and unfolded as we scale through 2021. So then we might get from $100 million to $120 million, we might get from $0.30-0.35 in earnings to $0.50-0.60, $0.70, that potential exists. So my question is, with the stock on its ass, the stock in the $5 range, 20% below book value and with the potential for book value to go from north of $7 to maybe $8 or $9 over the next few years, I mean the business the way it is, is you paid down $20 million in debt -- I mean $20 million swing in debt paydown and cash increase in 9 months. So I know you have to do the calculations, but does another acquisition makes sense? Or does it make sense where you could maybe buy 5 million shares here in the $5-6 range under book, where it will be accretive and reduce the denominator from 15 million shares to 10 million share?. Then on the same net income, your earnings go up 30% as opposed to going out and trying a new acquisition that may or may not work. So I suspect you go through those calculations, but it just seems like with everything in place and in terms of this $0.30 to $0.40 level of earnings before all these good things have the potential to start driving revenue, there seems to be an opportunity here to really reduce the denominator, which could really help earnings per share going forward. So can you talk to that point a little bit?

Yes. I think everything is on the table, Gary. When we think about just the decision tree in terms of investment versus obviously organic growth activities, whether it's market and sales reach expansion opportunities or new product development or multi-generational product planning. We've inserted strategic CapEx, again, as an enabler for organic growth, which we believe is a very profitable way to make investments. The third criteria has been accretive acquisitions. And the fourth would be improvements to liquidity or share repurchases and things like that. So getting through this year, we wanted to really pay down the debt and not have the costs associated with that and continue to look at all 4 of those different drivers for overall return to the shareholders. So everything is on the table. I'm glad that we're in a position that this debt has been paid down. We're laser-focused on these transformational activities to get the revenue potential. And if there's other things we can do in terms of the capital structure because of excess cash, if we're in that position, we would certainly pull that trigger as well.

Okay. Yes. In light of the stock price and in light of the potential you're talking about, it seems like stock buyback at a discount to book, maybe instead of being #4 on your list, maybe moves up to #2 or #3 or some combination of stock buyback and the next acquisition, while the stocks in the $5 range or under book value, it seems like a Dutch tender or spending $5 million or $10 million could really reduce that denominator and really leverage EPS growth if everything in the hopper starts to come through. So thank you for carrying me on that. And then my final question is, I'm sorry.

That's a good suggestion.

Okay. And then my last question is, we haven't seen anything, Mike, in terms of personnel over the last couple of years. And I know all the various reasons why earnings have flattened out, and then we've taken a dip this year due to energy, COVID, et cetera, and investment for these future products. But we haven't seen any new hires announced in terms of R&D, in terms of technology, in terms of sales, in terms of marketing. We haven't seen any new board members. So I guess my question is, does it make sense to maybe bring in some new blood who might have some new ideas that could help accelerate everything you guys have been doing?

It's a good observation, Gary. And I apologize, we're not as public about internal personnel moves. But in fact, sort of in the case of like some of this new product development activity, I think we've more than tripled the number of manufacturing engineers that we have now. We've hired and doubled up in many cases, electrical engineers, mechanical engineers, both in Coms Systems and in Battery & Energy Products. We brought on board, as I mentioned earlier, a subject matter expert in the manufacturing area as an outside resource, looking at things freshly and we've also brought on board a very senior battery expert in our commercial area, business development area of our business. So that's going on. It goes on a regular basis. It's something that we review with the board on a regular basis as well. The vitality of our people, bringing in highly capable people, look at things fresh. It's just something that doesn't hit the screen in terms of public disclosure, but it's definitely going on.

Okay. I didn't realize that. I know you've got some new people with the acquisitions, obviously, but I didn't know you had done more than that because we haven't seen anything announced. But then how about on the board level? I mean, maybe I'm not saying anything is wrong with anyone on the board, but maybe you can add one or two people, get some accretive intelligence, accretive wisdom, maybe they have connections for M&A, connections with military contractors or the government. Is that something that you can look at?

Yes, I can't comment on it, but it's certainly being discussed.

Okay, and then last question. You did a great job on the expenses in the quarter in light of the hit to revenue. Is there anything else, Mike? I mean I'm sure you've hit all the low-hanging fruit, but is there anything we can do in addition to layoffs? Is there a possibility that you can reduce the footprint go from maybe instead of 5 manufacturing facilities down 4 or down to 3? Is there any potential with anything like that in terms of manufacturing efficiency and reducing the footprint?

Actually, from an efficiency standpoint we're trying to make sure that each facility is fully utilized. We were -- with a small company, particularly, you tend to have from time to time, a little NIH. And one thing that I think that the team (inaudible) has done a really good job, they're the ones in the multiple facilities, is integrating some of our U.K. facility better with the excess facility with the Newark, New York facility and working through China, to get a better balance. Some places, we're very, very busy. Some places were not that busy. And by having the capability to do sort of, for instance, medical products in multiple facilities, when that's a high growth area. It spreads things out a little bit. It makes us more cost effective. So I think there's -- from an efficiency standpoint, not only in the manufacturing side, but also on the engineering side, I think we're doing a better job of utilizing all of the tools in our toolkit. But there's still a lot more work to do.

Okay. That's fair. So that's it for me. So congratulations on keeping things profitable with the headwinds you've experienced in the last quarter with COVID. And good luck next year, looking forward to some earnings growth as these various things come to fruition.

It appears we have no further questions over the audio, sir. I'd like to turn the conference back to you for any additional or closing remarks.

All right. Thank you, operator, and thank everybody once again for joining us for our third quarter 2020 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. As mentioned earlier, we'd also like you to know we updated our investor presentation on our website. So please take a look at that. Everybody, have a great day, and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.