Ultralife Corp (ULBI) 2006 Q1 法說會逐字稿

Good day and welcome to this Ultralife Batteries first-quarter earnings release conference call. Today's call 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, Trish, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Batteries earnings conference call for the first quarter of 2006. The earnings press release was issued earlier this morning and if anyone has not yet received a copy. I invite you to visit the Ultralife's Website at www.UltralifeBatteries.com. You can also find the release under "Investor News" in the investor relations section.

In a minute I will turn the call over to John Kavazanjian, Ultralife's President and Chief Executive Officer, who along with Bob Fishback, Ultralife's Chief Financial Officer, will provide their formal remarks. Management will then take questions until 11.00 Eastern Time.

Before turning the call over to John, I'd like to remind everyone that some statements made during this conference call contain forward-looking statements, including references to Ultralife Batteries' future plans and objectives. These statements represent the current views of management with respect to future events and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those contemplated in these forward-looking statements. A more detailed description of these risks is contained in the Company's filings with the Securities and Exchange Commission. With that, I would now like to turn the call over to John. Good morning, John.

Thank you, Jody. Good morning and welcome to the Ultralife Batteries conference call for the first quarter of 2006. Joining me today, I have Bob Fishback, our Chief Financial Officer; Bill Schmitz, our Chief Operating Officer; Nancy Naigle, our Vice President of Sales and Marketing; and Julia Cirin, our Vice President of Marketing.

Today, we reported revenue of $18.3 million for the first quarter of 2006. Net income was $140,000 and operating income came to $228,000. If you exclude the $258,000 of non-cash expense associated with FAS 123(R) expensing of stock options, operating income was almost half $1 million. Revenue was slightly up from the fourth quarter and was in line with our preliminary revenue estimate. The shortfall against expectations was due to lower shipments of BA-5390 batteries to the U.S. military. Extremely strong operational performance in both our U.S. and our UK operations gave us both a positive operating profit and a positive net income despite lower than forecasted revenue. Operational efficiencies that we work on continuously and cost savings measured instituted last year are starting to have their full effect and will continue to benefit our results.

In regards to the BA-5390, the Department of Defense continued to finalize its product technology strategy, including the transition to the new version, which now incorporates the state of charge indicator SOCI. This transition has required close synchronization with the Department of Defense and within DOD has required a coordinated strategy between the services. This involves ordering and stocking strategies as well as reserve levels across services and geographies and was not settled when the quarter ended. Subsequent to the end of the quarter, DOD notified us that it was their intention to move as fast as possible to field the new SOCI version because of its benefits. It is our understanding that all future orders for either the BA-5390 or the SO2 version, the BA-5590 will require a qualified SOCI.

As a reminder, our 5390 is the only qualified SOCI version currently in production and shipping. It is our belief that this now positions us to start to again increase market share for the BA-5390.

In commercial markets, we continue to expand the opportunities and broaden our base of customers while growing inside of our existing customers. Shipments of batteries into the telematics market increased over the fourth quarter and we expect sequential growth in shipments through the remaining quarters of the year. Medical applications also continue to gain traction. In the last quarter, we saw significant pickup in opportunities for monitoring and diagnostic equipment being designed to be smaller and more portable.

Military opportunities are also growing. In addition to the growth that we see from penetration of our technology into new geographies, applications are also expanding. Our Thin Cell is now in final qualification for a new unintended sensor program.

Sensor programs are growing in importance for both military and homeland security and we're engaged in several programs in this area. We also introduced a new rechargeable battery based on our industry-leading UBI-2590. Many applications, both military and commercial, need more energy and can run on lower voltage than the 2590's voltages of 16 or 32 volts. By leveraging the same circuitry, the packaging, and the same cells, but by configuring them differently, we now have a 12 or 24-volt battery that delivers 50% more capacity. In military markets, it can displace the old nickel metal hydride batteries that are still used in many applications. And in commercial markets, it's a great replacement for lead acid batteries used in large portable and transportable devices. It brings new Lithium ION technology to old applications and provides both the 12 or 24-volt applications with a high-density power source. It can be charged by any of the UltraLife charger line that charges the 2590. Early response to this product has been strong and we anticipate this being a contributor to revenue growth in the second half of the year.

In the second quarter, we expect to close on our acquisition of ABLE New Energy. We started to work closely with the management of ABLE on technology, product, and sales and market coverage. We expect our product line to enhance their offering in automated metering, toll passes, tire pressure monitoring and other key markets we're engaged in.

In the beginning of the quarter, we implemented an organizational change to better align with our target markets. We divided our sales, our marketing and our applications engineering organizations in line with two broad market areas, commercial and military government. Corresponding to this organizational refinement we will start to discuss our target markets along these same lines.

In our military government sector, we continue to broaden our offerings and our customer base. The first quarter saw our first shipments of the BA-5347 thermal weapon site battery and our first shipment of the BA-5368 survival radio battery. We had previously made the cells for these products with others assembly the batteries, although we had not had any BA-5368 related business of any significance for almost three years.

We also made shipments of military batteries to the Canadian and German militaries and shipments of land warrior products to General dynamics. We expect this trend to continue as we diversify across products and channels.

To this end, on Tuesday, we announced a definitive agreement to acquire McDowell Research of Waco, Texas. McDowell is extremely successful as a major supplier of communications accessories and solutions to military contracts and to the special operations community. This acquisition adds an entire new product to the Ultralife portfolio and extends our market coverage into the very fast-growing special operations area. For McDowell, Ultralife's power solutions enhances their offering and our worldwide reach expands the markets available for their products. We also plan to use some of the McDowell product portfolio in certain areas of our commercial markets.

We've worked closely with the people at McDowell over the past several years, selling each other's product and cooperating on opportunities. Together, we believe we will be a formidable team that can grow even faster than we have separately. Tom Hauke, President of McDowell, will stay on as will virtually all of his employees and management team. We will be proud to add Waco, Texas to the list of major company locations. We expect the McDowell acquisition to be accretive to the Company this year and will bring more than $20 million in annual revenue and an increase in operating profit to Ultralife. We expect to close this acquisition in the early part of the third quarter.

Turning to our second-quarter guidance, we said today that we expect revenue of around $20 million. We have based our second-quarter guidance on only the current order backlog for the BA-5390 with SOCI. Initial feedback is that this product truly allows the soldier to realize the full benefit of our lithium magnesium oxide chemistry and will enable us to grow our market share. Based on field feedback and working with DOD, we have been asked to enhance the SOCI further with some small changes to the LE indicator light in intensity and spacing. In the meantime, DOD will keep their inventories lean and we will get orders on an as-needed basis until these minor changes are made, most likely in the third quarter. Once those enhancements are phased in, we can expect that the inventory pipeline will be brought back to plan levels. In the meantime, our assumption is that orders from DLA will flow as they get demand.

For the year, we're reiterating our outlook for revenues of at least $90 million with shipments picking up in the third and again in the fourth quarter. Approximately one-half of that revenue growth in the second half will come from the military government sector with about two-thirds of that from BA-5390 shipment increases. The other one-half of that planned revenue growth will come from commercial markets and will consist of increased shipments in automotive telematics along with increased sales of rechargeable batteries.

One final note. Our full-year revenue outlook does not include any contribution from either the [A-volt] or McDowell acquisitions.

Now I'd like to turn it over to Bob Fishback, who will cover some of the financial highlights, after which I'll have some comments and we'll open it up for Q&A.

Thank you, John, and good morning. Earlier this morning, we released our first-quarter results for the three-month period that ended on April 1, 2006. Consolidated revenues for the quarter amounted to 18.3 million, in line with our revised estimate and representing an increase of $3 million or 19% over the same period last year. This improvement was the result of higher sales of batteries to commercial customers, most notably in the automotive telematics market, as well as an increase in shipments of a variety of military products.

Gross margin for the first quarter of '06 was $4 million or 22% of sales, a sizable improvement over the $2 million or 13% of sales reported in the comparable quarter in '05. This favorable change resulted from the rise in sales in addition to improved manufacturing efficiencies, primarily associated with the cost-saving actions that we took last year. Our rechargeable segment reported a 27% gross margin for the quarter versus only 2% last year, due to a favorable product mix on higher sales. Our nonrechargeable operations reported a 21% margin this quarter versus 15% last year, the improvement mainly resulting from higher sales volumes and better production efficiencies.

In our technology contract segment, we reported a slight margin loss related to margin adjustments in certain development contracts that are nearing their completion. Typically, margins in this segment are by design lower than other parts of our business, as we use these contracts to assist with development of products that we expect will eventually become part of our standard product portfolio.

Regarding non-cash stock-based compensation expense, the total amount recorded in Q1 was approximately $300,000 most of which was reflected in operating expenses. In the first quarter, operating expenses totaled $3.7 million, consistent with the reported results from a year ago. However, excluding stock option expense, operating expenses declined year-over-year by approximately $200,000. SG&A expenses decreased as a result of lower professional and consulting fees. Our R&D line reflected a corresponding increase related to a greater investment in development projects.

Operating income for the first quarter of 2006 amounted to $200,000 compared with an operating loss last year of $1.7 million, an improvement of nearly $2 million on a $3 million revenue increase. Excluding the non-cash stock-based compensation expense in the first quarter of '06, operating income was $500,000. This quarter's positive operating income demonstrates the benefits of the steps we took last year to bring our cost structure in line with an $18 million quarterly revenue level. We reported net income for the first quarter of $140,000 or $0.01 per diluted common share compared with a net loss last year of $1.6 million or a loss of $0.11 per share. The 2006 results included a $150,000 gain on insurance settlement for the finalization of our insurance claim from the 2004 fire at our UK operation.

Income taxes reflected an effective rate of 38% on pre-tax earnings. However, as a reminder, since we have significant net operating loss carryforwards, our cash outlays for income taxes will be nominal for some time into the future. Average diluted shares outstanding for the first quarter of '06 were 15.1 million shares, up 700,000 shares from last year related to stock options.

Our cash flows for the first quarter, that is EBITDA excluding expenses related to non-cash stock-based compensation expense, amounted to approximately $1.3 million. Cash used for working capital during the quarter was modest, although inventories declined a bit as expected, reflecting shipments of BA-5390's without the stated charge indicator. We intend to continue driving these balances lower. We spent $400,000 in capital asset additions during the quarter. Financing activities included cash inflows of $300,000 from the exercise of stock options and cash outflows of approximately 500,000 for debt principal payments.

The balance sheet at the end of the first quarter remained sound. Overall, the cash flow activities resulted in an increasing cash of $300,000. We ended the quarter with total cash of 3.5 million. Our current borrowing availability under the revolver is approximately $4.5 million. We are in the process of working with the banks on structuring an amendment to the overall credit facility in order to provide us with even more financing flexibility and fund the cash portion of the purchase price for the ABLE and McDowell acquisitions.

At the end of the quarter, total outstanding bank debt was $7.2 million and total debt as a percentage of total capitalization was down to only 10%. As we look ahead, we're estimating that revenues for the second quarter of '06 will be approximately $20 million. Growth over the first quarter is expected to come from increased shipments of batteries to both commercial and military customers. Operating income for the second quarter is expected to be in the range of $500,000, which includes approximately $300,000 of projected expenses related to stock options. For the full year of 2006, we are reiterating our revenue guidance of at least $90 million on the base business of Ultralife before considering the incremental impact from pending acquisitions. The second half of the year is projected to be significantly stronger than the first half, mainly related to continued growth in commercial markets as well as added penetration in military markets. We are as confident as ever about the growth prospects of the Company. Our core business in technology are solid and we are excited about the addition of ABLE and McDowell to the Ultralife family and the opportunities they will bring for growing revenues and generating cash. Now I'd like to turn it back to John.

Thank you, Bob. Before I open it up for Q&A, I'd just like to say Ultralife is evolving in new ways. Our core business is expanding in commercial markets and we're really diversifying our military portfolio as we restart the growth in our BA-5390 business. These acquisitions of ABLE and McDowell will markedly change the face of the Company and expand us into new markets, new products, new channels, and new geographies. With ABLE, we will have a range of new lithium thionyl chloride products for markets that we have targeted and we will leverage our technology and their infrastructure into lithium manganese dioxide products that were previously uneconomical for us to produce.

We'll also gain a presence in China, a market of unequal potential and a manufacturing location that can bring us cost efficiencies where they are needed. With McDowell, we will expand our product line much further into accessories and power components. We will leverage their expertise in special operations markets and they will leverage ours in international reach and operating excellence. It is a win-win proposition for all of us. And with both companies, we get sound management teams that will help Ultralife manage this growth as we move forward.

With those comments, I would like to now turn it back to Trisha and ask her to open it up for the Q&A session.

(OPERATOR INSTRUCTIONS). Steve Sanders, Stephens Inc.

Good morning, a couple of questions on the 5390. I think you received orders for about 4.6 million for the 5390A over the past couple of months. I guess you didn't ship much of that in Q1 and what does your 2Q guidance assume on the A in terms of shipments? I know you said the 20 million is just basically based on backlog. Does that mean it's backlog and it's been released for shipment?

Yes. It's the remainder of that order and the order that we just received, yes. And we believe that -- we've been told flat-out that we're going to get orders as they get orders, which means pretty much the run rate demand, which has been running in the ballpark of $5 million a quarter, all in, all out.

If we increase market share, which we will hope we'll do, that demand will increase. But we are not -- it's tough to give visibility on this right now because it's just getting out there in the marketplace and we're not going to have a big order backlog until -- we are trying to keep inventories lean and so are they. We don't want to get stuck with stuff in the product transition.

Okay. And then can you talk a little bit more about the enhanced stated charge indicator? Is this complicated, does this have the potential to drag out beyond third quarter? How are you looking at that?

I will ask Bill Schmitz to answer that since he's right in the middle of doing it.

We've already started the process of relaying out our circuit board and changing some of the tooling. We think it's a relatively simple change and we don't expect to -- there's really not any technical changes on how it operates. It's really the ramping and the lights and the spacing of the lights so a soldier has much better visibility as to how much battery power is left in the particular unit.

I want to emphasize that this change has nothing to do with filling demand. We will continue to fill demand with the unit we are producing today. It's just that we have decided with them -- we've both decided that it makes sense to do this as a phase-in and when they go restocking, they run it down pretty lean right now and when they go to restock reserves and supply lines that they want to restock it with the best product possible and we want them to because it will only enhance the acceptance of the product.

Okay. And then on the McDowell acquisition, I think in the release, there was sort of an adjusted operating margin of 15% or so. Is that a reasonable way to think about that business?

Yes. They spent -- they had some charges last year, some expenses last year connected with some development they did, some product development. They actually had a little bit the year before in '04. That development activity is done with and it won't recur this year.

Okay. And then I think you said they should do north of 20 million in '06'; I may have misunderstood that but they did 22 million in '05. Talk a little bit about their growth prospects, what's driving it. Is it product line expansion? Are there specific programs they are tied to? Military spending on communications, whatever color you can provide there.

Yes. Well I would characterize their business as very program oriented but it's also unit support oriented. Some of their business is with military contractors where it's connected to a program. So for example, they have programs going with I think Raytheon -- I need Nancy to help me on this -- maybe General Dynamics, [Tallus] Communications, people like that. So that they will go along as that program goes along and grows and matures. So they have some continuous repeat business that way. They have some business that is connected with mission-oriented, where special ops will take on a new mission, whether it is drug interdiction or it's not all -- it may be working Afghanistan or Iraq, but special ops is deployed all over the world, the Philippines, places like that. And so they will have a particular mission where they will need some specialized equipment and McDowell does that. And then they have some continuous work with certain units of the ops community, where they have some advantaged products that they sell into those communities. That's how to characterize it.

Just a final question on McDowell. Do they sell many batteries now with their products and what do you see as your opportunity there?

They have sold -- they sell mostly rechargeable batteries because they have a chargeable line also. They have sold our 2590 product, the UBI-2590 product along with their chargers. We have optimized the working of those two products together. Their chargeable line complements our chargeable line; it's actually the only place where we have similar products. And we sell their charges. Their charges are in our product. We have product data sheets; we've been selling them. So, there is a pretty good relationship between us there. And they have sold the 2590's again into the community.

I will make one other comment about special ops. It's the -- the defense budget has been growing but it's the fastest-growing part of it and if you look at trends over years, that's really where a lot more work is going into special ops. So we cover very well selling standard batteries through DLA and to DOD and to the different services. We cover very well the forward-looking programs like Land Warrior and this is really kind of a third leg of making sure we cover this marketplace properly. And that's what the work with McDowell is about.

Mark Grzymski, Needham & Co.

John, could you just run through how the revenues broke out in Q1 from a rechargeable, nonrechargeable and then also specifically in telematics and medical?

I think we showed -- I mean, if you look at the statement, rechargeable was about $2.5 million; 2.5, 2.6; nonrechargeable was the rest, 15 (multiple speakers). We have not -- the problem with breaking out by product -- I can give you some broad guidelines. The problem of breaking it out by product line are that we run into definition issues of what's military versus government versus you sell to the subcontractors; sometimes you don't know where your product necessarily is going applications wise. But of the remaining 15.6, somewhere in the ballpark of a third of that was our 9-volt business and probably a third of that was commercial and a third was military. And those are pretty good broad guidelines. Of the commercial business, we were running -- I don't know we're running somewhere in the $1.5 to $2 million for telematics on a quarterly basis. Does that help?

That's exactly what I was looking for. Okay and kind of looking forward, as the year goes on, 9-volt business you're just kind of staying pretty much where it is but --

9-volt runs a little cyclical sometimes. It's at a pretty decent level.

Would you say the majority of the growth kind of in the back half of the year would be driven by some pickup in military orders but more commercial or how (multiple speakers)

No, no. Half -- I think I said in my statements I will repeat it -- that half of the growth is military and half is commercial as we look through the year. In the military side, about kind of like 60% of that is going to be 5390 growth related. But the rest of that is increasing of some of the other products we have and some of the geographic penetration that we are accomplishing.

On the commercial side, it's telematics and rechargeable. And I can safely say roughly 50-50 because I haven't calculated it. But telematics this year, I told you we did kind of 1.5 to 2 million in the first quarter; we're going to do $10 million in telematics this year so that's going to have steady growth through the quarters.

That's perfect, great. And then regarding the McDowell acquisition, it seems like, as a battery manufacturer, now you're sort of building around the battery through acquisition here. Is that kind of the plan looking forward? I mean I'm not implying that you are going to make additional acquisitions. But if you were, is the logic kind of online here with the logic from McDowell here? Could you just maybe explain your logic?

Yes, it is in line with what we've said is our approach. We're very market and applications focused. And so, when we look at the military market and we look at the applications and the customers, they -- if you look at power, they need things to enhance their ability to supply power. They need generators. They need antennas. They need amplifiers. In some cases they need packaging and cases, watertight cases, shockproof cases, to carry all this stuff, to drop it from a plane with a parachute. And so yes, I think that's really true. I think one of the things that really alerted us to this is as we started getting into the charger and accessory business, we were asked to supply diesel generators as part of Land Warrior. We were asked to supply cable, EMI protected cables. So, we looked more and more at this and said we just to serve our customer in these markets.

And the McDowell acquisition isn't much different. I mean the ABLE acquisition. As we looked at our markets, automated meter reading, toll passes, markets we're participating in, we said you know there are some customers who have needs that thionyl chloride -- lithium thionyl chloride batteries do a better job of servicing. And that was one of our things was that we thought it made sense to be in those businesses. The packaging is essentially the same, it's lithium; it uses the same type of separator in some cases. It's just a different chemistry and we were lucky enough to find somebody who had that chemistry but also hit on some of the other things we wanted, which was to have a presence in China and be able to get after some of those markets. So it really just comes from markets and applications and customers, so, in the broadest sense. As we look at those, I think it's fair to say that we will be driven in whatever else we do by what else we can do to service those markets and customers.

Great, thanks. Just finally, regarding gross margins -- Bob maybe this one is for you. If we are expecting 10 million in telematics business and half the growth in the back half coming from the commercial markets, are we going to see a sort of maybe a change here in the gross margin complexion or as opposed to prior years where we have been heavily military?

We typically look at the business; the basic model that we've used here is incremental margins on incremental sales will be in the range of 30 to 35%. And that seems to work fairly well. That's what we would expect. I don't think we're fine enough to say that telematics is going to generate necessarily higher margins than military. It's relatively consistent within the production operation.

I think it's fair to say, Mark, that in both commercial and in military, the core business model isn't that much different. The way for us -- our plan on gross margin is threefold. One is efficiencies in our processes; the second one is to leverage our overhead; and the third one is to move to higher engineered content products, which generate better gross margins, better returns on gross margins. If you look at our Thin Cell product, whether it is in military or commercial, it has got that opportunity. If you look at chargers and accessories, they have those opportunities. So that's where -- and higher levels of assembly of batteries, they have those opportunities. So that's -- I think we see both military and commercial driving those same kinds of things on gross margins.

Okay great. Thanks, guys and congrats on the acquisition.

Mike Huffman, Rock Point Advisors.

Good morning. Could you comment a little further on both ABLE and McDowell in regards to proprietary manufacturing advantages and the synergies you saw between your operations and theirs as you made these deals?

Sure. With ABLE, I will start with ABLE. They had a very good technology for assembling manganese dioxide and lithium manganese dioxide and lithium thionyl chloride batteries. They have a good chemistry for thionyl chloride. I will start with that. But we were more impressed with their assembly techniques. We think we can improve the performance of their products on the technology side and the repeatability in their manufacturing process but it really started with their assembly -- the quality of their product, their ability to assemble it in a quality way. Because anybody can build a product in a laboratory, one copy of it and say, oh, we have a leadership product. The question is can you build 5 million or 10 million of them, do that on a consistent basis. So the technology and the capability that ABLE brings is we're just impressed with their ability to manufacture. And we think they need some investment in I would call it not automation as much as in-process metering verification instrumentation that we can bring with some capital, very modest capital. These guys have financed this by themselves up till now. And I think -- and that we can bring some advantages in technology. But what they have is a really good process orientation. That's what we liked about them. And a flexibility to be able to -- they have a very wide range of products and they had a flexibility to be able to move around within products without sacrificing kind of volume manufacturing capabilities.

On the manganese dioxide side, same thing. They had the real ability to put stuff together but they didn't have the kind of cathode we have. So you take an Ultralife cathode with their process for making a product like a CR-123, which is the two-thirds A photocell; they had a good product; they have a great product now with our cathode. I think that's what ABLE brings to the table for us.

The second thing that you asked is about McDowell. McDowell has some real advantage capabilities. They have a new amplifier line; that's what a lot of their expenditures were for. They've sold amplifiers in the past, but those were purchased amplifiers. They now have their own line and that's a pretty good-sized market and one with a lot of potential and one that we think we can leverage actually into some commercial at least government type of applications.

On the other side of it, they have a real ability to configure communications systems. They have real expertise in RF communications. And communications systems are like transmission line systems in that matching an antenna to an amplifier to a generator to enhance the performance of a radio, it's a science. It's not an art, it's a science. So they have some real ability there.

And then the last thing is whenever you're putting systems together, you have to really know how they are used. And McDowell has a real capability in a special ops community, where they have -- you look at the military experience, I think we added up something like 250 man years of military experience in the principals in that company, out of the special ops communities, the seal, green beret, delta, army ranger community. So when somebody says here's what I am trying to do, they have been there. They have done it. So they really have a reputation for being able to configure things together for these guys that allow them to hit the ground running and not worry about, boy, was this put together right, does this meet my needs. And in some cases, it's as simple as, is this a case that I can drop from a helicopter and have it not break when I land in a jungle somewhere. I don't want to be dramatic but it really is that kind of expertise of on the ground stuff. So that's what they bring to the party.

Does the DLA handle purchasing for special ops?

The answer is rarely. Almost all of that stuff goes directly from the units or directly to the special ops command. So they do almost no business with DLA. They do have some standard products that they have made sense for them to put on the GSA price list. But I don't think very much of their sales goes that way. So no, like I said, it's a whole new channel.

Can you comment further on the history of your relationship with both McDowell and ABLE in terms of time. And also if McDowell has been running at 20 million plus in revenues, what does their history look like or ABLE's for that matter in terms of sustainability and any further comments that sales trends will continue?

Well, I'll just comment -- I will start with ABLE. ABLE did about $2.2 million last year. That's from a dead start two years previous. I think they started two, 2.5 years before that. So they kind of went from hundreds of thousands of dollars of revenue to $1 million of revenue to 2.2. I wouldn't necessarily draw a straight line there, but this year there's no question in our mind that this year they're going to grow again significantly past the 2.2. Will it be 3, 4 or 5? I can't tell you. And we're not going to be able to really judge that till they are part of us.

I can tell you though that just the announcement that they are becoming part of Ultralife, they would say themselves that it's opened up opportunities to them that we think are going to be an enhancement to them.

We have known them for over -- I think about a year and a half, about a year and a half ago, we started looking through China at -- we must have looked at two dozen different battery companies. But we looked at many more before that. We physically visited two dozen different battery companies. And for us, there were a lot of elements that made sense for us with ABLE. They're not a state-owned enterprise. They were run by -- I think it was a couple of single-minded entrepreneurs. We like that. And then we just like the people.

I mean I would tell you there were several other companies we could have bought, would have bought, could be just fine but we just thought these were the right people. Culturally, there is a great fit. They're actually in the states right now at our annual sales meeting with us. There's a great fit culturally. We are going to help them; they're going to help us. I think that was really the clincher for us was that we thought they were the right people. And so there's every reason to believe that that growth will be sustainable and I think maybe even -- we might even be able to accelerate it.

McDowell did -- has steadily grown. That's how they made the ink list, not just for the quality of their company but for their growth. The last two years have been in the low 20s revenue. We only have audited financials for '04, '05. I won't comment on the absolute volume before then. But they did -- they have grown steadily through the years. I don't know how long -- how many years they have been in business but it's been at least seven or eight years, I believe (multiple speakers). It might even be more than that. They started actually as a research company twelve years ago but for substantial revenue really have been the last seven or eight years that they've really grown that revenue. We have known them for somewhere in the ballpark of three years.

We started our relationship of selling each other's products. We found ourselves cooperating on opportunities. And about a year ago, we were just sitting, talking to each other about business and what we were going to do together, and I think the light went on for both of us that boy, if we were just together, we would have just a huge opportunity and we could do even more in terms of cooperation. So, that's how it started. It does take a year to really get these things to germinate and put them together.

Christine Daye, Unterberg, Towbin.

It's Jim McIlree sitting in for Christine this morning. What was the CapEx for the quarter and what's it going to be for the year?

CapEx for the quarter was about $400,000. For Ultralife stand alone, it will be in the range of 2 or 2.5, we project. And then some modest additions probably as we add McDowell and ABLE.

Are either of those more or less CapEx intensive or less intensive than all the stand alone?

McDowell is not capital intensive at all. I don't know of any major capital expenditures planned or required for McDowell this year. I would have to ask them but I don't see any.

And for ABLE, it's in the range of 3 to $500,000. It's about $300,000 we had planned for this year. But if there's several major opportunities that if we closed them, we would spend probably another couple hundred thousand to do a little bit of enhancement to some of their processes. So it's very modest.

The McDowell business, is that widely dispersed throughout the DOD or does that run mostly through DLA, or can you explain the customer (multiple speakers)?

It doesn't run through DLA at all. It's very widely dispersed across literally a half a dozen to a dozen subcontractors and multiple different commands. It's a very widely dispersed business and they do almost no business with -- I don't know of any business they do with DLA actually.

The operating margin that you suggested excluding the onetime charge in 2005 is around 15%. Is that unusually high or low? Or where does that sit relative to what it could be and should be? It's hard to comment on that. It's running about 15%. I can only comment on that that if you look at their audited financials and go back through two years, it's pretty consistent there. We think there's opportunity; they think there's opportunity.

Andrew [Muro], [Adore] Capital.

A question about the funding for the acquisitions. Looking back, the ABLE acquisition, I could be wrong but it didn't seem like you were going to be looking to your revolver for cash in that way?

No, we have sufficient cash to finance that -- to pay for that.

I thought that I heard earlier in the call that you were going to be looking to increase your revolver for both of the acquisitions?

You're right, that statement was made. The revolver we expect to be increased to help us finance to provide support financing for those expenditures. But on a stand alone ABLE, we believe we have the cash available to finance that purchase price.

The reason we want the revolver capability is that if we grow ABLE at the rate we think we have the potential to grow it, we're going to have to probably do some financing on receivables and inventories.

I see, I see, okay. And then while we're talking about inventory and looking at your essentially 19 million, how do you see that going forward for the rest of the year?

We have got $4 to $5 million to take down out of inventory. There is about $1 million in the UK related to a product transition that will occur by the end of the year where we have to keep -- we have an old version of our UK cell that's qualified for certain FAA [Iauda] qualification for emergency beacons and such. So if you had that stock on hand, until we get those -- the new product tested and certified -- our customers get them certified -- we have to do that. That will occur by the end of the year. There is about $1 million in the U.S. in inventory related to the old version of the 5390 without a stated charge indicator. We have to protect that some because we have a steady demand for that from other militaries in the world that buy it and will take time to get them qualified and moved over. And in fact, even in the U.S. military, there are some -- the U.S. securities services I should say. There are certain securities services in the U.S. government that procure that battery. The military is moving to the stated charge version but there are some security organizations that still buy that. And so until he we get them converted to the A, the stated charge version, we needed to protect that. But suffice it to say we think by the end of this year we'll have that moved over. And then there is about 2, $3 million in inventory that we need to take down that will come down also. Because quite frankly we thought we were ready to ramp up a little faster thinking that we were going to start restocking some of the supply lines here. So as we -- we'll take a good-sized bite out of that this quarter and I would say that stuff will be all taken care of by the end of the third quarter. So like I said 4 to 5 million, we anticipate bringing that number down by.

Excellent. Then quickly moving to the SG&A line, how do you see that? You know, obviously you brought it down a little bit, a little bit of growth quarter over quarter but it's definitely less than on the average for last year. Do you see that being consistent going forward at least through this year until the acquisitions happen?

Yes, on the R&D line, we're in very good shape. We have gotten -- we supplement that funding with our technology contracts and with other R&D contracts and we have done a very good job of doing that and we think we will continue to do that. On selling, general, administrative, we just added tremendous capability to our selling organization. We're going to pick up five or six salespeople coverage with ABLE. We're going to pick up a whole entire sales team, very capable sales team, with McDowell. There's huge leverage in that so we are in really good shape there. And administrative costs, we have made significant -- we have been very consistent in making the investment in IT systems so that we didn't add -- as I always say to Bob, armies of clerks with green eyeshades, as we grow. And I think we've done a very good job of leveraging that. The last year or two, we've had to make some significant investments to comply with Sarbanes-Oxley section 404 internal controls. I think a lot of that has been very beneficial and warranted. A lot of that is excessive but there's nothing we can do about it because we have to sign our lives away that we have all these controls and pay our accounting firm to verify that we have signed our lives away that we have these controls. So, unless the latest SEC task force recommendations are adopted and they eliminate that from medium-sizes companies, that expense is about where it is going to be.

Sounds good. Then moving onto the acquisitions. ABLE, you guys have been hoping for a June close, I believe, you said earlier looking at the second half of the year. Has that moved a little bit or did I hear it wrong?

No, no, no. ABLE, we're going to close in a couple of weeks. We have all the final approvals. I think we're now narrowing down, just to make sure everything is lined up for us. So we said in the second quarter but it's literally a couple weeks away.

And McDowell, we just signed this thing. We're not -- we're saying early third quarter. Would we close it sooner? Sure. But if it ends up being June 15, we'll probably wait till the quarter is over to do it just so that we don't burden ourselves unnecessarily in the closing. But it's more likely to be the beginning of the third quarter.

And in regards to McDowell, and essentially the product line, the amplifiers you've acquired and the non-battery specific products -- where do you see that market share, not market share, but the size of the market going forward like a year from now? Is that going to be like a $5 million market or do you anticipate it being like a $20 million market? Obviously, who knows what's going to be happening in Iraq a year from now. Things could change dramatically with a lot of the tension in the Middle East, continues to aggravate. But if you have any color on that that would be interesting to hear.

I will ask Nancy if she wants to comment on it.

I don't really think we have the precise numbers on the size of the market but the key point is that it's part of the military communications market, which is one of the fastest-growing segments of expenditures for the military. So it's definitely a growth market.

And it's not tied necessarily to Iraq and Afghanistan. The special ops organizations are actually deployed in over 30 countries. It's not a secret. I mean we are training the army in Chad, for example. We are training the army and work with the army in the Philippines, fighting guerillas there. We're in drug interdiction in Columbia and many, many other places they can't be talked about. So that special ops component has grown and is forecasted to continue to grow, not just in the U.S. but also in the rest of the world. And one of the things we hope -- while McDowell has some sales in other parts of the world, we have a very extensive network in military organizations in the world. We've really started penetrating those. It's taken a while but we're really starting to penetrate those and we're going to bring McDowell's product line into those organizations as well.

(OPERATOR INSTRUCTIONS). Jerry Heffernan, Lord Abbett. Okay, it looks like his line was disconnected. (OPERATOR INSTRUCTIONS). It appears there are no further questions at this time.

Thank you, Trisha, and thank you, everybody, for participating. I would like to remind everybody that on June 8, we will be holding the Ultralife annual meeting of shareholders at our headquarters in Newark, New York. We would like to invite all shareholders of record to attend this. And for those who can't attend, we hope you'll listen in on the webcast.

We'd like to thank you all for participating today and we really look forward to updating you further on our progress in August when we will have our second-quarter conference call. Thank you very much.

Thank you, ladies and gentlemen. That does conclude today's conference and you may disconnect at this time.