Ultralife Corp (ULBI) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Ultralife Batteries Fourth Quarter Earnings Release Conference Call. Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn it over to your host, Ms. Jody Burfening. Please go ahead, Ma'am.

Thank you, operator, and thank you and good morning, everyone. Thank you for joining us this morning. This is Jody Burfening of Lippert/Heilshorn & Associates.

The earnings release was issued earlier this morning and if anyone has not yet received a copy I invite you to visit the Ultralife web site at www.UltralifeBatteries.com, where you'll 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 CEO 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 would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties, including continued acceptance of and demand for the Company's products, changes in the Company's products and changes in customers' purchasing plans. A more detailed description of such uncertainties is contained in the Company's filings with the Securities and Exchange Commission such as the Company's annual report on Form 10-K for the period ending December 31st, 2006.

In addition on today's call, management will refer to certain non GAAP financial measures that management considers to be useful metrics that differ from GAAP. These non GAAP measures should be considered a supplemental to corresponding GAAP figures.

With that, I would now like to turn the call over to John. Good morning, John.

Good morning. Thank you, Jody. Good morning and welcome to the Ultralife Batteries conference call for the fourth quarter of 2007. Joining me today are Bob Fishback, our Chief Financial Officer; Julius Cirin, our Vice President of Corporate Marketing and Technology; and Bill Schmitz, our Chief Operating Officer.

Today we reported revenue of $36.8 million for the fourth quarter of 2007 with an operating loss of $2.7 million. These results are in line with the preliminary figures we discussed or disclosed on February 15th and include non-cash expenses of about $1.4 million from the amortization of intangible assets and the expensing of stock based compensation, and a $1.3 million inventory adjustment, primarily related to the McDowell Communications business.

Despite the $7.5 million revenue shortfall to guidance, we posted a second -- a record quarter in our Communications Systems business with $16.5 million in sales. We expect major increases in revenue for 2008 in this segment with strong orders and prospects in the systems part of this business and in recognition of this trend have renamed this segment in our reporting from Communications Accessories to Communications Systems.

Gross margin in this segment was down to 16%, due to both the revenue shortfall and the inventory adjustment. With strong order backlog and alleviation of the key parts shortage, the continued improvement in delivery should move us back to a gross margin in the 30% range.

Our Rechargeables segment was relatively flat to the third quarter with $3.4 million in sales in gross margin at 17%, below our target margin. We expect this segment to resume growth in the first half of the year as we start shipments on our $7 million contract with a prime contractor to the UK military, and as we commence sales on additional rechargeable projects.

The Non-Rechargeable Battery business was down slightly from the third quarter when sales spiked as we completed shipments of BA-5590 batteries to the UK MoD.

Gross margin was down due to unobserved overhead on lower volumes and exacerbated by our decision and moved a significant part of our workforce over to work in the Communications Systems area. We have strong order activity from the U.S. Department of Defense and expect this business to also rebound in the first half of the year.

In the fourth quarter, we added two new businesses in the area of Design and Installation services. RedBlack Communications became a part of our Company at the start of the fourth quarter. RedBlack had modest sales in the fourth quarter but generated excellent order activity that, together with the strong prospects we have, will lead to higher sales in the first quarter and continued growth throughout the year. We expect RedBlack to be an important part of our solutions offering and a contributor to revenue and profit.

On November 16, 2007, we completed the acquisition of Stationary Power Services of Clearwater, Florida. Stationary Power represents our entry into the stand-by power market with a full portfolio of design, installation, and maintenance services. While Stationary Power contributed about $1.5 million in revenue for the quarter, acquisition accounting rules required that much of the profit on certain orders that were booked prior to acquisition be reflected as increases to the value of the tangible assets rather than through the income statement.

As we have already started to aggressively grow our footprint in this market, with the opening of sales and service locations in Atlanta and Dallas, we expect to expand in markets where Stationary Power Services have seen strong demand and expect to be able to increase our design and installation activity, as well as secure more service contracts to an expanded local presence.

In 2008, we expect Stationary Power to be a contributor to sales and profit. And we expect this contribution to grow significantly through 2009 and beyond, with the addition of new technology and service offerings.

Through development work going on today, we expect to start to introduce Smart Lithium Ion batteries into this market in 2009. The growth of small distributive hubs for wireless, fiber and cable communications presents a maintenance challenge that our SmartCircuit technology with remote monitoring can help to solve. Over time we will expand this capability to larger applications and installations.

We are also studying the feasibility of establishing these services in international locations where we have a presence and where these services are in demand.

Government and defense markets are fueling much of our sales growth in 2008. As we are at a cyclical high in U.S. defense spending, there is always a concern that this is not sustainable. The growth we are projecting for 2008 is as a result of our product development in the area of Communications Systems products. We intend to continue this development work.

The trend is for these systems to require extended ranges, more power and more complex systems integration. Our work with SATCOM systems, our tactical repeater product, our growing line of RF amplifiers, our high-capacity Smart Batteries and Chargers and our work with fuel cells for remote power are all directed at these trends.

The addition of RedBlack Communications gives us industry-leading systems integration capability and a high-level security cleared operation as well.

In 2007, we made significant strides in growing our International Defense business, particularly in our battery product lines. For the first time we sold more batteries directly to overseas military organizations than we did directly to the U.S. Defense Department. We intend to make similar inroads with our world-class Communications Systems products.

We firmly believe that our enhanced capabilities and international reach will allow us to grow our share of domestic and international defense spending. Our goal is to sustain if not grow revenues even in a declining total market through these moves.

Based on a strong backlog and known demand, we expect to reach revenue of at least $238 million in 2008. This includes making up the $7.5 million in revenue that has moved from quarter 4 of 2007 into 2008.

For the first quarter, we expect an operating profit of between $2.5 and $5 million on sales between $50 and $60 million. While these projections are still highly dependent on parts flow, we believe we have the commitments from our suppliers and the plans to ensure that last quarter's problems do not reoccur.

Now I would like to turn it over to Bob, who will give the financial commentary after which we will open it up for questions.

Thank you, John, and good morning. Earlier this morning we released our fourth quarter results for the period ended December 31st, 2007. Before I get into the specific results for the quarter, let me first summarize a number of items that occurred during the quarter which had an impact on the business and our overall financial results.

First, in mid-November we completed the acquisitions of Stationary Power Services and Reserve Power Systems, giving us half a quarter's worth of financial results in Q4. In addition, we added a full quarter's worth of results from Innovative Solutions Consulting, now RedBlack Communications, which we acquired at the very end of Q3.

To reflect our Expanded Services business, we have renamed our Technology Contract segment to Design and Installation Services. This segment will now include the results of Stationary Power and RedBlack as well as technology contracts. The Reserve Power business which mainly consists of sales of rechargeable lead acid batteries will be folded into our Rechargeable Products segment. Currently this business has a very minor impact on the financials.

We have also renamed our Communications Accessory segment to Communications Systems to reflect a significantly increased focus in this segment on integrated communications systems as opposed to individual accessories.

Second, in early October, we announced that we had negotiated a $7.9 million reduction in the overall purchase price for [McDowell] Research. This settlement agreement was consummated in mid-November with a $3.5 million prepayment on convertible notes we had with the sellers.

In the end, we recorded a onetime nonoperating gain on the McDowell settlement in Q4 of $7.6 million, and subsequent to end of the year, the holders of the convertible notes exercised their rights to convert the remaining $10.5 million principal balance on the notes into 700,000 shares of common stock.

Third, in order to provide financing to the recent acquisitions and the payment on the McDowell notes, we completed a limited public offering in mid-November where we issued 1 million new shares of common stock raising gross proceeds of $13.5 million.

These significant items added to the complexity of our year end closing process, causing us to report a little later than we otherwise would have liked.

Turning now to the financial results for our fourth quarter of '07, consolidated revenues totaled a record $36.8 million, a $6.7 million increase or 22% over the same quarter last year. This revenue increase was the result of significantly higher sales of Communications Systems as well as the added contribution from RedBlack and Stationary Power. Offsetting these increases in part were lower revenues in our Rechargeable segment compared to a strong prior year when we shipped a large order of 2590 batteries and chargers for an IED Jammer application.

Gross margin in the fourth quarter of '07 was $5.7 million, an increase of $600,000 from the prior year. As a percentage of total revenue, however, gross margins declined from 17% last year to 16% this year, mainly due to lower margins in our Rechargeable business related to the decline in sales volume. Our fourth quarter 2007 results were adversely impacted by a charge to inventory of approximately $1.3 million, primarily related to the integration of the McDowell business into our Newark operations as we completed the relocation of that business and conducted a year-end [physical] inventory.

In addition we experienced unanticipated manufacturing inefficiencies during the quarter as we ramped up our assembly operations. While we added $2.2 million in revenue during the quarter from our new acquisitions, the margins associated with these operations were much lower than our 30% target, due to the requirements of purchase accounting or inventory as of the date of acquisition is marked up to fair value and current volumes are not at levels to be able to adequately absorb current overhead costs.

Operating expenses in the fourth quarter totaled $8.4 million versus $6.6 million in '06, an increase of $1.8 million. Of this total, R&D costs accounted for $400,000 of the increase as we accelerated spending on certain new product development programs during the quarter.

Approximately $500,000 of the increase was related to the added SG&A cost associated with RedBlack and Stationary Power. In addition, other SG&A costs rose $900,000 due to higher professional fees associated with the integration of our new businesses in addition to generally higher costs required to support a broader organization. Included in total operating costs in '07 are approximately $1.3 million of non-cash expenses related to intangible asset amortization stock compensation expenses, compared with $1.2 million a year ago.

As a result of the above, we reported operating loss for Q4 '07 of $2.7 million compared with an operating loss of $1.5 million last year, reflecting the lower gross profit and higher operating expenses in the low gross profit margin.

Below the operating line, net interest expense for the quarter was above $500,000 down $100,000 from last year due mainly to the reduction of the outstanding principal on convertible debt. As mentioned earlier we recorded a onetime gain of $7.6 million on the negotiated settlement for the McDowell acquisition. Income taxes were nominal in the fourth quarter of '07 as a result of our decision in the fourth quarter of '06 to fully reserve for our deferred tax asset due to the uncertainty at that time of our ability to fully utilize our existing net operating loss carryforward. We continue to monitor this situation each quarter.

On the bottom line, we reported net income of $4.4 million or $0.27 per diluted common share compared with a net loss of $26 million last year or a loss of -- or $1.73 per share.

Average diluted shares outstanding were 17.3 million shares, up 2.2 million shares from last year due mainly to the impact from the limited public offering during the quarter, convertible notes outstanding and unexercised stock options. With respect to cash flows for the fourth quarter, adjusted EBITDA was relatively neutral as adjusted for the add back of non-cash stock based compensation expense and the onetime nonoperating gain on the McDowell settlement.

During the quarter we used approximately $4 million of cash for working capital needs as inventory levels and receivables increased, offset in part by an increase in accounts payable balances. With respect to investing activities, we spent approximately $700,000 on additions to property, plant, and equipment and $6.2 million on acquisitions.

With respect to financing activities during the quarter, we raised $12.6 million net from the limited public offering. In addition we generated $800,000 from stock option exercises and we drew down $2.3 million from our revolving credit facility. We used $500,000 of cash to reduce the principal balance on our term loan, $1.2 million to extinguish debt that we assumed in the Stationary Power acquisition and $3.5 million to make the prepayment and retire a portion of the McDowell convertible notes.

As a result, we ended the year with an outstanding balance on our revolving credit facility net of cash of approximately $9 million, up $1 million from the end of September. Inventory levels rose $5.2 million during the quarter due mainly to the ramp up of production for SATCOM-On-The-Move and other communications systems as shipments to our customers were delayed.

As we work through our supply chain issues, we expect to be able to bring our overall inventory levels down during the first half of '08 which will help us to eliminate our need for borrowing under our revolver. As we look ahead to the full year for '08, we expect to generate revenues of at least $238 million, with very strong sales of advanced communications systems and excess rates.

Specific for the first quarter of 2008, we expect revenues in the range of $50 to $60 million, due primarily to higher shipments of Communications Systems. Our ability to achieve this projection is highly dependent upon the parts flow from our supplier for a key component in our Advanced Communications Systems.

We are currently forecasting operating income in the range of $2.5 million to $5 million for the first quarter based on the range in revenues.

Our fourth quarter results were certainly disappointing, but we remain very upbeat. 2008 is looking to be a record-breaking year as we see increasing demands for our products and services, particularly Communications Systems; and our recent entry into the stand-by power market is opening new growth opportunities in the commercial marketplace.

We remain very optimistic about our ability to sustain long-term growth while delivering profitable results.

That concludes my remarks and I will turn it back to John.

Thank you, Bob. While we are not happy about the issues we faced in the fourth quarter, our supply lends are intact and we believe we have all the elements to make up for this with a very strong first quarter and a great 2008. We also think we are making the investments in products, services, markets and applications that will keep the Company growing in 2009.

Now I would like to ask [Darrell] to open it up for questions.

(OPERATOR INSTRUCTIONS) Jim McIlree with Collins Stewart.

John, this is a pretty wide range for Q1, so what would be the primary delta between doing $50 million or $60 million in the quarter?

Yes. We have a -- still have an increase. If I look on a weekly basis in terms of shipments, supplier shipments for the month of March, we still are counting on increasing supply. We have, we believe we have the supply chain to do it. We have all the work plans behind that. We are in with our supplier and their manufacturers. We think everything is being lined up to do that, but we are just kind of making sure. Because they've demonstrated the capability to produce a certain volume and they have to increase that. So it's really dependent on them increasing their volume of output on a weekly basis during the month of March.

And this is one supplier or a couple of suppliers?

We had one supplier who had a problem getting parts and it was one particular part that prevented the manufacture of [a board]. It's really that simple and we are in there helping them and making sure that that's going. It goes into multiple products that we have. And plain and simple.

But we are not assuming that everything else is perfect. So we've really gone in and made sure that with everything we have that we have the right backups and the right confidence in the ability of our different suppliers to perform. So I think -- we believe we have done everything we can to ensure our supply chain, but it still counts on some increases.

Bob, on the debt, I just want to make sure I have it right. The $10 million of the McDowell convert is now gone, so on a pro forma basis your long-term debt would be about $5 million, correct?

The long-term -- well, yes. Following the retirement of the $10.5 million convertible debt, we added in the fourth quarter we added $4 million related to the acquisition for Stationary Power. We have about $3 million remaining outstanding under our current term loan as of the end of the year and then we've got the revolver outstanding which at the end of the year was around -- or -- yes, was around $11 million.

I thought you said that post-Q4 close, more of the McDowell notes were converted. Is that not correct?

That is correct. As of year end we had $10.5 million outstanding on that McDowell convertible note and then post year end, that is gone now.

So on a pro forma basis, your long-term debt with the about 4.5 million?

Well there's -- Well, okay, yes.

I'm just trying to figure out going forward. So that's about 700K and additional -- additional stock you said. Is that correct?

Yes. 700,000 shares, yes.

Steve Sanders with Stephens, Inc.

I just want to come back to the guidance range again. So is it fair to say that the current run rate for the supplier that caused the problems put you at 50 million and if they expand, you get to 60?

I think that's exactly right.

And where do you stand on a second source and what is your thinking on that?

We will not have a second source for that during the term of the $24 million contract.

What about the 102 million? Does it use the same part?

In some places it does. During the term of that contract, we may have a second source. It is something we are actively working on.

And then how would you characterize the customer relationship coming out of the problems in Q4?

Oh, I'd ask Bill since he is intimately involved with this.

It's cooperative. I mean it's such a great product that it's in such high demand, so everybody is working really effectively together to get this behind us and meet the customer expectations.

(multiple speakers) and then how did the delays impact the expected margin on the SATCOM project in the near term? You have additional freight cost. I don't know if you have overtime. Can you just talk about that a little bit?

At the end of the year we had significant overtime. We typically take the Christmas to New Years week as a holiday week so we were paying people to come in, waiting for parts to come which didn't happen for us. There's overhead absorption, we moved significant [of our] people over from our battery operations over to manufacture these systems.

So we -- hit us about $600,000 in overhead absorption, probably $200,000 in freight and expediting and other stuff. So we factored that in for this quarter because to make sure we don't have that again, we factor some of that -- not in the overhead absorption, obviously, because we have to count on a certain volume, but we factored that into some of our expense categories for sure.

And then, John, you talked recently about a near-term to intermediate term target on the gross margins line of around 30%. Can you just revisit that in light of what has happened over the past few months?

Yes -- no -- we, in the Systems business we believe we should be there this quarter. It is heavily weighted by these systems. We get -- we think we have a very good grasp on the costs and the -- certainly the pricing of these things. So we feel pretty good about that. In the Non-Rechargeable segment, that was really hit by the fact that we moved people over. That's a heavy capital-intensive business about very high percentage of product cost is overhead. 25% I believe of our product cost in that area is typically overhead.

And so we overtly started scheduling things out. Not making customers dissatisfied, but where we could move things out we did to be able to move people over. We are -- I think we are back in pretty good shape this quarter with that -- in that business and in the Non-Rechargeable segment.

And Rechargeable, it purely was kind of a cyclical low. Last year we had a lot of sales in that area. We spent a lot of money in the fourth quarter in Rechargeable. You saw we spent the money in the R&D area for some projects with people that we are getting reimbursed for, but we don't get the reimbursement and can't book that until we have hit certain milestones which is in the first and second quarter.

Additionally there's another good-sized project that we started shipping on in that quarter and we had a fairly -- let's put it this way, it was in the $100,000 range, six-figure range in terms of scrap as we started not anticipated, but certainly you don't plan for scrap, but as we started that up, we are through that now and we are going to have pretty good shipments in this quarter.

I think we started pretty much last week with some pretty significant shipments there. That will continue and increase into the second quarter.

The first project was the one we did for the UK MoD through our prime contractor. That is starting to ship this quarter. The development work -- the product that the development work will result in will start to ship in the second quarter and we will see how that falls. We've also made sure that we were conservative in how we assume that that would be accounted for.

What happens in some of these projects is that even though we are getting reimbursed, you have to be able to look at contractual terms that [gate] the reimbursement in deciding where you can -- how you can book that either as an offset to expenses or as a technology contract revenue. I think we've taken that into account pretty well.

So we expect Rechargeable to come back this quarter in terms of volume. Get back gross margin because, again, we have -- on a low-volume like that given the fixed cost in test equipment and factor we have there, it's pretty easy to end up with a low margin if you don't get the volume.

We will see that back this quarter in even better shape in the second quarter.

Again we are being -- if you look at kind of what our guidance implies, we are being careful to make sure that we accommodate any unanticipated issues in both of those areas.

And then a couple questions for Bob. Can you just talk about run rate expense levels in 2008 with the acquisitions? Maybe compare them to 4Q and then carve out the amortization expense and talk a little bit about the CapEx and free cash flow outlook for '08?

The acquisition expenses that carried over or we've added in the sense in Q4 were $400,000 or $500,000 from the acquired entities in the SG&A area. And those because Stationary Power we've added in Q4 was a half of a quarter, that may go up a little bit as we go into a full quarter in Q1.

The amortization expense for the new -- well, total amortization expense for intangibles was around $700,000 in the quarter. As we go into next year, I expect it to be in about the same range per quarter. Capital expenditures will be or was in -- or were in Q4 about $700,000. As we go into 2008, we've put together a capital plan that is a little bit higher than that on a quarterly basis, but we typically every year put a plan together that's fairly aggressive and we typically spend in the $750,000 per quarter to $1 million per quarter as I would be looking ahead into 2008.

Then free cash flow, our EBITDA, adjusted EBITDA in Q4 I mentioned was relatively neutral, the $700,000 of capital expenditures in Q4 then would place free cash flow at about a negative $700,000 to $1 million in the fourth quarter. But as we go into this year, I would expect for the full year, we should be generating some very positive EBITDA and free cash flow should be offset or adjusted EBITDA should be offset by CapEx of -- you know, what, $3 or $4 million for the year. So we anticipate some very positive EBITDA for the year.

Ted Kundtz with Needham & Company.

Couple of questions for you. I just want to go back to some of these contracts that we've got here. The SATCOM-On-The-Move contract, that's the one that caused the delay. Where are we in that whole contract? There's a $24 million contract, how much have we shipped so far and what is the balance?

We shipped about a third of it during the quarter, during the fourth quarter and most of the rest of it will go -- does it all go this quarter, Bill?

No. It stretches out.

All right. So the good -- most of it -- it all goes out by the end of the second quarter. So in the first half of the year. There are some pretty healthy shipments this quarter.

And on the other Communication Systems orders the $62 million order and the $40 million order we will start shipping on those -- I think we've started shipping on those. We did start shipping on those already.

And how does that shipment rate look to you guys? What is it? Is it fairly equal or is it waited in any particular order quarter or -- ?

They are asking us to get up to a certain run rate in the second quarter and then they are going to make a determination whether they increase it or not. We don't -- I'm not trying to be invasive here, but there is some chance they will accelerate it. There's some chance they will spread it out.

So we have kind of assumed that that is going to go throughout the year.

Can you say what that run rate target is?

I don't have that. I don't have the ability to say that right now, to be honest with you.

And then how -- the question was asked, I just want to get a little more verification on it again, was the Component issues there? It's the same supplier. (multiple speakers)

Yes the parts, the parts (multiple speakers)

(multiple speakers) said but it's already starting so -- .

The part that was in short supply at the end of the year is designed into several of our systems and we are getting the flow we need right now. Let's put it that way. We are getting the flow we expected right now. It's got to increase -- kind of by the second half of the year we expect to have -- maybe it's earlier, but by the second half of the year we expect to have all (inaudible).

And how long does (multiple speakers)

And by the way, given that we are happy that we get the supply going on this thing, we don't really need an alternative, but we are certainly going to try to back up (multiple speakers).

Right, yes. So there's no issue with the performance of the part? It was just the supply of it?

It was just the supply. The board -- there was one part (inaudible) missing. I think was -- I don't want to get too fancy on this, but it was one part missing that they couldn't get and they had commitments for in which we -- wish we would have known about sooner to be frank with you.

Yes I just sort of -- little puzzled why you don't have better clarity on the second -- on the first quarter here given it's so late in the quarter already. (multiple speakers) they would have the parts or they don't have the parts to ship to you.

We are expecting -- I mean we are expecting increases in shipments every week of the month of March and if those happen -- .

We will be at the higher end.

We will be at the higher end.

Right. This $102 million of this Advanced Communication Systems product, you haven't identified who that is with or where that's going. Is that correct?

That's right. I think what we've said is that some of it is -- it's packaged in different ways. It's multiple configurations, packaged in different ways. Some of it goes into vehicles and some of it is man -- is human carried.

I thought so. Okay. And how long does that business go for? What is the timing on that entire contract? Is that (multiple speakers) this year or is that going to go into '09?

No. We've said that is all for deliveries in '08.

Is there potential follow-on business there?

We think so. Look, the fact is that wherever you see -- let's talk about that particular Communications Systems business, wherever you see a radio there is a need for that radio to talk longer, further and to more -- over more different frequencies. And so when they're vehicle mounted or backpack radios, they want the power and capability to go to SATCOM, for example, which is different frequencies and higher energy, more power. So we put together systems that are comprised of converters, amplifiers, antennas, in different configurations to serve that market.

We think that is a big market. We think people have, people keep talking about this is tied to MRAP. We think it's tied to vehicles. We think that every time a vehicle is procured and a radio is put in the vehicle, our goal is to have one of our systems in there to make that radio perform better, talk longer and over a wider distance.

With a handheld radio, that's -- we think that is the next frontier. There's hundreds of thousands of handheld radios deployed in the world. Most of them are deployed outside of the United States -- military, actually. In places like Kenya, Indonesia and Japan, and UK, and Australia and other places.

So we think that those radios typically have a radio to radio range of about two miles and that's why we are so, that's why we designed our tactical -- portable tactical repeater product. Because it is a hub that enables you to, through that hub, communicate over much longer distances with those radios. We think that people are going to want to do that.

So this Systems business -- and we have -- there are other products we have that we are working on the Systems business that play on those and other trends that we see. We think that's not just U.S. military, it is a worldwide trend in defense and in government.

The margins on this business would be what? In what range?

Because these are highly engineered products, they are typically 30% range margins. We think with more complex systems they could be higher, but I think 30% is, in our experience, is a good number for it.

Is all the work at McDowell, the integration completed? Do we -- are we -- should there be any more charges or is everything kind of finalized by now?

I would like to address -- I'll address it -- let me address the charges. When we make the settlement on McDowell, we looked at the inventory and we said that we were not comfortable with the valuation of it. Part of the negotiation was the valuation.

We had -- our obligation is to evaluate inventory based on what we know as best we can, but we don't have the experience -- we did not have the experience to look at parts necessarily and say, yes this is obsolete. This is going to sell.

There's -- we look at some parts and we say, when is that going to sell and the next thing you know you get a big order for it. There's cyclicality to the business. There's very, very large product offering. Literally thousands of different options. The thing that they do really well is really cater to the needs of customers. And that's spawned a lot of different products and our goal over time is to make this more platform-oriented, so we can do variations on it.

But right now there's lots of different products. So every time we get new information, we reassess. Every time we make new buys on products, we reassess do we have the right standards set for the parts we have in stocked already? And so we think we have done the best job we can.

We did a full audit. We got everything into our facility here. We sorted everything out. We looked at (inaudible). We went through it. We went through it with our external auditors. One of the things that took a long time in the month of January was to do the audit, audit it ourselves, do the inventory, audit it ourselves and go through it with auditors, look at evaluations and make that adjustment.

So we think we are there. We really do. But we still -- we get new information every day, but we've substantially gone through that stuff.

So you think it is pretty -- it should be fairly complete. (multiple speakers) don't expect any more charges?

Yes I wouldn't be -- we wouldn't be doing our job in terms of posting financial statements if we thought there was more there. (multiple speakers)

Taking a long time. It's just taking a long time to get this totally finalized. (multiple speakers)

Yes it has.

Do you guys give any backlog numbers, where you were at the end of the year?

We typically don't give backlog numbers because it doesn't -- ordering patterns are not any indication of the health of the business typically. In one part of our business if you look at the 9-Volt business, we have pretty good -- we don't want people to have backlog because it's an order to stock business. We want to stay lean.

In the business we sell directly to military, that has to do with budget approvals and then the ordering patterns change. Sometimes they place orders after long periods of times, sometimes they order a month at a time. DLA or the UK MoD, it's really, it is not a good predictor.

And then of course in the Systems business, it is fairly project or -- the big orders that everybody wants to focus on big orders, it's very project-oriented. And so (multiple speakers) when those happen.

Are you seeing any stretchouts in the military ordering? Any deferral of budgets just pushing out of any order patterns?

We see projects move around. So we thought we had been asked before about, for example, the [Decrew] program, the just founded ID Jammer program. We'd been thinking for a year that they were going to buy more into that program, but the military sets priorities and one of their priorities was to order more vehicles, more MRAPs, right.

And now you see MRAP coming [down], but they are, also, in place of that it's not that they don't need vehicles, it's that they decided that, they are looking to see if they buy different vehicles. Lighter weight, faster versus heavily, more heavily armored.

So the priorities change is what we see. And it all depends kind of on the situation on the ground, and an assessment of what they need in the coming months is how they decide their priorities.

So no particular trend there?

No. It's just that the more areas that we can participate in, the more we can insulate ourselves from funds that move around.

Walter Nasdeo with Ardour Capital.

Most of my questions have actually been touched upon already, but I was wondering what the DSOs were for the quarter?

The DSOs were consistent with where we were -- what we reported last quarter which was around 55 days.

All right, good. And did you -- have you broken out again this quarter -- it's a question I ask you every quarter -- military versus the commercial sales or the industry sales, what the percentage was?

We didn't break it out. I mean I don't -- I think we were a little more -- because of these Communication Systems sales, we ended up being more heavily weighted to defense and government. So we might have been in the past where we were kind of 60, 2 to 1, we might in closer to 3 to 1 this quarter. Does that sound right to you, Bob?

Yes. That's about right.

Yes. Probably closer to 3 to 1.

We still consistently run about 50-50 on the battery side, military and or defense and commercial. But on the growth in the Systems business has changed that a little bit.

Now as far as the capacity that you guys have there and is that still going to be sufficient? Or do you expect any capital expenditures going forward as you grow this system-oriented business more?

No I think we are in pretty good shape in capacity. We -- this business really does require -- because it is engineered content and we are not bending our own sheet metal. We're not -- well, we are making our own cables in some cases, but we are not making -- we are not putting a lot of capital-intensive labor in to these products. Our labor is more assembly and test.

And so really, the capacity there is floor space and people. We did announce that we are starting a small operation in Starkville -- I'm sorry -- West Point, Mississippi because we have some development projects going to Starkville, Mississippi at Mississippi State University. So that's in recognition that we might need more floor space and, frankly, it helps us a little bit to spread out our -- not too much, but have a different, another labor base because there are times when economies are cyclical in different parts of the country. And we want to -- we will be people-intensive in some of these businesses as we go forward. Not capital-intensive.

When I say intensive meaning that will be the biggest gate is hiring and training people. And we want to have two different pools of labor to be able to pull from.

Because we do go through periods where unemployment gets very low in particular areas and it's happen to us before up here. So we think we are in pretty good shape in terms of the resources that we require.

Is that Mississippi facility going to be more of assembly or manufacturing?

It's going to be -- well we call it assembly manufacturing, but it is going to be more assembly on the front end. It won't be heavily -- assembly and tests. I mean the capital equipment part will be test equipment. It's nothing like the Non-Rechargeable Battery business where we have large coating, mixing, dry rooms, compresses compressors, etc.

Then just lastly, what is the total number of employees at year-end?

We had around, I think it was about 1150.

That was what I thought. I was going to say 11, 1200 employees.

[Ryan Jones] with RBC Capital Markets.

This is Amit Daryanani actually. Had a really quick couple of questions. First off, the $0.5 million professional fees you had this quarter, is there any (inaudible) flow through the next quarter?

Yes. That was -- we don't think so. There might -- we might have a little bit higher fees because with more complex organization certainly our audit fees will go up, but we had certain legal fees. We had to do an audit on the front end of the acquisition of our acquisitions. Those fees hit us during the quarter. We had some consulting fees connected with work that was done in conjunction with expanding our bank line.

So I would say that a good -- the most of those, but not all, will not be

Got it. Not to beat a dead horse here, but the component provider, was this component provider put on the aVL by you guys or by the OEM itself?

Us.

By you guys. All right.

This is a part that we have been using -- we -- McDowell Research started the SATCOM system in early '06, Bill?

2005.

2005, I think. They had one good-sized contract that happened that they shipped in the quarters before we bought the company. Then last fall, we got another order which contained this component also, same type system. We did some changes to the system to make it more repeatable in that we shipped in the spring of this year. And then with this system still had the same parts. So we had a long history.

It was a matter of -- it was really a matter of getting an order for three times the quantity that they had ever gotten before.

Right and so far it sounds like the [ramps] are going in line with expectations with this component, right?

We are where we expected to be.

My final question, just kind of looking at the history for the last few years with you guys, at least it's been -- there've been a number of negative preannouncement every quarter and partially it is because we are in a lumpy business and revenues flow around. But just given that lumpy nature, given the history of having preannouncement, have you guys looked at potentially backing away from giving quarterly guidance? Because clearly the lumpiness does indeed the predictive power you guys have?

That's a really good question. That's something that we -- we are kind of looking at each other here because it is a very serious discussion we've had and we have with our Board. We have with our audit finance committee and it's something we are going to look at. We are going to look at with our Board very seriously next week and going forward to say, what do we really have a capability to give.

Only defense I can give you is we try to -- I mean we studiously look at this and say, we want to tell people what we really think is going to happen. We haven't been very good at that, okay, but it's something that we are actively talking about.

Right and in my head partially it's just not even your take, it's just the programs you have are so lumpy that I think it is beyond your control to (inaudible) flow out.

Then just finally, can you just talk about what sort of appetite do we have to do acquisitions at this point or is the focus more to totally drive revenue growth out at least for 2008?

There are some areas in which, I will say the acquisition of ISC which is now RedBlack Communications was relatively seamless, because they really are they are engaged in markets we are engaged in. They have services that we've used in the past. We actually subcontracted work to them in the past. We knew them well and it very easily slipped right in with what we're doing. I mean our salespeople get calls to sell their products and their services all the time.

So things like that, I don't think we are going to shy away from if they come up. Right now, our goal is to really look at long-term revenue growth opportunities. We think Stationary Power gives us the platform to be able to do that. We can do that with what we have and with products that we are developing moving forward.

So we don't have any plans for any big acquisitions coming forward, but on the side of some smaller things that integrate well with what we're doing, maybe help us vertically integrate in some ways, we will continue to look at those. But frankly we would like to do it this year (inaudible) with McDowell's business.

The McDowell business was 20 -- , a little over $20 million a quarter -- a year business when we bought the company and that business is going to be $150, $60 million this year maybe if we keep cranking

Colin Rusch with Broadpoint Capital.

I'm just wondering if you can give us an update on the development of the channel strategy? How large is the service infrastructure at this point and how do you see it growing in 2008?

Well, first, with RedBlack Communications, they have a market for services that is pretty well defined in the government marketplace. That when they had financial issues over the last couple of years, they had one big customer there who they were getting all of their business with. They didn't really have sales and marketing and when they lost that customer, they turned to product sales.

So there's still some product sales there, but I think there's a lot of capacity that they have there to do more services to a pretty good extent. They were doing about $10 million a year with the services in the past.

So we think there's capacity to grow that pretty well to $10 million or above in services.

On the Stationary Power side, really, we have a very solid infrastructure that we've augmented some with the addition of an operating manager down there and some finance staff down in Tampa which is their headquarters. They've expanded -- we've expanded now -- they had started just as we were doing the acquisition to put an office in Atlanta and the importance of the offices is not that they can't do installations in other places, but they have to fly crews there to do it.

And then the implication of that is if you flight a crew there and do it, you don't pick up -- you can't pick up the service contract, because you have to have somebody -- you get service within a four-hour driving distance of where you are at that point in time. So we've added Atlanta. We've now added Dallas. So we have a real opportunity to add more there.

It's not huge infrastructure when we do it. We just need crews and [van] and parts to do that.

Excellent and -- .

So I think there is capacity to do that, I guess. I think we have infrastructure and we've given them management infrastructure and financial wherewithal to be able to do that more.

Can you give us any sense of the scope of how that is going to grow throughout the year? Or do you -- ?

Well, they did -- I mean we said we did about $1.5 million in the month and a half we had them. They've been -- they had been running pretty much at a million -- in '06 they've ran about $9 million. In '07 they are at about a $12 million rate, kind of 30% growth. 30% growth, I would say would be the bottom. I think we are now (inaudible) wherewithal to grow that even faster.

So it's not prone to some explosive contract growth like we had with the Communication Systems business, but I think we can grow that -- think 30% would be a bottom for me in terms of this being we can grow that business with.

The other thing we want to do that we think is there is that every time we do an installation, we have the opportunity to get contract maintenance. And contract maintenance is usually a good predictable -- it is a good predictable revenue stream. It allows you to get critical mass in particular areas to put resource there that when they are not doing that maintenance can do installations work.

And I think that really does change the model when you get a percentage of contract maintenance. They, they're kind of $12 million run rates, they were under 10%. They are probably under 5% of contract maintenance. They did do maintenance but it was time and materials as needed type work.

My goal is that we start getting contract maintenance up to be a decent 10 to 20% of that service sector, and that's good. It is also good business because it's business you get paid for before you do the work.

Excellent. And on the Stationary Power applications, how do you think about the timeline for the sales cycle? And can you give us a scale for how to think about that going forward?

Well I can tell you what we've learned in last six months since we've been working with the team down there. And that's that there are some things that happen right away. There was a big power failure in Florida yesterday and when systems which went on to lead acid batteries came back online, all of a sudden alarms went off because some of those lead acid batteries didn't do too well.

My analogy is if you discharge your car battery all the way, try to do that three, four, five times, one of those times it's not coming back. And so when they went to recharge those strings of backup batteries, some of them didn't come back. So Stationary Power is probably getting calls as are people like them today from customers that are saying quick, I need to -- now they put redundancy in. I have a redundant string that needs to be replaced.

So some of that business that's very event-driven and it happens very fast. There's some of that business that goes on a cycle where companies like Verizon and QUALCOMM, people who have cellphone towers -- Sprint, AT&T -- know that on a rotating basis they have to kind of rotate through that every two or three years or whatever their cycle is, based on how they use those backups. They have to change them.

So those kind of sales cycles, those can be three, four, five month sales cycles. Six-month sales cycle is the customer doesn't know you. Then again if the customer knows you, they may -- you may be on their list of people they bid for particular jobs and it may be a month or two.

So I don't know if that helps, but there's a real range of how that business happens.

Yes it certainly does help. The last question is just about how do you estimate customer acquisition costs? Clearly if you've got a couple of different ways that you're gaining customers, how do you put numbers on that?

Customer acquisition in any particular market?

Why don't we just stay with the Stationary Power and the RedBlack.

How do we estimate customer acquisition costs? I think right now our approach is we think there's geographies where that -- that market is growing and it's growing because more and more installations are going in that need backups. As soon as they start doing fiber to the home, there's a hub in that home in the garage with a backup battery.

So there's more and more applications and more and more things that need backup, plus the SEC now is pushing from four to eight hour backup time. That requires more batteries. So we think that is a growing market. So we think there are geographies that in particular are growing faster because new installations, new homes, new things are going on.

Southern United States, you know -- you follow where the population's growing. And so we look at those markets and we see -- I don't know about customer acquisition, we see unfulfilled demand. We have a model for what it costs us to put in a salesperson and a couple of maintenance people, give them the van and the tools they need, get the right level 3 electricians or whatever we require in that space and then we have a model for what kind of revenue we think those installations can generate. And I think we are learning what it can do.

We know what it can do on the installation side. We are learning what it can do on the contract maintenance size. That's something we are going to learn over the next year. Then as we go forward we want to change that model because we think with remote monitoring capability of smart batteries that changes the model of what it -- what a crew can do or what what one office can do in terms of maintenance. Because if you can do predictive maintenance instead of reactive maintenance, it changes the equation.

So I don't -- that's how we look at it. We don't look at it as a cost of acquiring a customer. We look at it as how do we serve markets that are underserved right now.

[John Barr] with Buckingham Research.

I wonder if you guys could just clarify the $24 million contract with Raytheon? You said the customer and the supplier were working with you on it and did you also say you had shipped 1/3 of that?

Yes, 1/3 of that shipment went in the fourth quarter.

And then also said that the rest would be completed by the end of the second half?

By the end of the second quarter.

All right. Is this contract sole sourced for you guys?

Yes it is.

One other detail question if you could, on the inventory increase, do you have a sense yet for how much is work and process versus completed product?

Bob can look right now, but if you look at the inventory increase, it almost totally ties to we were staged for that $7.5 million in revenue plus what we were going to do in the first part of this quarter. If you do the math on margins and take a little off for labor content, that pretty much represents what our inventory increase was.

If we would have shipped that $7.5 million, inventory would have been flat even in a growing business.

I don't have the number right in front of me, but probably work in process inventory was probably about 25% of the overall inventory I'd say.

Can you tell us what the part was or characterized the part for us a little bit?

We have been asked not to only because there's competitive issues here, but we've said it was an electronic board. It was a circuitboard and it was for lack of one component at the contract manufacturer of the board.

Okay. And McDowell had worked with this board for a long time?

Yes. It has been contained in every SATCOM system that was made going back to 2005 or '06.

How do you not have a second source for this? Wouldn't that be part of your proposal to the government?

Not particularly. There's a cost associated with putting second sources in place for things. There are board layouts, component qualifications and in a lot of these things there's fairly extensive qualifications required. And you have to kind of pick and -- .

If I did it for every part -- this is a very complex system. If I did it for every part in the system, it would be a very large increase to research and development costs. So the question we ask ourselves right now is what else should we be second sourcing and what is that going to cost? And what is the best business decision

So the supplier just wasn't able to ramp with you?

Yes they had -- they believed they had commitments from their suppliers and they didn't get the parts in time. It was literally that simple. But like I said, we wish we would have gotten a little heads up on it because we frankly think by getting involved in this we were able to help ensure that this doesn't happen again.

That completes today's question-and-answer session. At this time I'd like to turn it back over to management for any additional or closing remarks.

Yes, thank you. Thank you, Darrell.

2008 is shaping up to be by far the strongest in the Company's history. We really believe we are on track and are actively ensuring that we have parts supplied. So the first quarter will get us off to a great start.

We want to thank everyone for participating and we really look forward to sharing our progress towards that end on our next call.

Thank you very much.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.