Ultralife Corp (ULBI) 2008 Q1 法說會逐字稿

Good day everyone 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 would like to turn the call over to Ms. Jody Burfening. Please go ahead, ma'am.

Good morning everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for the Ultralife Batteries earnings conference call for the first quarter of fiscal 2008. 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 website where you will 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 the formal remarks. Management with then take questions until 11 Eastern.

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 a 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 ended December 31, 2007.

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 everybody and welcome to the Ultralife conference call for the first quarter of 2008. 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 record revenue of $49.6 million for the first quarter of 2008 with an operating profit of $2.4 million. These results are in line with the low end of our guidance at $50 million in revenue and $2.5 million in operating profit and include non-cash expenses of around $1 million from the amortization of intangible assets and the expensing of stock-based compensation.

First quarter saw a revenue of more than $24 million in our communications systems business. This was fueled by the more than $100 million in orders that we received in the fourth quarter for advanced communications systems. Gross margin in this segment was up to 25% but was constrained by costs that we incurred in expediting orders and managing our supply lines. We have resolved the critical parts delivery situation and believe that it is under control. We expect no further delays with deliveries of this item. While expenses connected with our effort to ensure supply will still keep us short of our 30% goal in the second quarter, we still expect to further improve on our gross margins.

Our rechargeable segment was also strong with revenue of $6.7 million. Gross margins were only 18% due to a startup of production orders on two new products. We're also seeing cost increases starting to occur as a worldwide shortage and high demand for rechargeable cells affects the entire industry. We have commitments from our suppliers to meet all of our delivery schedules but price increases will have to be passed on to customers. We expect this segment to continue to be strong and margins to grow toward our target of 25% to 30% as we mature our processes and address pricing to cover the increasing costs.

Non-rechargeable product revenue was down slightly from the fourth quarter. While demand is very strong, we have lengthened lead-times in order to devote resources to our large ramp-up in communication systems production. Gross margin was also up from the fourth quarter to 21% but was still affected by unabsorbed overhead and lower production volumes. We have strong order activity from the U.S. Department of Defense and see expanded penetration in automotive telematics and expect higher volumes to bring us toward our target margin of 25% to 30% by the second half of the year.

Design and installation services accounted for little more than $4 million in revenue. Gross margins were low as we started to make the investments that are important to grow this business. RedBlack Communications has expanded its marketing efforts that will fuel growth in the second half of the year. This includes both efforts to sell our services directly to government agencies and work on integrated campaigns with the Ultralife sales force. We're already seeing results with an expanded opportunity list and are optimistic about prospects for significant growth in this business.

Stationary Power Services is expanding as well. We have already established and staffed new sales and service offices in both Atlanta and Dallas and expect investments like these to take anywhere from three to six months to become productive. With a strong backlog for the year and growth in demand in all areas, we're now focused on the long-term steps needed to grow both demand and profitability.

On the revenue side, our focus is on new products and new service locations. In communications systems, our growing line of RF amplifiers will be a source of growth sold both as component products and as parts of our communications systems.

Over a year ago, we determined that RF amplifiers were going to be an important part of any communications systems offering. And to that end, we brought into Ultralife a very talented group of RF amplifier developers. This represents an important area of investment for us that is now starting to pay off.

In the first quarter, we started quantity production on our 50 and 100 watt amplifiers adding them to our 20 and 30 watt products. Our Tactical Repeater product based on our 30 watt amplifier extends the range of hand-held radios by five to 10 times. We will expand the types of radios covered by this product line and increase its capability over the year and we expect this to be an important source of growth.

Our SATCOM-On-The-Move and similar communications systems for tactical radios will also grow in capability and reach as we continue to add features. We believe that ultimately these systems have the potential to be used in every military vehicle anywhere in the world to enhance the range and the capability of tactical communications.

In our rechargeable product line by taking advantage of advances in cell technology, we're both increasing the capability of existing products and developing new products. Our SmartCircuit capability first developed from military applications is now being embraced by commercial developers in applications such as those in medical markets where devices can benefit from advanced battery management.

The addition of lead acid products to our product line will contribute to growth in sales through our existing direct channels into non-telecom standby applications such as backups for military communications and medical devices. Most importantly for the future, we are actively engaged in the design of a line of lithium ion batteries that will be the basis for our product lines in the standby power market.

In our non-rechargeable product line, our new high-capacity D cell had doubled the performance of sulfur dioxide cells, gives us access to more markets and applications that can benefit from its best in the world power density. In addition, it allows us to bring to market premium versions of our existing non-rechargeable products for those customers who get value from the increase in energy inside of the same package.

Our SmartCircuit technology is also being utilized in certain of our non-rechargeable products where advanced power management is a benefit to an application. This is the year that we will be bringing to market the Ultralife versions of our ABLE product line of thionyl chloride cells and small magnesium dioxide sales.

In services, our extended market reach will help us to grow demand for RedBlack's advanced communications and electronic services. And further geographic expansion with Stationary Power Services will help us to accelerate the growth of our battery and services business in standby power.

Across all of our products and services, we now have volumes supported by a robust infrastructure and the growth prospects to provide for continued success. We also have the wherewithal to increase margins by optimizing our operations, driving down parts costs and by capitalizing on our investments.

Ultralife has expanded its core product and services offerings and its adjustable markets and more importantly has become a diversified enterprise with products and services ranging from portable and standby power solutions to communications and electronic systems. Therefore in recognition of the different company that we have become, at our June meeting, we are asking our shareholders to approve a change in the name of the Company from Ultralife Batteries Incorporated to Ultralife Corporation. Ultralife Batteries will remain as a brand that represents the top of the line in performance and quality for advanced batteries for diverse applications Ultralife Corporation will embody our family of brands representing the diverse collection of power solutions, communications systems and the wide range of services that bring value to our customers in the broadest sense possible.

Based on the strong backlog and known demand, we still expect to reach revenue of at least $238 million in 2008. For the second quarter, we expect an operating profit between $4.5 million and $7 million on sales between $60 million and $70 million. The wide range is reflective of the potential variability in our customers' delivery schedules.

Now I would like to turn it over to Bob. After which, we will come back and open it up for questions.

Good morning everyone. Earlier this morning, we released our first-quarter results for the period ended March 29, 2008. Consolidated revenues totaled a record $49.6 million, a $17.3 million increase or 53% over the comparable quarter last year. This revenue increase was primarily the result of significantly higher shipments of advanced communications systems in connection with the three large orders we received in the latter part of 2007.

During the quarter, we successfully resolved the supply delays we encountered last quarter. First-quarter revenues were also favorably impacted by the contribution from the RedBlack and Stationary Power acquisitions which added approximately $3.6 million to our design and installation services segment. Offsetting these increases in part was a modest decline in our non-rechargeable segment.

Gross margins in the first quarter of 2008 were $10.9 million, an increase of $3.4 million from the prior year. As a percentage of total revenues, gross margins were 22% in 2008 versus 23% last year. Gross margin improvements in our communications systems segment were significant, increasing from 18% last year to 25% this year as volumes rose and the premium cost inventory issues that impacted us a year ago have been put behind us.

The margins in our non-rechargeable segment declined from 25% to 21% on lower volumes. Rechargeable gross margins were 18% in 2008, down from 25% in the first quarter of '07 as we incurred some startup costs on new products. The margins in our design and installation services segment were 12% in the first quarter of '08 reflecting initial integration efforts with RedBlack and Stationary Power and the investments we are making to accelerate growth in these new brands. Last year's 50% gross margin in this segment related to certain technology contracts.

Operating expenses in the first quarter totaled $8.5 million versus $6.9 million in '07, an increase of $1.6 million. Approximately one-half of this increase was related to the addition of RedBlack and Stationary Power. The remainder of the increase in operating expenses resulted from higher sales marketing and administrative costs associated with running a larger organization. Included in total operating costs in 2008 are approximately $1 million of non-cash expenses related to intangible asset amortization and stock compensation expenses compared with $1.1 million a year ago. As a result of the above, we reported operating income for Q1 '08 of $2.4 million compared with $600,000 last year.

Below the operating income line, net interest expense for the quarter was $300,000, down from $600,000 from last year due mainly to the conversion of the convertible notes associated with our acquisition of McDowell. The remaining balance on the notes of $10.5 million was fully converted into 700,000 shares of common stock in January of 2008. Additionally, we recognized a $300,000 gain from the conversion of the McDowell debt prior to the notes maturing. With the booking of this gain, we have finalized the accounting for the McDowell settlement.

Income taxes were nominal in the first quarter of 2008 as we continued to fully reserve for a deferred tax asset. We continue to monitor the deferred tax reserve and our ability to fully utilize our NOLs each quarter. Our U.S. NOLs offset 90% of our taxable income but we are subject to paying alternative minimum tax on the remainder. As we generate positive earnings, this will result in modest cash taxes of approximately 2% of our pretax income.

In addition, as we have discussed in the past, we're subject to an IRS Section 382 limitation on the use of our NOLs each year which deals with computations that address changes in our ownership structure. Our most recent analysis had indicated that as of December 31, 2006, we had met the criteria for a change of ownership that effectively results in an annual limitation on the use of our U.S. NOLs of approximately $12 million, the unused portion of which can be carried over to subsequent years. We analyzed the Section 382 issue as our ownership structure changes to determine if there are any further restrictions on the annual use of our tax loss carryforwards.

On the bottom line, we reported net income of $2.4 million or $0.14 per diluted common share compared with a net loss of $36,000 last year. Average diluted shares outstanding were 17.5 million shares, up 2.4 million shares from last year. The increase in shares reflects one million shares issued in our limited public offering completed during the fourth quarter of '07, 700,000 shares issued from the conversion of the McDowell notes in January and the impact of stock options and warrant exercises.

With respect to cash flows for the first quarter, adjusted EBITDA amounted to $4.5 million as adjusted for the add-back of non-cash, stock-based compensation. During the quarter, we used approximately $7.8 million in cash for working capital needs as inventory levels and receivables increased, offset in part by an increase in accounts payable balances. Inventory levels rose approximately $5.1 million during the quarter due mainly to the ramp-up of production for advanced communications systems and receivables increased approximately $12.8 million due to the timing of shipments.

Investing activities included approximately $400,000 in additions to property plant and equipment. We generated $1.8 million during the quarter from financing activities from stock option and warrant exercises and we drew down an additional $900,000 from our revolving credit facility.

Offsetting these cash increases and financing activities, we used $600,000 during the quarter to reduce principal balances on outstanding debt. As a result, we ended the quarter with an outstanding balance on our revolving credit facility net of cash of approximately $11.4 million, up $2.4 million from the end of December. Last week, we finalized an amendment to our credit facility which increased our overall revolver borrowing capacity from $15 million to $22.5 million giving us the flexibility to fund potential working capital demands as we become a significantly larger company.

As we look ahead to the second quarter of '08, we expect revenues in the range of $60 million to $70 million with growth coming from all parts of the business led by the strength in communications systems. We are currently forecasting operating income in the range of $4.5 million to $7 million for the second quarter based on the range in revenues. For the full year of 2008, we continue to expect to generate revenues of at least $238 million.

The financial health of our Company has never been better. Our balance sheet continues to improve and we have established the financial flexibility to continue to grow. That concludes my prepared remarks and I will turn it back to John.

The first quarter has been a good start to the year. In the second quarter, we're going to grow revenue, we will improve our margins and we are going to continue to make the investments for growth in the future. I would now like to turn it back to Abe and ask you to open it up for questions.

(OPERATOR INSTRUCTIONS). Colin Rusch, Broadpoint Capital.

Good morning. Can you give us an update on the number of military RFPs you responded to and the magnitude of the potential opportunity and this would be for '09 delivery?

The number?

Really, what I'm looking for is a sense of how big the backlog can end up being.

We get asked this question all the time about what '09 is going to be and it is May 1. We have a luxury here now which is a fair amount of backlog for the year. Most '09 procurements are only in the starting stages right now to be honest with you. In fact, the military budget, the supplemental budget is only going to be funded through I believe Congress's plan is only to fund that through March of '09. They're going to leave the second half of the government fiscal year up to the new Congress.

So all we know about are plans for programs, bids that we are being asked to participate in or bids that we want to participate in. And right now, there is probably three or four of them that are of a significant nature. I don't know how to characterize them because a lot of those are based on what people think they're going to get funded for. Our experience has told us that literally occasionally people get what they think they're going to get but not everybody gets what they think they are going to get. So I don't really know how to answer your question except to say --

No, no that's fair enough.

-- there are opportunities out there.

Excellent.

And I would also say that not just the U.S. military, I think the trend you're going to see like we did with batteries. We're doing more in batteries overseas -- we did more overseas last year of standard battery types than we did in the U.S. to the U.S. military. I think you're going to see us take some of our accessories communications products. I think that's the next trend is to start moving some of that overseas.

Thanks for segueing into my next question. So I was just hoping you could comment on the cross selling. As you start to expand the markets for the battery products, what are the cross selling trends you're seeing with the communications devices? Are you seeing a little bit of traction/interest? Can you just give us an update on that?

We already have very good relationships in the rest of the world with the UK MoD, with Australia, places far flung to Singapore and Japan. And so there is interest. As the U.S. has deployed things like IED jammers, thermal sites, SATCOM-type systems and not in our area but MRAP vehicles, I don't know if you saw but UK MoD just bought a small number of MRAPs through an FMS program.

The threat that we face wherever we go in the world of IEDs for example it is going to be faced by everybody. And so yes, we're seeing interest all over the place on those kinds of activities.

Excellent.

There is also more and more new technology getting spread through the world too. And that is the kinds of things that we like to be on the front end of.

Then just one last quick question. Do you have a timeline for the lithium ion design for Stationary Power when that will be introduced?

Yes. I think we've said that is going to be in '09. We're in design now. There is a long -- a fairly long qualification cycle for some of the approvals you need to have. Certainly there is early adopters who are taking -- we have some projects now. We have a project for a portable cell site that is already in production. So I think you will see it then; I think you will see it on the low end moving up because obviously as you scale lithium ion, safety protection becomes more and more critical but the benefit is clear. But it is '09.

Congratulations on a strong quarter.

Steve Sanders, Stephens Inc.

Just a follow-up, maybe another way to look at the '09 opportunity. I know John that you guys expect to have some significant opportunities on the advanced communications side to follow up what you have done so far. But maybe just shifting the focus a little bit more to the growth opportunities you see going into 2009 beyond on that. So talk a little bit more about Stationary Power, about auto telematics, about other programs outside of the advanced communications they could at least provide partial offsets to those tough comps as get into '09?

Sure. In advanced communications, we're seeing almost every vehicle program in the U.S. and overseas is at least looking at the vehicles that have the tactical radios in them are at least looking at SATCOM as an add-on to it, so adding SATCOM or adding amplifier capability to extend the range, a wider range type communication.

And some of them are even looking at more of a stationary application which is backup battery. We have a backup battery on the system but it is purely for a ride-through of a couple of seconds of -- or a couple of minutes of loss. People are looking -- some of them are particularly looking for silent watch, meaning being able to run for an hour or two without the engine running, people that run a heavy-duty system like that.

So when I talk about add-ons and enhancements, those are opportunities there as well. But virtually everybody who is looking at vehicles -- advanced vehicles with the radios in them is looking at this as an option.

So are there more $50 million orders? I would be surprised if there were. Are there lots of $10 million opportunities? Yes, there are and on multiyear programs. The Tactical Repeater product is another one. We are in the middle of shipping our first 300 units of the Tactical Repeater. That is just very, very small sale into a special ops community but there is a worldwide use for that and not U.S. military as much as the rest of the world who uses handheld radios and are operating in either rough terrain or areas where they want to be able to fan out from a vehicle and have longer range communications.

The use of a Tactical Repeater just with five to 10 extra range is a phenomenal capability. And we have done it in a very portable way. We're getting great field feedback and that will -- second half of the year, that is going to be sold worldwide. So that is the second opportunity we see out there.

You talked about other markets in commercial markets, telematics. We're just on the front end of talking with some of the companies we work with. But there is a very large, really looking at some fairly substantial potential increases for model year '09 extending to more and more models. And then, we have at least three other carmakers we're working with now that two of whom we have done designs for, one of whom we have a design that will fit what they need and we're doing quotations too. So whether they put them in that vehicle or not, we don't know right now. But those are fairly large opportunities kind of anywhere from $2mil to $10 million a piece type of opportunities.

And then at Stationary Power, the Atlanta office got opened just about when we bought the company because we planned that. That is really starting to pay back. This quarter, they are already having a great quarter. Just April was a great month. After being kind of a lot of opportunities coming in in the first quarter, but now they are closing them. As we look at our Texas Dallas office, it's kind of following the same trend. That's why I said three to six months, it looks like you get up and running there. I am not going to for competitive reasons talk about where we're looking at next but we're going to expand that footprint. And it is a big opportunity for us as we go forward.

They did I think about 12 million last year, Stationary Power, Bob, is that right?

Yes.

10 to 12 million last year. We can grow that at least 50% if not better this year with a good number exiting a bigger number than that on a run rate basis exiting the year. The same thing for RedBlack. Right now, RedBlack is really building a strong backlog of what I would call smaller opportunities leveraging on a lot of what we do already. You said cross selling. We're finding Stationary Power -- we sold into telecom -- we're finding opportunities in the military. We're going in the military now and cross selling that. We're finding opportunities in the secure community through RedBlack Communications RedBlack's capabilities. We're cross selling it to some commercial markets, local law enforcement maybe and places like that.

So we are starting to utilize that kind of cross selling as well in what we do. I would say those are -- did I miss anything, Julius? I think those are the biggest projects we have going forward in terms of where we think revenue growth is there.

Our penetration to the primes has grown significantly.

Bill just said in the military side, our penetration into prime contractors. We've said this before that the prime contractors are becoming more and more general contractors. And we're finding that there is more and more things that they believe we can supply them more efficiently than they can do it themselves. So we're working with just more and more people and not just in the U.S. Bill just came back from the UK and Europe where there are lots of opportunities globally.

And then on the guidance really specific to 2Q, you commented that you have essentially working through the supply chain problems that you had toward the end of 2007 and for I guess a good chunk of 1Q. How would you describe the April run rate relative to at least the low end of your guidance?

April run rate probably gets us to the high end of our guidance. I think I referred to it in my comments that we just have to be sensitive to the fact that our product -- we have had our customers call up and say, jeez, I need next week's now. And we have had our customers say, I need next week's the week after. And as we come up to July 4th weekend at the end of the quarter, we just have to be a little careful that we could have a week's worth of deliveries where somebody says, hey, we're going to shut down for two weeks or we're going to slow up a little bit for vacations or whatever. But I don't now, Bill?

We're seeing our customers -- we're participating in the phenomena right now where across the board our customers are looking for expedited deliveries almost in every segment we're participating in right now. So April has been very strong and we see that going through the quarter.

Then Bob, can you give us a little guidance on the cash and non-cash expenses going forward relative to 1Q? A quite a few moving parts here expanding in some areas, just a little guidance there would be helpful.

With respect to the non-cash expenses, the stock comp and amortization of intangibles, we will be running around $1 million a quarter right in that range combined. Next quarter or Q2 may be a little bit higher actually with respect to stock comp expense related to a proposal or to some stock options that are pending the current voting with a proxy. And that relates to some acceleration to a certain extent of retirement eligibility options but it may be a few $100,000 higher in Q2.

That bears some explanation. If you grant stock options -- under FAS 123R, if you grant stock options to a retirement-eligible employee, you do not amortize that expense. It gets expensed immediately if the retirement plan allows for the continued vesting of options which ours does. So it is my fault in that I am retirement eligible now under the Ultralife -- I have no plans to retire by the way -- but retirement eligible under the policy of the Company. And as a result, any options I get are expensed immediately along with at least one other officer now. So that is a FAS 123R artifact. It is a onetime probably a couple of -- $200,000 or $300,000 next quarter.

And then the cash expenses?

Cash expenses, you are talking about operating expenses?

Yes, just kind of thinking about run rates for 2Q and general trends over the balance of the year relative to what we saw in 1Q.

Generally, the operating expense is probably going to be a little bit higher just as we continue to invest in sales and marketing expenses and with the higher revenue growth commissions on sales programs and so forth. So it will be a little bit higher in Q2.

You had some pretty significant working capital needs in the quarter. I would assume a good chunk of that is timing. But where do you stand now at this point in the second quarter and what are we looking for in terms of working capital generation of cash over the next couple of quarters?

At where we stand right now, our borrowings under our revolver are down probably about $5 million from the end of Q1 so we're in good shape. We have been managing the collections from our suppliers -- from our customers fairly well. And as we kind of balance things out in the ramp-up with the communications systems orders, we should start to see more and more cash coming in. So we are in pretty good shape from a working capital standpoint.

So do we see receivables in inventory actually come down 2Q and then continue over the course of the year? Or is it more flattish for a quarter or two and then start to roll off? I just want to understand that a little better.

I think our inventories will be relatively flat as we go through this quarter and then come down later in the year. On the receivable balances, I would expect that to come down as we kind of roll into the later part of Q2 and into Q3.

Then just a final question. I think you maintained a couple of new products on the rechargeable side and you also mentioned needing to get some price increases through. Can you just give us some additional color on that?

Yes, we started shipping on two contracts that we have talked about before, one set of batteries for Harris and a new product for UK Ministry of Defense and fairly substantial. We started up the product in the first quarter. We had some scrap rates as we were getting our processes in place January and February that really hit us a bit.

On the costs side, we have been having little cost -- very small cost increases here and there on metal, grid, on steel, just little things here and there and then transportation costs. I think our transportation costs of inward bound materials was up $200,000 or $300,000 in this last quarter over where we would have expected it to be. We have absorbed it in the past. And we are at the point in time where we're going to have to pass some small increases on to our customers just for those, not big. But we have looked at it very carefully. I think we understand where the market bears it and I think people understand that it's just costing more especially again in transportation logistics.

On rechargeable batteries, there is a worldwide shortage of 18650 cells, the basic building block for everything from a lot of the batteries we make like the 2590 to some of the other radio batteries to the rechargeable batteries that are used in your portable PC. And there have been several fires in factories, the latest one being LG. I think HP has been public that they're not selling high-capacity batteries for their portables and they are not selling extra batteries for their portable because they do not have enough cells. And Dell's got the -- everybody has got the problem worldwide.

The suppliers have used cobalt price increases as an excuse for raising prices but I think they're raising prices just because they can. And we have seen price increases as high as 20% for the cells themselves. So we have started -- we're having to pass that on; there's just no choice and it is just the way it is. None of us -- we don't have any alternatives and our customers don't have any alternatives. It's just the price is going up and it's a phenomenon in the marketplace.

Ted Kundtz, Needham & Company.

I just wanted to follow up quickly on that last statement on the price increases. Are you able to pass along those and not impact where it has a neutral impact on your margins or are your margins suffering from it?

As I've said, we had some slight impact on our margins in the first quarter because of some of the smaller increases we have had. The sale increase on 18650 cells will start to affect us this quarter and we're passing that on. So the smaller increases which are probably anywhere from 0.5 point to 2 points on margin probably, we're going to have to pass that on. We don't have much choice and have. We did not in the first quarter.

But you think you will be able to. And so the net-net should be hopefully a neutral impact to you guys? That's your goal?

Yes, that is our goal. I am hamming a little bit only because we have to look at competitive situations or maybe some situations where we can -- it may not be even across the board. Let's put it that way.

Could you comment a little bit on each of the larger two contracts. While the SATCOM-On-The-Move is a $24 million contract is almost completed. Is that correct?

You would have to ask Bill.

It is some blending in there, where we have got a variety of contracts so it just depends on delivery schedule. I don't think any of them are complete of the moment.

So that's going to continue.

Yes.

How about the larger two, the advanced communications systems, $100 million there is two contracts there?

We're shipping on both of those through the year.

Right.

That will be going out throughout the year?

Yes.

Can we expect to see increasing quarterly revenues as we go through the year or is it going to spike in one quarter and then kind of trail off? Do you have any sense of that for us?

We expect it to increase. It is really a question of right now it is a little hard because I alluded to this when I said giving a range is that we get stuff ready and then we have to have a release to be able ship because it has to be ready to take the product. So I think we have a pretty good feel for quarter two into quarter three. I just can't tell you right now exactly what quarter three, quarter four is going to be.

I think it should increase during the year, be fairly level quarter three, quarter four. But I cannot tell you if some will get pushed out or some get pulled in between quarter three and four. The other effect is we expect to grow the rest of our business also in those quarters.

Along those lines, I got cut off at one point. But could you talk about -- you did mention the decline in the non-rechargeable business. Do you think that's going to be spiking back up in Q2 or what is the outlook for that for the balance of the year?

I don't think you're going to see a spike. We are seeing good order backlog right now. We have good visibility to the third quarter. We have been pretty much holding our run rates fairly steady but we're under pressure right now to increase that capability. We're seeing it growing throughout the year.

From this level? Because this came in a little below where we were thinking but you think it will start to grow again?

Yes, you will start to see it grow. We deployed a very large number of people from those production areas over to the communications accessories area.

We're just trying to balance the custom orders at the moment.

I don't want to get you into the gory details of operations. But the other thing we have going on is that we are opening a Mississippi facility sometime this quarter. We've had some delays. The city of West Point and the state are working together to get the construction project done. And we have had our Waco operations still open as a backup for overflow because we have had more than we can move and that is finally -- we're finally closing that down and then we will move stuff from Mississippi. So as a result, we have kind of contemporary operations going on as we move those things around this quarter but none of that is material in terms of affecting us. It is just some things we have to manage.

Logistically you have to manage, right. So the business is there, it is just a question of you being able to put enough resources behind to get it?

Yes the business is definitely there. There's no question about it. In the non-rechargeable area, we have to be very careful as we increase production there because there's a lot of capital, a lot of machines. And if we have new employees, we have to train them properly because there's a safety aspect to it but there is also a yield aspect to it.

Could you comment anything about the new contract wins in the first quarter?

New contract wins in the first quarter?

I don't think we saw any announcements. Was there much in the way of new contract wins?

We won new business. We've gotten new orders. We had been involved in -- there's a tremendous amount of activity on the design side both on the military and in the commercial area in the battery part of the business. But there's been nothing of a magnitude that -- our cutoff is $1 million. There's been nothing of the magnitude that would cause an announcement.

I know you don't comment on backlogs then but you have spoken enough about that on the call.

The non-rechargeable business, let's see, the backlog is -- as Bill said, we have been scheduling things out in August and September. And our customers have kind of pushed back and said hey, come on, we need -- both commercial and defense customers have pushed us and so we're starting to bring that level back up and bring some of that stuff in.

Are you currently increasing your hiring?

Yes. But we still do have some temporary workforce because we're going to be moving 10 to 20 jobs to Mississippi when we get that up and running probably end of this month, beginning of next.

Nice to see you on track.

James McIlree, Collins Stewart.

On the $102 million for the communications accessories. How much of that have you shipped so far?

I am not sure we're giving that information out to be honest. There is a balance we have between these three orders in terms of getting stuff out and meeting our customers' deliveries. So I am not even sure.

But you still expect to have completed all three of those round number $125 million by the end of this year?

By the end of the year, yes.

On telematics, what is the general range of what you think you might do in telematics this year versus --- and also what was it in '07?

We are running about $12 million run rate this year. In '07, I think it was about 9, maybe less, maybe 8, 8 or 9 last year. It is running at about 12 this year I would say.

Any impact yet from lower car sales?

We haven't seen it. For us, it is a matter of models. We're only in a small percentage of the models right now. I shouldn't say small percentage. I think it is a double digit percentage. It's 10%, 15% right now.

John, I hope it is not too tedious but I just wanted to go over the gross margin commentary that you had by each of the groups. The design and install, what is the goal there for gross margins?

Well, we want the contribution margin to be up in double digits. There's no question it can be. It just varies because let's take the Stationary Power standby power business. Sometimes we just do pure battery sales and maybe install it without a lot of design value add. Some of those may be -- the gross margin may be 20%, 15% or 20% but the overhead associated with it is very low. In some of the design projects, the gross margin could be 30% or 35% with a different overhead associated with it.

So right now, we are kind of trying to understand that model in terms of what the margin should be. One of the reasons we broke it out as a segment is that we really want to look at the contribution which we think should be double digit.

In the design services for RedBlack Communications, we believed all along that there's no question that should be 30% plus gross margins. Now, sometimes because there's a lot of people costs associated with it, sometimes it can be as high as 50% gross margin but it is 35%-40% people costs, so your contribution margin is only 10% - 15%. But some of the projects have very high margins associated with some of the government projects but they also have high overhead costs associated with them. So again, the same problem there. The margins run higher in that segment but the costs run higher too.

The 12% or so that you reported for Q1, it sounds like given the expansions in -- excuse me if this is incorrect Dallas and Atlanta -- might cap those a little bit for a quarter or two and then they could rise from there?

Yes, we'd expect that to be up in the 30% range. The bottom line is we would expect that to be up around 25% to 30%.

But in the second half not necessarily next quarter.

In the second half, yes.

In the second half, okay, great. And then you need the price increases in the rechargeable in order to get back up -- get into the 25 - 30 range also?

No, let me be really straight about this. Across the board, we had price increases in transportation costs and in some of the small parts we use, some of the metal parts, some of the plastic for resin things like that. That hit us everywhere including rechargeable. That is a couple of points' effect.

The big -- so that hit us everywhere. That did hit us in rechargeable. What we need in rechargeable is we need to keep running the way we ran toward the end of March and into April with a low scrap rate. We had a fairly significant scrap rate on a lower volume of some of the parts, the two new products which was most of our production which was the part we make for Harris and the part we make for the UK Ministry of Defense.

But we think we're now mature on those processes. We generally run a very low scrap rate, 2% to 3% or lower Bill is saying in those rechargeable battery packs but we ran way higher than that because of startups in those product lines. The problem with building those battery packs is they are podded with heavy epoxy so one mistake and the whole thing is gone. So we get our process there; we've got it there now. But that is what bit us on the front end of those.

So there is a clear path there that you control to get you to 25 to 30?

Absolutely no question.

And then on the primary batteries, you said you would get your goal later and that later is also second half? Is that a function of getting people back on those lines versus working on the comm accessory stuff?

Exactly. It is exactly that.

The comm accessory, why are you less than 30 in Q2? Is that again throwing people on it so a little bit less efficient?

The contribution margin of an additional system in the systems business is greater than 30% and with such an overwhelming number there, we should be up there. But we have spent a lot of money shipping parts around, expediting. We have had people on-site in three different facilities. Both our customers' facilities, we have people on-site. In our vendors' facilities and in their vendors' facilities and we still have some of that going on because we're going to make sure that this thing is nailed down that part and other parts. So that is costing us money as simple as that.

A lot of start and stopping.

As Bill said a lot of start and stop. I think you can tell by our receivables that I would have loved to have this thing fixed and flowing by February 1. It was more like March 1. We grew receivables by $16 million purely because of timing of shipments. We had a big shipment in the month of March and that is why we dropped our cash needs by $5 million in just April along our borrowings because we are starting to collect on the stuff we shipped at the beginning of the month there.

So we did not run efficiently. And when I say optimizing operations, that is what it is about. We're getting in a pretty good groove now.

Bob, did you throw out the operating cash flow number for the quarter? And if you did not, could you throw it now?

EBITDA was 4.5, 4.5 million. Are you talking about the first quarter?

Yes.

Let me say this. From the cash flow statement that we will present, we had EBITDA of about 4.5 and then we had a working capital usage of about 7ish. So the actual cash flow from operating activities will show the use of around $3 million. But adjusted EBITDA was about 4.5.

And the short-term debt, is there a term on that or could you just potentially keep that rolled over forever? Does that make sense as a question?

Let me try and answer it. If I don't, then tell me. We have got $2 million, a little more than $2 million outstanding under our term loan under the current credit facility. That is $2 million in short-term and a little more than $0.5 million in long-term right now. As of the end of the quarter, we had $12 million under our revolver. So we will work that down over time. So is there a term on that? No, it is just based on --

I guess that was how I was trying to ask it. So there is $2 million that actually has a due date on it and the rest is a revolver?

Yes, yes.

Richard Baxter, Ardor Capital.

Just a little question on the Stationary Power sort of the growth strategies you were talking about. I guess the two questions are either like a geographical and a client or product type. Are you seeing the idea of you expanding from opening a couple of offices and then getting them up to speed and then growing them again? Or are you seeing the idea of it being pulled by some of the customers you have? And then also the different types of either clients or products that you have before the acquisition and then now that you have more capabilities to feed into this?

I think it is a mix of all of those things. That business today -- go back. Our end goal is to move lithium ion batteries into that marketplace. On the way there, we can make a significant amount money designing and installing lead acid batteries to that marketplace. There still will be an important market for that. But the advantage of moving lithium ion batteries is that right now to service a customer properly in that market, you have to be within four hours driving distance of their site. It is as simple as that. You can do installation but to do maintenance you have to be there. You have to be close to them.

So with lithium ion batteries, it changes -- that's with lead acid. Lithium ion batteries it changes it. That's because a lead acid battery when it discharges, you don't know it has gone bad until you try to charge it and it does not charge. Then oh my gush, I have a redundant string that's gone. I don't have any redundancy any more. Next failure I can be out of business; let's go fix it.

Lithium ion batteries you can do predictive. You can watch them. You can see how they discharge, how they recharge themselves. They die slowly. You can actually see it especially with our SmartCircuit capability.

So we don't need to be all over the United States to do that. We just need to be regional to be able to service those customers. So number one, we want to be on a regional network. But number two, we want to do it so we can pick up the service around there. As far as customers go, yes, if we have some customers who are asking us to go from one place asking us to go to another place, that will factor into our decision of where to go next. So that is part of where we are also. So does that answer you?

Yes. The other side of it was, do you see either a difference in customer class or targets before and now after the acquisition? You mentioned data centers or something.

No, only in as much as some of the larger customers who wanted the business for the bigger companies, it's a little bit of capitalized we're getting into and only in as much as some of the customers, some of the cross selling opportunities, some of the customers at Station Power didn't know they have a focus or a channel to defense companies we can get at.

Ryan Jones, RBC Capital Markets.

On the SATCOM contractor, there was the component issue that was resolved this quarter. What happened to that supplier? What was the resolution there?

The resolution was that our supplier had a contract manufacturer who was shored apart from one of their suppliers. They caught up, they got the part in and they caught up on their manufacturing and their tests and got us parts.

Did you start dual sourcing or looking at that opportunity at all?

No these electronic parts are qualified as part of the system. This is not a system that you put together like a personal computer. EMI/RFI data communication security are very important parts of the system so it is not easy to substitute parts. You really have to -- if you start doing that, you end up checking cabling links and connectors and all kinds of groundings and no. We are not there now.

We are we looking at do we need to dual source some of these things in the future? You bet we are. But for these projects right now, we are not -- and then you go get a change order on a part from the Army or Navy or whatever it is pretty tough (multiple speakers).

Then on the rechargeable cells, it sounds like there's a possibility of a shortfall?

There is a worldwide shortage. We have no shortfall to our customer requirements, none. Now are there tons of people coming at us now looking for these? You bet. We've got more people calling us who are all of a sudden our friends because they cannot get parts from the people who have been supplying them before. Everybody we need to service and take care of, we are getting parts for. We have got enough to address new opportunities. But we're doing it in a way that is strategic versus just throw stuff in the marketplace.

But there is a lot of people out there looking for parts. Like I said, HP cannot sell extra batteries. They suspended selling extra batteries on portables. They said that publicly and I think Dell is in the same situation and so are a bunch of other people.

And then one quick housekeeping question. CapEx for the quarter and then D&A for the quarter?

Depreciation and amortization should be in the range -- depreciation runs at about $1 million a quarter. Amortization is running at about $0.5 million a quarter. And then CapEx we were light in Q1. I would expect in Q2 -- for the year, we have a CapEx plan in the range of $4 million to $5 million right now. We were light in Q1 so that will probably start to ramp up in Q2.

(OPERATOR INSTRUCTIONS). Mr. Kavazanjian, we have no other questions here at this time. So I would like to turn the call back to you for any closing comments, sir.

I would like to thank everybody for participating. Ultralife is rapidly becoming a different company. We're going to continue to grow by cultivating these successes and while continuing to invest in the future. We look forward to sharing these results and talking with you further next quarter. Thank you.

Thank you. That does conclude the call. We do appreciate your participation. At this time, you may disconnect.