Ultralife Corp (ULBI) 2008 Q4 法說會逐字稿

Good day and welcome to this Ultralife Corporation fourth quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Miss Jody Burfening. Please go ahead.

Thank you Patricia and good morning everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us for the Ultralife Corporation's earnings conference call for the fourth 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 at www.ultralifecorp.com where you'll find the release under investor news in the investor relations sections. 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 AM Eastern time. Before I turn 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.

These include worsening global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring and delays. The Company cautions investors not to place undue reliance on forward-looking statements which reflect the Company's analysis only as of today's date.

The Company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. 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 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, John.

Thank you Jody. Good morning and welcome to the Ultralife Corporation conference call for the fourth 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 revenue of $49.2 million for the fourth quarter of 2008. These results are in line with our preannouncement of two weeks ago.

Operating profit was a loss of $300,000 and adjusted EBITDA of positive $2.7 million. Revenue of $20 million for Non-Rechargeable Products was fueled by robust demanded in most sectors. The only weakness was in automotive telematics, where shipments to customers ceased in December due to extended holiday plant shutdowns.

Gross margin was up to 18% in the Non-Rechargeable segment. But we're still impacted by the flowthrough of increased material costs and the product transition at our China operation. We expect to continue growth in this segment and continued improvement in gross margin in the first half of 2009.

Rechargeable Products revenue was at an all-time high of $15.4 million. Revenue was fueled by strong international demand, increased demand for existing programs. Margins were 20%, as we were still faced with high costs, particularly for rechargeable cells.

We also made a strategic decision to make a lower margin sale of our Smart Chargers to an international military customer. By changing over this customers' infrastructure for battery charging, we will benefit from future sales of our products. With attractive margin, the customer will realize a lower total cost of ownership.

Material costs have started to decline and price adjustments we've made will start to improve margins in this segment in the first half of 2009. In our Communications Systems business, revenue came in at $9.4 million versus an average of about $40 million per quarter in this segment during the first three quarters of the year.

Revenue in the fourth quarter was lower because we had completed virtually all shipments against our large, advanced Communications Systems orders that we received the second half of 2007. Since the middle of last year, we have been prepared to ship an order for spare parts and spare systems. These systems are needed and funded and the order was to have been placed in the fourth quarter.

Late in the quarter, the decision was made by the Department of Defense to include this order as part of a new contract vehicle and that change caused the delay. It should be resolved by the end of the first quarter.

As we participate more frequently in major systems programs, we may see fluctuations in our quarterly revenue from time to time caused by either contracting delays or expedited shipments of orders. Aside from the very low contribution of advanced systems to fourth quarter revenue, the rest of our Communications Systems business is stronger than ever and produced a gross margin of 27%.

Design and Installation Services accounted for $4.4 million in revenue. Gross margins were 13% as we began the integration of our recently acquired US Energy Systems Inc. of Riverside California with our existing Stationary Power Services business.

We now have one sales, service and engineering organization across our Standby Power business of consolidated back office operations. We will continue to expand our footprint and grow our revenue, increasing our margin significantly through 2009.

In terms of our markets and demand, our defense and government business is very active. Domestically, battery sales are strong and we are achieving our goal of making our systems products standard equipment as forces reequip.

We now see that most vehicles with a military radio, including those used for food, fuel and medical needs, are planning to become Satcom enabled. There are currently only two qualified systems in use by the US military and ours is the only one that works with any vendors' radio and which can be modularly serviced; multiple new vehicle program scheduled for deployment in the US for 2009 and several out into the future. We're well positioned for our share of the business.

Internationally we have been down-selected for batteries and chargers and to several new procurements. We're starting to see Satcom, SOTM, Satcom-on-the-Move systems appear in the vehicle programs of many of our allies. In addition, our tactical repeater for handheld radios is now being tested by at least four different international customers. All indications are that it will be become an important part of our systems product revenue this year.

We see similar success in many commercial markets. In automotive telematics, although we now expect a drop in revenue with the automotive industry's lower projected vehicle sales, we also see expansion of our product into added platforms.

Aside from this, our commercial battery business continues to grow. Strength in markets such as safety, security and automated meter reading which will only be enhanced with our new ABLE productline, growth and development, applications and revenue is also being fueled by our Smart battery product, particularly in markets such as medical devices and process control. Our SmartCircuit based batteries and chargers are winning high-value designs and projects.

In our Standby Power Services business, our strategy is sound and simple. The addition of US Energy Systems truly increases our reach across the country and enables us to better serve our national accounts.

We already serve many of these accounts in certain geographic areas and we can now service them in additional locations. We will improve margins by procuring our batteries and associated products directly from manufacturers, rather than through their distributors and we will focus on service efficiency with the flexibility of a broader organization as well as pick up a higher percentage of post-sale service with this broader coverage.

2009, we expect at least $250 million in revenue. We expect to have an additional $10 million from the fourth quarter Communications Systems order that has been delayed until this year but we also expect less revenue in automotive telematics, hence we're not adjusting our guidance at this time.

Our goals and aspirations, however, go well past this guidance. Underscoring everything we do, we offer products that create value.

In defense and military applications, we support the agile mobile force that's needed to fight the global war on terror which will not end with our departure from Iraq or Afghanistan. Commercial markets could provide people with better and more efficient ways to accomplish important tasks and solve critical business problems.

This we believe is especially valued in tough economic times. We continue to invest in new ways, new technologies and new products and services aimed at solving real problems.

A solid balance sheet and strong financing with our new $35 million credit facility, we have we need to invest for the future and to grow. Now, I'd like to turn it over to Bob Fishback, after which, we will open it up for questions.

Thank you, John, and good morning everyone. Earlier this morning we released our fourth quarter and full year results for the fiscal period ended December 31, 2008.

Consolidated revenues totaled $49.2 million for the fourth quarter, a 34% increase over revenues of $36.8 million in the same period a year ago. The $12.4 million increase resulted from strong growth in sales of batteries and chargers in the Rechargeable Products segment in addition to higher shipments of BA-5390 batteries in the Non-Rechargeable segment. Partially offsetting these increases were lower shipments of advanced Communications Systems and a modest decline in battery sales to automotive telematics customers.

Revenues in our Design and Installation Services segment reflected the inclusion of full-quarter results for Stationary Power Services acquired in mid-November 2007, in addition to the incremental sales from US Energy Systems acquired in November 2008. Gross profit amounted to $9.8 million in the fourth quarter of 2008, an increase of $4 million from 2007.

As a percentage of total revenues, consolidated gross margins were just under 20% in 2008 compared with 15.6% in last year's fourth quarter. The improvement in the overall gross margin was primarily led by the Communications Systems segment, which reached 27% compared with 15% last year.

In our Rechargeable Products segment, a better product mix resulted in gross margins of 20% in the quarter, up from 17% last year. Non-Rechargeable Product margins were 18% compared with 16% a year ago due to increased overhead absorption on higher volumes. Margins in the Design and Installation Services segment were 12.5% in the fourth quarter of 2008, much lower than our target as we continue to invest in developing this new business and integrate the operations.

Operating expenses for the quarter totaled $10 million compared with $8.4 million in 2007, an increase of $1.6 million. This increase was mainly attributable to higher selling and marketing expenses related to the development of new sales opportunities in addition to higher R&D investments and other general costs associated with running a larger, more complex business.

Included in our total operating expenses in the fourth quarter of 2008 are approximately $1.1 million of non-cash expenses related to intangible asset amortization and stock compensation expenses compared with $1.3 million a year ago. As a percentage of revenue, operating expenses were 20% in Q4 2008, down from 23% last year.

Overall we reported a $300,000 operating loss for the fourth quarter of '08 compared with an operating loss of $2.7 million in 2007, a $2.4 million improvement. Below operating earnings, net interest expense for the quarter was $100,000, a decrease from $500,000 last year on lower levels of debt and lower interest rates.

In addition, in 2008 we recorded a $300,000 gain related to a grant from the State of New York as we completed all of our job creation obligations associated with this grant and we recorded a foreign currency exchange gain of about $500,000 due mainly to movements between the US dollar and the British pound. In 2007 we reported a $7.6 million gain on a negotiated settlement related to the acquisition of McDowell Research.

Our fourth-quarter income tax provision amounted to $300,000 reflecting mainly the alternative minimum tax on US taxable income and booked tax differences related to intangible assets. As of the end of the year, we performed a thorough evaluation of the valuation allowance against our net deferred tax asset in accordance with GAAP and we concluded that a full allowance is still appropriate at this time.

We will continue to evaluate this position each quarter and we're carrying forward into 2009 approximately $48 million in US net operating losses. As we have discussed in the past, the amount of our NOLs that can be utilized to offset our US taxable income is limited annually in accordance with Internal Revenue Code section 382.

We used up a significant amount of our NOLs this past year and we were not affected by this section 382 limitation in 2008, as we were able to use carryover amounts from prior years. However, the use of our US NOLs in 2009 will be limited to approximately $21 million and then roughly a minimum of $12 million per year beyond 2009.

The important thing to understand is that our cash taxes on US taxable income up to the 382 limitation will be relatively nominal, above which we will pay income taxes at a more normal rate in the range of 35%. We reported net income for the quarter of $200,000 or $0.01 per common share compared with $4.4 million or $0.27 per share last year. Average diluted shares outstanding were 17.4 million, up slightly from 17.3 million shares a year ago.

With respect to our $10 million share repurchase program, at year-end we had spent approximately $1.8 million to acquire a little more than 200,000 shares of our common stock at an average price of around $8.50 per share. Shifting to cash flows, adjusted EBITDA defined as EBITDA excluding non-cash stock based compensation expense, amounted to $2.7 million for quarter.

Changes in working capital had a relatively neutral impact on cash as declines in inventories and receivable balances were offset by decreases in accounts payable and accrued expense balances. Year-over-year, our working capital metrics showed improvement as inventory turnover amounted to 4.6 turns for the full year of 2008 versus three turns for all of 2007 and our DSO's were 53 days cumulatively for the year compared with 55 days for the full year of '07.

With respect to our investing activities during the fourth quarter, we spent $2.8 million in cash for the acquisition of US Energy and approximately $1.5 million for capital expenditures. Our financing activities included a $1.8 million cash outflow for our stock repurchase program and $600,000 of payments to reduce outstanding debt, offset in part by $300,000 cash received from exercises of stock options.

As a result, our cash balance at the end of December was $1.9 million compared to $5.5 million at the end of September. As we anticipated, we ended the quarter with no borrowings outstanding on our revolving credit facility, similar to the end of Q3.

Let me take a minute to summarize the full-year results for 2008. We ended the year with $254.7 million in revenue, an increase of $117.1 million or 85% over 2007, primarily driven by the significant increase in our Communications Systems segment.

Our consolidated gross margins improved from 20.9% in '07 to 22.4% in '08. We leveraged our operating expenses very well in 2008 as our revenues rose, resulting in a 16% expense ratio, down from 21% in prior year.

As a result, our operating margins improved from a loss of $200,000 in 2007 from an operating profit of $17.3 million in 2008. Our adjusted EBITDA for the full year of '08 was $26.4 million compared with $8.6 million in 2007.

We saw a significant improvement at the balance sheet. We reduce the debt on our books noticeably and we ended the year with a modest amount of cash. Overall, 2008 was a major step forward in our financial profile and we continued to make ongoing investments to continue to grow into the future.

Looking ahead to 2009, we're projecting revenue of at least $250 million, consistent with the guidance we provided in our last earnings call. While the fourth quarter's delayed spare parts order for advanced Communications Systems is additive to 2009, the softness that we're currently seeing in the automotive telematics business causes us to be cautious on the overall revenue outlook at this time.

Following the spike in revenue in our Communications Systems segment in 2008 associated with a few larger orders that we received late in 2007, we expect less revenue in this segment in 2009. But we expect to see a strong increase in sales in our Rechargeable Products segment along with additional increases in Non-Rechargeable Products and Design and Installation Services.

Our balance sheet is solid. I noted earlier, we have minimal debt on our books. Our debt to total capitalization ratio was only 6% at the end of December. And in January, we entered into a new extended credit facility with our banks, JP MorganChase and (inaudible) Bank which increased our borrowing capacity from $22.5 million to $35 million, and enhances our flexibility through June of 2010.

We're optimistic about our prospects for 2009. We continue to focus on improving in our gross margins across all segments and leveraging our operating expenses as we grow. With a strong balance sheet and a solid outlook, we expect to continue to generate positive cash flows that we can reinvest in growing our businesses.

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

Thank you Bob. Patricia, now I would like to turn it back to you to open it up for questions, please.

(Operator Instructions) Jim McIlree, Collins Stewart.

John, when you -- for the quarter, the Rechargeable revenues doubled for a specific contract. Did I hear that correctly?

No, no. They doubled across a whole bunch of areas. International sales were very strong and domestic projects that we do both in defense and commercial were strong as well.

I think the point we made was that one specific contract, which was -- I don't know -- a couple million dollars (multiple speakers) $5 million of it. So, yes, I guess it was a percentage -- about one-third of it were for charges that we took less in our customary margins because we had an opportunity to change over some of these charging infrastructure.

Right, okay. So is that $15 million a good run rate going forward or is it more likely to be kind of that $10 [million-ish] for a quarter going forward?

It's a good base going forward.

And then secondly on the -- I'm going to call it McDowell for lack -- just because of -- out of habit. On the McDowell stuff, it seems like $10 million a quarter without the big contracts should be a good number. Is that correct?

I would say it is in the right range, 8 to 7 to 10. It could be a little more sometimes, it could be a little less.

The problem we face now is that such a big part of our business with some of these programs is really kind of -- is the lumpiness of it; stuff that can move from quarter to quarter, either in or out. You saw how huge our shipments were in the second and third quarter. I think we were pretty clear that wasn't going to continue that way. But yes, the non-big systems part of the business runs anywhere from $7 million to $10 million a quarter, fairly consistently.

Okay and these [Satellite-on-the-Move] projects that you're chasing, are these formalized programs of record or are they urgent operational needs that you are responding to?

Programs of record. What you're going to see is you know -- again, we can only tell you what we're told from the subcontractors we work with or the [primes] we work with, I should say. And that is that these are getting put into IDIQ multi-year contracts and those contracts will then service vehicle programs of record.

Okay, so it's part of -- make up something -- the (inaudible) ATV or the --.

Or LAV or something like that.

Okay, I get that. That's great. I think that's it. Thank you.

Ted Kundtz, Needham & Co.

(technical difficulty) goals that you have put out there for this year. I'm trying to get a sense of (technical difficulty)

Ted, we missed the first part of your question. Could you start again?

Okay, sure. I'm just trying to get a sense of what kind of visibility you really have for the targeted revenues that you have given us here of $250 million. How much of that is really -- I hate to say backlog, because it's probably not really fully backlog. But you know, I'm trying to get your degree of comfort on the visibility and then how much has to be kind of booked and you're kind of hoping will be booked throughout the year?

Let me see if I can build it up for you. In the Non-Rechargeable battery segment, a big chunk of that is our 9-Volt business which is very consistent. It just hasn't varied very much. We have a very good track record and [very] close to the customers for that. So we're pretty confident about that. That only really books 30 to 60 days out because we've conditioned people to that. We just (multiple speakers) respond fast enough.

In the military area, US military area, we are in very good shape there. We're actually booked out for -- the first half of the year is booked. We're actually not happy with the leadtimes we're giving and we're trying to up our capacity on at least a temporary basis.

We have the capacity. We just need to move people over to just make more sells and get that going faster. Because we don't like the leadtimes were giving people. So that -- we're half booked in that area, I guess is the short answer way to say that, and with demand still coming at us.

In the automotive sector, you know, I don't know. We have really backed off. We have been -- the forecast from the people we're working with has backed off. We've kind of backed that off in a very conservative way because who knows. I just -- we don't know. It's going to be down, so we are projecting I think a very -- fairly conservatively right now.

What was the auto last year?

It ran about $12 million.

And this year, you're really backing it way down?

We are backing it way down. We would have expected that to grow this year to maybe $14 million let's say or $15 million. And we're taking last year's number and cutting it in half. So we've really have backed off there.

So I would call it more of an opportunity than anything. It sounds kind of funny to say that, but yes. And then in our other businesses, we have seen very little impact economically because we don't sell in consumer products. We are in industrial products and so we have a pretty good track record of predicting what we're going to sell in those different segments, whether it be medical or safety and security or things like that.

So are we booked all the way out in Non-Rechargeable? No. But pretty well, actually given -- based on the past. Rechargeable segment, we're in very good shape. We have good bookings. But typically those go for three months to -- three, four months out. So yes, it is February and you do have a year, but there's several procurements as we mentioned that we have down-selected for.

It's generally between us and one other person. That decision is being made in the next several months. Business that we have had, the customers that we've had that we -- that we really have a chance at the core business for. And we want our share of those and we're going to be in really good shape there and we're pretty optimistic (technical difficulty)

In communications accessories, we have this business that just as Jim pointed out, the non-systems business that really just moves right along. But the rest of our business is tied to programs of record that we know are getting fielded. It's just what happens with those programs is the orders come in, the orders come in, the orders come in and it gets delayed. Then when it comes, it's hurry up. Ship fast.

So we kind of went through that last year with big pull-ins into second and third quarter of what we did there. But those programs are there and needed. With the big shift from Iraq to Afghanistan, they are getting ready to move vehicles in there too and they're not going to move them from Iraq. That's not going to happen.

So we are in pretty solid shape there on our core business. But yes, there's a big piece of business in the advanced Communication Systems that still have to be booked.

Okay, is your target in that sector like 110, $115 million this year?

Where are we in that segment?

Right now the target is less than that. It's probably in the range of 80.

(multiple speakers) we would be down about 60 in that segment year to year and then maybe a little more up; so 80, 90 maybe. Again, we have a budget with plans but there's variability on all of these and we try to kind of diversify that out (technical difficulty) a little.

In Standby Power, that will probably be about 10% of our business here, but that's not a huge growth rate over what we are running now. We have a lot of repetitive customers and we usually are scheduled out pretty well on that. We're probably scheduling in the second quarter, late second quarter right now.

So we will probably book pretty well through the second quarter for that business. Again, it's (technical difficulty) customer base. So I think we are in pretty good shape there.

Terrific. Does the stimulus package help you guys at all? Is there anything in that that directly pertains to you?

We believe so. We think that there's going to be a lot of funding for research that will come through agencies we work with, either Department of Energy or Defense. A lot of projects that they wanted to work on we think now are now getting funded through this. But we have to see, have to work through them to see.

And in Standby Power, things like broadband buildout, a lot -- we do Standby Power, cable is a big part of our -- cable and telco, a big part of our offering there and a big part of our customer base. So that (technical difficulty) important. A lot of the work that's being done in alternative energy, you know we have had long plans to move lithium ion batteries and solar and wind charging into those kinds of installations.

This is only going to -- it will only accelerate those efforts we think and the efforts there. So, we think there's a lot of opportunity there. Some of those opportunities are going to come through the states, the way the funding runs. Some are going to come through the federal government.

And again, they say oh, we're going to do this right away. But you know by the time the bill's passed and money gets passed down, we're probably 60, 90 days away from seeing really where the impact is going to be. But we're getting ourselves positioned to be able to execute on some of these. So, yes.

And just a last question for either one of you I guess. It's really kind of the gross margin trends. You alluded to them and you thought they would likely be increasing this year, was the tone. You got some higher costs than last year and you didn't get to start passing that along, it sounded like. Is that a correct assumption just kind of overall? We don't need to go through each group but --

Yes, we're starting to see material costs come down. We started seeing that in the beginning of the fourth quarter, end of the third quarter, beginning of the fourth quarter. And I think we said on the last conference call, we're starting to see it.

But we turn our inventory four to six times. We FIFO, so we really can't see the impact of that until we get through our FIFO system which is kind of beginning of this year and they haven't totally come down. So we've taken some pricing actions, GSA price actions were able to be taken the beginning of October. So that helped us there.

But with most of our contract customers, most of that stuff couldn't happen until we got into the new year. And then we have a couple of contracts that are March and July affected. So as we said, through the first half of the year, we're going to start to see the impact of that.

Would your goal for the year be at least 200 basis points improvement in gross margins?

I think we have been very clear that we would like to get our gross margins up. We need to get our gross margins up above 25% -- between 25 and 30%

That's the goal, that's the longer-term goal. I just didn't know given where we are now, what is the year goal.

We did 22.4% in 2008. I think our expectation is we could improve gross margins at least 200 basis points throughout 2008.

Richard Baxter, Ardour Capital.

Great, thank you. Just a question on the Stationary Power, some of the growth strategy. Is there expectations for steady growth through the year or any seasonality to this and I guess following that, any expectations or milestones we can watch to follow the expansion here?

I think what you've -- the milestones are the ones we're looking for which is steady growth through the year. We don't see any seasonality really in that business. And as we grow that business through the year, we're steadily improving gross margins. We did a lot to kind of get that business immediately structured as an integrated operation in the fourth quarter.

You know, we moved around resources, changed over management and stuff like that. And so getting the contracts in place for our parts so we could take advantage of our larger base and as I said buying direct from who we buy from rather than going through distributors is a big opportunity for us. I think you should start seeing that improve the gross margins and also utilization of service [force] and increasing penetration of service.

Increasing penetration of service percentage will take a little time to get. But once you get it, it's more lasting. So I think you should watch steady increase in both sales and margins in that business.

Steve Sanders, Stephens, Inc.

Just kind at kind of a high level, I think at the analyst day you talked about '09 being roughly one-third of the McDowell related businesses, probably 20 to 25% commercial and then I think you said recently about 10% backup power and then I guess the balance would be split among various military programs and services. Can you just revisit that mix today versus a couple of months ago? Is that still in the ballpark?

Yes, I think that really is in the ballpark. It will be about one-third communications products, it will be about 10% Standby Power Services and then the remainder would be about half military and half commercial battery programs. It doesn't look a whole lot different.

And then what is a rough run rate going into '09 on the backup power business? How do we think about stationary and US Energy in terms of the run rate today?

I think we were $4.4 million last quarter. That is with the US Energy only being there for half a quarter. US Energy was not profitable as an operation. They were close to around breakeven.

And the real efficiency we're going to get there are we have consolidated all of our back office operations there and taken a large number of people who were doing back office operation out, did that in the fourth quarter. And we have a wider service offering now. So I would expect kind of $5 million to $6 million a quarter business we have going into this year.

Okay, and then generally, where is the lumpiness in that business? I know you have given us some good color on the margins and it looks like you have some good marketshare opportunities given your broader geographic footprint. But where do we see the lumpiness there quarter to quarter?

Well because it's project -- the lumpiness occurs because it's a project based business. We can have a $1 million installation for somebody that can be completed at the end of the quarter. But if there's acceptance criteria that says it has to operate for 30 days, you don't recognize revenue until that happens.

So the lumpiness comes in because it's really project based and some of the -- I won't say all of them, it just depends how the contract is structured. Sometimes the contract is -- the batteries are bought outright but then the service doesn't get paid for then. Sometimes the entire project doesn't get recognized until then.

It depends on how it's structured. And that's the only thing that can cause lumpiness. Believe me, this is a service business and we seek to fully utilize our people every day, every hour. So the pace of operations is pretty steady. It just has to come into play with contracts and revenue recognition.

Okay, and then within auto telematics, I know you have taken what sounds like a pretty conservative view on the revenue side. What are you doing or what have you done to improve the margin profile for that product, so hopefully as we see the topline rebound sometime over the next year, the margins are better?

We have one particular large customer who we've had a design that we wanted to redesign for more than a few years. And we now as I said before a tough economic time (multiple speakers)

Okay, okay. So that's done essentially?

That's done in qualification and we will have that -- second half of the year, we will get the benefit of that. You still there?

I lost you after you started to answer the question.

I'm sorry. I said that's done and by the second half of the year, we will get the benefit of that. It's in qualification testing right now. As you know, in that market, there's pretty extensive qualification work that has to be done.

And then I know you don't want to provide quarterly guidance. You have given us some detail on the spares order and I guess that is expected by the end of the quarter.

But generally based on what you see in terms of backlog and visible orders like spares, how do we think roughly about the first-half revenue versus the second half? 40, 60? Is it more back-half loaded than that? What would be kind of some rough guidelines at this point?

Again, Steve, the problem for us is the way things can move quarter to quarter on us. But our operating assumption -- all I can tell you is our operating assumption is that we will grow pretty steadily every quarter. We don't have any peaks built in or anything.

But the problem is that customer demands for early deliveries or contract delays can cause those peaks to happen. But right now our operating -- we believe the demand is a steady growth through the year.

And then final question, it sounds like you have done quite a bit of work on the product side and I assume the manufacturing side for your China business. Can you just provide a little bit more color there and what you're expecting out of that business in 2009?

We pretty much, I mean, we pretty much stopped -- I don't want to say we stopped -- but we pretty much froze the work we were doing there midyear, really stepped back. we were trying an evolutionary approach. We're trying to evolve the processes and evolve the product development there and we just decided that was taking too long.

In the third quarter, we froze the work that was going on there and we have taken our -- what we have is we have a development team back here in upstate New York, actually mostly a couple of Chinese members actually, leading this effort with the people in China. We took them and we've now moved them there. And our Director of R&D, Mr. [Xulong Zhang] is now running that factory. He has moved there with his family and he's running that factory.

We just started from scratch on the product side in the beginning of the fourth quarter. We're still producing the old products, but we're not trying to tweak them or anything. And we will be introducing this quarter a whole new product line out of that facility. So we decided instead of an evolutionary approach to just stop, build out the old product and instead of a product evolution, do a product transition. And that's what we are doing.

And the focus markets there, applications in markets?

The focus markets there are safety, security, meter reading. Automated meter reading is a big one. There is a huge opportunity in China itself in AMR because they have their own stimulus package. Part of it is rural (inaudible) and utilities and they're bringing meters to that business.

The products we make in China, private products we make there are (inaudible) products, half AA and AA (inaudible) chloride products, some of our lower-end manganese dioxide products with cathodes from the US, they make products there. And then we moved our thin cell, our volume production of our thin cells we moved to China and we now have with the cost structure we have there because it is mostly manual building the thin cells, doing them in China gives us a real opportunity with the cost structure we have there, we have several major opportunities in the area of thin cells.

Okay, okay and then I apologize, one more. On more just on the M&A outlook in the Standby Power business, what kind of deal flow are you seeing? What would make sense for you guys to add there? Just whatever color you can provide on that?

I think, you know, if there is opportunities to do acquisitions there, we have our eyes open. Right now we think we have enough of an infrastructure that we can pretty much organically grow additional cities.

Right now we have some filling in to do. We have some customers now covering the Southern United States who are asking us to do other cities. I mean, I'll give you an example.

US Energy was in Chicago also. They're primarily a Southwest company but they were in Chicago and that's because one of their large customers asked them to be there. US Energy also has a small office in Northern California. So we don't have to buy something in Northern California to expand that. You know, we already have a footprint there.

And the other question is where else are our customers. Right now we can be little more customer driven and that enables us to grow without adding a lot of sales, without having to sell new customers as customers are asking us to go to additional cities. We can do that organically.

Final, final. Bob, CapEx outlook for the year? It looks like it was a little bit higher in the fourth quarter but how should we be thinking about for '09?

I would say right now we're probably looking in the range of about 5 to $6 million in 2009, a little bit higher than 2008 as we're looking to make some incremental investments in China and some infrastructure there.

(Operator Instructions) It appears that there are no further questions at this time.

Okay, well I want to thank everybody for participating. I'd like to say that even in these tough economic times, we really believe Ultralife's positioned well for the coming year.

In defense, our focus on the agile and mobile force and our international distribution really is expanding and broadening our opportunities. In the commercial markets, we're really seeing traction with our SmartCircuit products. They give us an edge as people try to deploy advanced portable power systems.

And in services as Richard asked, deploying green technology is widening and we are building the channel, we think, that's going to be able to design, install and service those kinds of alternative energy systems along with the backup systems that we're doing all along on a national basis. And we look forward sharing our progress with you again and participating with you again next quarter. Thank you.

This concludes today's Ultralife Corporation conference call. Thank you for joining us and have a wonderful day.