Ultralife Corp (ULBI) 2009 Q3 法說會逐字稿

Good day and welcome to this Ultralife Corporation third-quarter earnings release conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Amy Gibbons. Please go ahead.

Thank you, David. Good morning, everyone. This is Amy Gibbons of Lippert/Heilshorn & Associates. Thank you for joining us this morning for the Ultralife Corporation earnings conference call for the third quarter of fiscal 2009. With us on today's call are John Kavazanjian, Ultralife's President and CEO, and John Casper, Ultralife's Chief Financial Officer.

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 will find the release under Investor News in the Investor Relations section.

Before turning the call over to management, I would like to remind everyone that some statements made during this conference call may contain forward-looking statements based on current expectations that involve a number of risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include worsening global economic conditions, increased competitive environment and pricing pressures, disruptions related to restructuring actions and delays and the possibility of intangible asset impairment charges that may be taken should management decide to retire one or more of the brands of acquired companies in the future.

The Company cautions investors not to place undue reliance on forward-looking statements, which reflect the Company's analysis only as of today's date. The Company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results is included in the Ultralife Securities and Exchange Commission filings, including the latest Annual Report on Form 10-K.

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 as supplemental to corresponding GAAP figures.

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

Good morning. Thank you, Amy. Good morning and welcome to the Ultralife Corporation conference call for the third quarter of 2009. With me today is John Casper, our Chief Financial Officer. And also joining us are Julius Cirin, our Corporate Communications Officer, and Bill Schmitz, our Chief Operating Officer.

Today, we reported revenue of $42.4 million for the third quarter of 2009 and an operating loss of $400,000, with an adjusted EBITDA of $1.4 million. Quarter over quarter, revenue was up slightly from the second quarter.

Subsequent to the end of the quarter, an ID/IQ contract for our Satcom-on-the-Move systems was finally concluded between our prime contractor customer and the US Department of Defense. With the contract now in place, our customer placed a $20 million order for our Satcom systems which we announced last week.

We also learned that the delay in finalizing the contract caused the government to source a different system to the MATV programs, at least for the current demand under the program, despite the fact that ours was the specified system, despite assurances from our sources that orders were imminent, and even though our cables were being preinstalled into the vehicles. Needless to say, this outcome has been extremely disappointing for us. Although we exhausted numerous channels in challenging this decision, our status as a subcontractor limits our remedies.

This decision does not alter our standing as one of the two government-approved suppliers of Satcom-on-the-Move systems. Advanced communications systems remain an important part of our government and military product portfolio and a tremendous opportunity. We expect to see continued requirements for these types of systems for new vehicle programs and for existing fleet inventory. In geographies such as Afghanistan and Pakistan line-of-sight communications are extremely limited. Virtually every vehicle and especially those going into remote areas will need Satcom capability.

We know that our tactical repeater is being used to extend the range of hand-held radios by special operations units operating in Afghanistan today, to great effect. We're also responding to a greater number of inquiries for our communications products from foreign government and defense organizations for both our Satcom systems and our tactical repeater systems. The deployment of these range extension systems has not gone unnoticed by our allies and it is a capability that we're starting to aggressively market internationally.

During the quarter, we decreased inventories by more than $8 million. We expect another major reduction in the fourth quarter as we start to make long-awaited shipments of Satcom systems and reduce inventory in that area with our recently announced order.

Sales of batteries remained strong, with rechargeable sales down slightly due to shipment timing issues. This quarter, we expect to start shipping on the $12 million order for chargers and one particular battery to the UK military under our new contract with General Dynamics UK. Three other battery types are also included on the contract, all for use with the UK MOD's primary communications radio system. Over the next year, we will be qualifying those batteries as well so that we can accept orders for those products as well. Communications Systems sales also increased, mostly due to the direct sale of some Satcom systems to the US military.

Our recently acquired AMT amplifier unit had a very strong quarter, and we're starting to use these amplifiers on our systems, including the latest version of our tactical repeater. Our compact amplifier gives us a highly advanced product in the fast-growing handheld radio market, as well as an advantage to designing compact and portable advanced communication systems.

We also saw a sequential increase in sales in our standby power unit. While very competitive equipment pricing is impacting margins, a better mix of service revenue lifted margins in the third quarter. And as adjustments in inventory level and competitive shakeouts improve pricing, we expect continued gradual improvements in margins.

In commercial markets, we have focused our product development efforts on our smart lithium-ion rechargeable batteries for backup power and energy storage. We've developed and have begun customer testing on a lithium-ion battery for rack-mounted communications or computing systems and for distributed communications hubs. These batteries are up to 10 kilowatts in size and can discharge to as high as 120 amps.

We're also in development of larger energy storage and backup battery systems in the 100 kilowatt to 2 megawatt range for use in supporting renewable energy and smart grid projects. This is an area where our SmartCircuit technology, our manufacturing capability, and our installation and service resources can change the way backup and energy storage systems are deployed and managed and can start to address the energy needs of renewable energy systems.

For 2009, we're expecting revenue of approximately $175 million. Having implemented cost-cutting and margin improvement measures, we expect to return to profitability in the fourth quarter and sustain profitability on a quarterly basis in 2010.

There is one small caveat to our forecast for the fourth quarter. As we've worked to streamline the business and realize cost efficiencies, we have been evaluating our multibrand strategy. We've acquired several businesses with strong brands that had value and meaning to their customer base, but our objective has always been to leverage the reputation, the power and the global reach of the Ultralife brand.

As the identity of these businesses has become increasingly identified with Ultralife, we are constantly reviewing the costs and the benefits of retiring several of these brands. Ultimately, we may decide to take such an action on any of these brands. That would result in a noncash impairment charge of the associated intangible asset and would reduce operating earnings by the associated amount or amounts on the balance sheet.

Now I would like to turn it over to John Casper for financial commentary, after which we will open it up for questions.

Thank you, John, and good morning, everyone. I'll start my comments with a review of segment revenues for the third quarter. Consolidated revenues totaled $42.4 million for the third quarter, a $25.6 million decline versus revenues of $68 million in the same period a year ago. The $25.6 million reduction reflects a $31.1 million decrease in Communications Systems revenue that was partially offset by increases in the three other segments.

Non-Rechargeable Products revenue grew $2.6 million to $18.4 million on higher sales of BA-5390 batteries. Rechargeable Products revenue was $8.5 million for the quarter, $5 million higher than last year -- $0.5 million higher than last year, thank you.

With respect to Communications Systems, we continue to be burdened by the unfavorable comparison against last year's Satcom shipments. Year over year, Design and Installation Services revenue increased by $2.4 million to $6 million, reflecting the broader footprint we now have since acquiring US Energy Systems in November 2008.

On a sequential basis, revenue increased by $2.8 million. Non-Rechargeable Products revenue was essentially flat. Rechargeable revenue was $1.8 million lower, reflecting the timing of shipments. Communications Systems revenue increased by $3 million because of increased event communications system sales. Design and Installation Services increased by $2.2 million, half of which was due to a contract award for standby power services that was completed during the quarter.

Gross margin was $10.4 million compared to $15.7 million for the third quarter last year, a decrease of $5.3 million, primarily on lower sales volumes. As a percentage of total revenues, consolidated gross margin was 24.5% in 2009 versus 23.1% for last year's third quarter. Gross margin for Non-Rechargeable Products improved year over year from 12.1% to 18.3% due to increased volumes driving higher overhead absorption. Rechargeable gross margin increased from 21.7% to 23.6%, reflecting higher volumes and favorable product mix.

Gross margin in the Communications Systems segment was 39.2% compared to 28% last year. Included in this year's third-quarter Communications Systems gross margin was a $1.3 million gain related to the resolution of a trade dispute, which contributed 13 percentage points to the year-over-year gross margin variance.

Design and Installation Services gross margin improved to 21.2% from 18.9% last year on stronger volume and a higher mix of services revenue, which compensated for the pricing pressures we've been experiencing.

Compared to the second quarter, gross margin improved in all segments and also benefited from the $1.3 million trade dispute resolution. In addition to Communications Systems, margins significantly improve for Rechargeable Products and Design and Installation Services due to reduced manufacturing costs and improved product mix.

Operating expenses totaled $10.8 million compared to $10.4 million in the same quarter last year, primarily due to increased research and development spending. Compared to the second quarter, operating expenses declined by $2.3 million. $1.2 million of the variance represents the absence of last quarter's nonrecurring items, and the remaining $1.1 million reflects cost reduction actions taken during the quarter and the reversal of a compensation accrual based on forecasted fiscal year results.

Third-quarter noncash operating expenses, namely depreciation, intangible asset amortization and stock compensation expenses, amounted to $1.4 million compared to $2 million a year ago. As a result, we reported an operating loss of $400,000 compared to an operating income of $5.3 million for the same period last year.

Moving down the income statement, net interest expense for the quarter was $450,000 compared to $240,000 last year, reflecting higher average borrowings under our revolving credit facility. We also recorded $350,000 in miscellaneous income related to transactions that were impacted by changes in foreign currencies relative to the US dollar.

Income tax provisions amounted to $105,000, primarily reflecting book tax timing differences pertaining to goodwill and intangible assets. The net loss for the quarter was $600,000 or $0.04 per share compared to net income of $4.7 million or $0.26 per share last year.

Turning now to the balance sheet and cash flow, we continued to draw on the revolving credit facility in the third quarter, primarily to fund accounts receivable. As of September 27, the outstanding revolver balance was $26.6 million, an increase of $2.7 million from the second quarter of 2009.

Inventories stood at $42.9 million, down from $51.2 million as of June 28, 2009, reflecting a significant reduction in finished goods inventory across all segments. Accounts receivable increased $5.6 million on strong quarterly sales.

DSOs for the quarter were 70 days, reflecting a higher proportion of shipments made toward the end of the quarter. FX for the quarter was $200,000. We ended the quarter with cash and cash equivalents of $1.7 million compared to $1.2 million at the end of the second quarter.

One of our highest priorities is paying down the outstanding balance on the revolving credit facility. To that end, we're drawing down inventory levels and preparing for shipments against the recent order for Satcom systems. Since the beginning of October, we have collected again shipments made during the third quarter, which has brought the outstanding balance on our credit line down by $11 million to approximately $15 million. We're also starting to realize the benefits of cost reduction actions to further cash generation. Our most recent actions have consolidated sales functions, reduced manufacturing support costs, and streamlined both corporate and R&D staffing.

We're actively engaged in discussions with lenders and in the process of changing our revolving credit line to an asset-based lending facility that will more closely match our operating needs and provide ample funding for growth. We expect to close on the new facility in the near future.

John?

Thank you, John. Over the years, we've faced many challenges and we've surmounted them all. With the loss of a significant piece of business, we were presented this year, this quarter, with yet another challenge, and we're meeting it. We sized our expenses to what should be a profitable level. We're trimming down inventories and we're reducing our borrowing to take down and eventually eliminate borrowing under our credit facility. We have a strong portfolio of business and an expanding range of product. We think that's important as we move forward and will serve us well as we move into 2010.

Now I would like to open it up and pass it back to the operator for any questions.

(Operator Instructions). Steve Sanders, Stephens Inc.

This is Trey for Steve. First, if we could start with your sales guidance of $175 million for the year, the guidance implies I guess $53 million in Q4 sales versus $42 million this quarter. How much of that sequential pickup is in Satcom specifically?

I think we've been pretty clear; the Satcom will ship between the fourth quarter and the first quarter. We have a similar situation with orders we got from the UK MOD. I don't think we can be definitive about what the mix of those is, because, frankly, we come up against the year end and we almost have to do a probabilistic analysis to get there. So I don't want to really give you any guidance on that, to be honest with you.

Okay. And what would make up, I guess, the remaining expected growth going forward? I'm seeing strength in some of the other segments. If you could talk a little bit there about that.

I think rechargeable is down a little bit mostly because of timing issues from the second and the third quarter. It's going to pick up again. We had some lots that shipped at the end of the quarter before that were not there. So we expect that to be up. We have business from the UK MOD which we will start shipping on in the quarter. We're going to have shipments from there, the $12 million order. Some of that will ship, and then the Satcom orders, and then just general communications products have been strong.

Standby power, I don't think we're forecasting it will be up. It'll be level to down -- down, I mean, $0.5 million, $1 million down. It's really because we have so many large orders, it's an issue of how much of it we get done, and some of them have acceptance criteria, which sometimes push them in revenue recognition across a quarter boundary. So it will be at about the same level.

So I would say those are really the drivers of the revenue growth, the communications systems and increased rechargeable sales.

Okay, great. And then on the $22 million in recently announced orders, you still feel good about that shipping by 1Q 2010?

Yes. We had a fair amount of inventory. I mean, not -- we didn't have all of it in inventory. We had inventory ready for Satcom. And we didn't get one order when we got this order. So the inventory we had on hand, which we really have had on hand for a little while, ready for the system, really put us in pretty good shape to get shipments out there.

Okay. And then as we think about 2010 versus 2009, can you give us your early read on what you see as growth opportunities and challenges?

Yes. I think the real growth opportunities for us are in Communications Systems. We see more programs, more vehicle programs, and wanting to put Satcom on the vehicles. Any time you have a radio for communications, long-range communications, you go into these mountainous areas, they need it.

And what is happening is people are getting used to having them. We put them on the MRAPs in Iraq, and it wasn't even mountainous areas. They like the ability to do long-distance communications that they couldn't do before. So we see that as big.

Our tactical repeater, we keep mentioning it, we're getting more and more interest and sampling -- when I say sampling size orders, we had one substantial order from the UK about a year ago that they've been really deploying systems on. But as that gets out there, it is a great product for hand-held radios. People want to extend their range. So we think that's going to be important.

We have new accessory products every day. Harris has brought out a new 117G radio, which we now have a great power supply for that we've almost sold one to one on just the really small early orders for that radio and some of the special ops community.

So communications is strong. And standby power, we're growing our footprint. We're getting into more and more geographies. For us, that is both tactical in that we think that certainly national accounts fills a need there. But it is also strategic in that our goal is to use that as a channel to move lithium batteries into replacing some of the more traditional technologies like lead acid into those spaces. So that is going to keep growing. We had a really nice quarter, $6 million in revenue there. And that looks like a solid business.

And then in the battery business, we have strong demand in our existing business, but we are very -- as we get more and more into these areas of backup power and energy storage, it's just a crying need. Everything from rack-mounted communications systems, where the battery has to be changed very frequently, or outdoor communications hubs, where in very hot climates lead acid batteries have to be changed preemptively, there is a real opportunity for us with lithium ion in there. And we have some very active projects there.

Because it is backup power, it is one of these where you have to gain the trust of the person that, okay, when the power fails, this is really going to work for me. But we're already end-serving those customers. It's one of these that takes time to happen. But once we get qualified and people see the benefit of it, it will happen pretty fast, kind of on an application-by-application basis. We're optimistic about that.

And then as we build larger and larger scale batteries, energy storage, we're not there right now but megawatt-size energy storage is pretty much the critical factor for making windfarms economical. The wind blows at the times when they don't need the power. And how do you store that to be able to supply it when they do? And it's not just windfarms. There's [ingrid] regulation. There's wayside energy storage. The guys in the transportation business want to do the storage [energy] breaking in lines and stuff. So there's a lot of opportunities.

I appreciate the color there. And then with the cost reductions, kind of your current mix, is the breakeven in the -- should we be thinking about that in the $45 million to $50 million a quarter range?

We're hoping it's lower than that, frankly.

Okay, and then --

But certainly, we would hope to be profitable in the $45 million to $50 million range. And when I say "hope to," we have to mix -- we are mix-sensitive company because we have some different businesses we're in. We're trying to take that out of the equation as much as possible by diversification. But we'd hope to be profitable in there.

And then one last question I guess for the other John. Could you give us a little more color on the credit facilities? I think you mentioned an ABL. I don't know what your thoughts are on timing.

I'll say some first -- John Kavazanjian -- and then I'll let John Casper answer it, which is an ABL, with our business going up and down, an ABL more closely matches what we need, which is financing for receivables and inventory when our business goes up. And it's just -- we hadn't wanted to go -- it was an administrative burden in the past, but it pretty much seems like that really matches better our business model.

I'll echo that. This is John Casper. We're in regular contact with our lenders and others. We keep them informed about our financial results and our forecasts. We've agreed with our bankers that an asset-based facility makes sense for the Company, given the size of the working capital assets we carry, and an asset-based facility will not in any way impede our growth plans.

Great. Thanks, guys.

James McIlree, Collins Stewart.

The inventory that you had at the end of Q3, the $43 million, how much of that relates to the satellite-on-the-move that you had been stockpiling?

Bill, what do you think?

About $7 million to $8 million.

$7 million to $8 million, Jim.

Okay. So is all of that gone now, since it looks like -- you said that you would pay down $11 million on the credit line because of the inventory drawdown. So is all of that $7 million to $8 million gone now?

That had nothing to do with quarter three. None of that had to do with quarter three.

Yes, I know.

A very small amount. Oh, you mean gone now, like today.

Yes, exactly.

No, but it will be. It will be substantially gone by -- because it was in different parts, the complete systems are gone pretty much, right?

There are some complete systems still here. We did break down some and ship them as individual components.

But by the end of this quarter it will be substantially gone, Jim. And certainly by the end of the order, it will all be gone, by the end of the first quarter, when we ship it all.

Okay. And I know this answer will be dependent upon mix assumptions, etc., but what is your targeted inventory turnover metric that you hope to achieve once you get rid of this?

We'd like to be at four turns. We'd love to be at five, but we have some contracts, some government contracts which require us to hold lots for periods of time, 30 or 60 days, that make it pretty hard to do better than that.

Okay.

We have businesses like the 9-volt that probably turns eight to 10 times a year. We have some others that, because of the hold periods we have, take longer.

Okay. Just a couple others. If my notes are correct, the NextGen II Phase 4 expires at the end of this year. Is there any reason to be concerned, or is there an opportunity there?

No, we think it is an opportunity. The orders have been strong. There is no solicitation been done. Unfortunately, we always complain about this, but we're on the other end of it now. What happens is that the end of the solicitation comes and nobody put out the new one yet. As you know, the rechargeable solicitation the government had, I think they're on the seventh or eighth year of a five-year contract.

So we haven't seen it yet. They've told us they're going to be doing it. But it's going to take a while. So, number one, we would expect to either continue to get orders or one big order at the end, or something. It depends on how DLA wants to handle it. But there will be a new solicitation. But the fact is we still have by far the strongest infrastructure for producing these products. We have nobody who comes close to us in terms of performance. And even with our 11-amp-hour-plus performance, we have a 13-amp-hour-plus product already that we would love to get into the mix here. It's all up to DLA and how they want to solicit it. So we're pretty optimistic about it when they do it. The question is, when are they ever going to -- when is it going to come out.

Right. Okay.

But it's one of these -- until it comes out, it's our business.

Right. And my notes say that you wanted to get operating expenses cut to $11 million per quarter by year end. Obviously, you achieved that this quarter. Is there more to go?

The answer is yes. On one hand, during the quarter we had some a couple of more modest onetime expenses. We closed down our facility in Seattle, had the carrying cost of that for a period of time that won't recur, a couple other things. On the other hand, we were the beneficiaries of -- we did have one or two compensation plans that were gated on performance, and that we carried accruals for, that when we saw we weren't going to have them -- I think John mentioned that -- we reversed those.

John Casper here. That was in my remarks. We had a compensation accrual reduction, so that slightly benefited the third quarter.

And then as we redo our credit facility, Jim, we may have some fees with that. Some may be amortized; some may not. So we have to be circumspect about how we -- we have to see how those fall out with [GAAP] accounting. But the answer is we're pleased with where our operating costs came out, and we're going to be keeping vigilant and disciplined about taking them down where we can.

Right. Okay, great. Thank you very much.

Ted Kundtz, Needham & Company.

John, could you talk a little bit about the commercial side of your business, what the outlook there is, and if you're seeing any upturn at all, specifically talking about the auto side, the medical side, the retail side (multiple speakers)?

Yes, the answer is yes, we've seen an uptick. We had virtually no auto business in the third quarter. During the inventory corrections, our largest customer there, General Motors, had factories shut down, but that has all started again. And that has been -- that is a good business at this point in time.

You know, our retail is small, but if I take the 9-volt product as a proxy for it, our volume in 9-volt has been down from where it was last year. It's not huge numbers. It probably relates to $1 million a quarter worth of business down. But we're starting to see signs of that coming back. We have very strong bookings. Our quarter this quarter, we're pretty well booked.

And in standby power, where we had projects that were being delayed, we knew they were going to happen because if you're going to back up a computer room or a cell tower, you can't go too long with a system that's got a couple strings that are out of order or something. But we did see project delays where stuff was getting pushed out and we're starting to see some of those things come back in.

So, yes, and additionally there, in that business, I can't speak to the 9-volt because we don't know what shelf inventories were. But we know for a fact in the battery part of the standby power business, there was a glut of inventory out there. And it was causing really, really awful pricing pressures there. A lot of that has abated as people have cleared their inventories to get cash in. So, yes, we're not ready to declare total victory yet in commercial market stuff, but we're starting to see a recovery.

So it should be a decently good growth year for you next year off of obviously a lower base, but a nice growth area?

Yes, we're hoping so. If you really look at it, if you take the -- we have to be real careful out there when you take the Satcom out, but if you take the -- because we sell Satcom systems, communications-type systems that do advanced communications in all kinds of different ways. Sometimes we sell components to people who are putting them together. We sell them -- we don't sell them just on big orders. But if you try to take some of that noise out of the system, the big order noise we've grown the business substantially from last year.

Yes, I was just looking at the commercial side being roughly, what, 35% of your business?

Yes.

And looking at that segment, and I don't know if it was 35% this year of your business.

No, but it's coming back. We have products, even in medical, we've had probably half a dozen new products come to market during this year. So -- from a place where there were none. So we're starting to see it.

Okay. I just wanted to go back to sort of your target model for next year. I'm looking at the adjusted gross margins in the quarter were like 21.5% or something, if you take out that onetime gain.

Yes, that's correct.

Okay, which led to a loss. And so you are talking about the fourth quarter being a profitable, say breakeven, slightly profitable. And that's kind of a -- right now that's your run rate to profitability. So the question is, if that were the case and you carried out that next year, that's like you'd almost have to grow the business 20% next year to break even. Now, I just wanted to drill down on that a little bit further, because you've mentioned you think you can improve margins. And I want to just kind of get a little more color as to how you think you can do that.

I'll make a couple of comments. First of all, on the product cost side, we are not -- in the third quarter, we were not finished with our facilities consolidation. So there was a fair amount of expense in there for some facilities that we still had in, for example our Seattle operation and some other consolidations we did. So that's the first thing.

Second, on the product cost side, because we had built up inventory on some of these programs, we've seen -- pricing went up in 2008. And we did not get the full effect of pricing that started coming down. And of course, people are going to be slow in bringing prices back down. But we're starting to see pricing on components coming down.

The effect of that wasn't totally felt this year because we have to work -- because we're working through inventory. But we see some -- we're getting some benefits there of pricing coming down in a bunch of different areas -- printed circuit boards, parts for amplifiers. Some parts for amplifiers two years ago we couldn't get. Now we don't have that problem.

So just across the board, energy costs and transportation were up and they've been slow coming down. We're finally driving them down. So I think that even looking into the fourth quarter, we see some more benefit for those things coming forward. On the expense side, we're still looking -- we still have work to do that we've done -- we've still done work that you won't see the full impact of. So I'll ask John to comment on that.

John Casper here. I will add to that, Ted. As you know, to get to our target model for 2010, we're going to need to drive topline growth and volume to get to the target margins. The improvement is going through volume and mix in order to get there in 2010, and continued work as we fine-tune the cost structure and OpEx. That's what will get us to our target model.

And I'll add to that. Somebody asked about the areas before that we're going to do that in. In the communications area, the reason we ended the amplifier business, any of these advanced communications systems, any of these amplifier-based systems have really very good margins for us because there's a high engineering content you get some software on those things. In standby power, the incremental business we're getting there, a lot of it is, by design, is service-intensive. Service margins are very good there. We're much more emphasizing selling the service to drag the battery and equipment sales rather than selling equipment to get service revenue. And that changes the model there. So a lot of that is starting to happen and will happen into next year.

Can you share with us what exactly those target margins are for your model for 2010, your gross margins and operating expense ratios?

I don't think we're ready to do that yet because we're just putting our plans together, and we go to our Board in December with our plans for next year. And some of it involves investments, R&D investments, things that we're going to do. So that -- I think we'll cover that next time.

Okay, because I've got gross margins now, where if you get to 22%, you've got R&D of 5%, you've got G&A of 15.5%, that leaves you only an operating margin of 1.5%. The key is, I guess, to really get these gross margins a bit higher, control the operating --

(multiple speakers) gross margins higher and the key is also to get some expenses out.

Yes, at least keeping them flat.

I'll also make the comment that we had our own amplifier unit. We combined that with a unit. So we've taken and redeployed some of those R&D. We do do some R&D that we have to expense that is for programs. So for example, the work that we've been doing on the UK MOD for General Dynamics, that's our dime. We pay for that. And so once we finish something and get it qualified, there's continuing engineering, but the large amounts of money we spend on our NRE and nonrecurring engineering costs and stuff we get behind us. So that is another item that I think is important to understand.

Yes. Okay, well, thanks a lot.

Walter Nasdeo, Ardour Capital.

If I could, I would like to take a little bit of a step back and maybe look at everything from a bit of a higher perspective and talk about what you -- how you plan to really through the government -- the stuff that didn't come to pass, how are we going to make that up, more on the government side? I understand how you're working on the commercial side and building business there. But as far as contracting and acquiring contracts, what do you see out there that can start incrementally increasing the revenue to kind of push you back to that $250 million a year range that you like to be in? Can you give me a little clarity on that?

Well, there's certainly no program on the horizon that has $50 million or $80 million of revenue on it that we see. We don't have visibility to everything. But the MRAP program and the MATV programs were pretty big programs, moving forward there.

Now, I'm not telling you there won't be, but we don't -- I don't know how to say to somebody, oh, yeah, there is this $100 million piece of business there. We want to do things kind of the old-fashioned way, which is to build the business incrementally. And every so often we're going to have we hope a chance at one of those kinds of programs.

But last year at this time, we could see that that was budgeted and something that they were going to go forward with. We didn't know that they were definitely going to put Satcom on those vehicles until they came and did the specification for it. But right now in the defense budget, there's nothing we know of that is like that.

On the other hand, the spending that's being done in the defense budget is being done for fast mobile operations, and that includes advanced communications at every step. It includes more and more radios and accessories and the kinds of things that expand the range of them. The Land Warrior program, they killed the Future Force Warrior or Future Combat System, but they did that to keep the Soldier Ensemble Land Warrior program going. And we are the battery and power contractor for that, the power electronics and the batteries for that are us. And There's people deployed with it. They've just got a sustaining contract for it. But I believe in the budget next year is to expand that program. They cut the bigger program to fund the ones that actually were delivering things.

So, everything that we think the Defense Department is starting to do and that Secretary Gates has been pushing, the fast mobile force, the force multiplier kinds of things are the things we do.

So I can't tell you. I will tell you there are hundreds of thousands of handheld radios out there, mostly in international markets. Those radios have ranges of one to five miles. They have 5 watts. Every 10 of those radios should have a tactical repeater, either deployed in the vehicle, a vehicle with jerk-and-run capability, or our suitcase repeater, which we put on a mountaintop or on top of a building in urban warfare.

So we're very active internationally now in trying to expand there. Satcom capability, like I said, the US, there's other people doing vehicle programs overseas who are looking to put that capability in their vehicle. And we think we're well positioned to do it. Our system works with any radio. Our system is modular, easy to service and very easy to configure in a custom way for people. So we will look at those things. Are any of those as big as $50 million or $100 million? No. Are there $5 million, $10 million programs out there and lots of them? Yes, there are.

That's what I was getting to. I understand there is not $100 million. But do you see a bunch of or a handful of $10 million, $20 million kind of opportunity that in the aggregate can kind of get you to where you want to go? So I guess you are saying you do see those, is that correct?

I can list for you probably $50 million to $100 million worth of opportunities like that. The issue is, these are governments. The program -- it's militaries who want to do these things. They have to get funded and the country has to have the money and the will to do it.

So it's not a whole lot different than the US defense budget, I can tell you. We know places today that want to go do these things. But it's very hard for us to assess a country in Eastern Europe that wants to buy $5 million worth of repeaters whether they have the money, they'll get the money, whether they'll do it. But that's the issue for us, is assessing it. But European allies, Eastern Europe and Asia, there is a lot going on. People see the capability, see it deployed successfully and they want it. Now it's a question of whether they're going to get funded to do those kinds of things.

Okay, I appreciate it. Thanks.

(Operator Instructions). Larry Litton, Second Line Capital.

Just really trying to get a clarification on a number of points that were made. First of all, in terms of the balance sheet, where would you think the debt level will be at the end of 2010?

We haven't really given a projection for that. We're going to be well below the $20 million level.

That's total debt.

Oh you said 2010?

Yes.

Sorry, I don't think -- I think it's a little early to project that.

Yes, John Casper here. 2010, over 12 months out. We are striving to move towards debt-free status; we're just not there yet. We expect to pay it down further by end of this year.

It would be a little premature to project our earnings for 2010. But suffice to say, we're looking at positive earnings, plus all of our noncash expenses we hope to be substantially along the way to being at zero or -- we would love to get to zero, but it's early to project.

So frankly, flipping it around the other way, because I think there are some concerns, there is no contemplation of any kind of equity or convertible equity offering at these depressed prices?

Not at all. We have well -- we are well covered with our receivables balances on an asset basis. Not a chance.

Okay. And again, obviously you've made some clear statements, but you don't want to be nailed down on operating expenses and gross margins. But is it fair to say, I mean, basically you're looking at a quarterly run rate in 2010 kind of in that $45 million to $50 million range, plus or minus? But there would have to be a surprise event to get above it and a real disappointment to get below it?

All we're prepared to say for 2010 is that we have a notion of what we think a real base most conservative level is. And we're going to size our expenses so that at that level we're profitable, with a goal of, as we exceed those, that we will get really good returns to it. And yes, if we can really see to hit some home runs, we can have a bang-up year. That is obviously our goal.

I appreciate the difficulty in predicting short term or longer term, but obviously it is something that you do on a planning basis. And you talk about the opportunities that are out there next year and beyond, but you're having trouble placing a probability on that. But conceptually, as you look out longer term, do you see this Company as a growth company in 2011 and 2012, or is it a struggle here because the unpredictability of the military side is overwhelming the business?

I think I was pretty clear in the comments I made at the end. We see growth opportunities everywhere we are. We're very focused on growth and our revenue growth. I think the change that we've made is to really try to take some of the ups and downs out of this thing. We think we're at a point where we have a good enough base that we can make that our base level of expenses, tune into that and then really capitalize on the upside opportunities.

We knew we were pretty well poised thinking that we had a large order coming, and we had made some forward investments. And I think that we're just a little more careful about the forward investments we made. But I think we're in the areas that are going to grow.

Lastly, I may be a little bit thick here, but in terms of Harris and the MATV program, is that dead and buried or is it possible we could be a second source supplier into Harris, or the government could want us pushed into that program? Or should we really just forget about it?

Well, it's very hard. This is a tough one, and it's tough because we're a subcontractor. We have no standing to find out what is happened. And nothing has been publicly posted. The release we gave gave you the details that we know. And that's that we went through an elected official to get a status and were told that the initial orders for the system for the first budget MATVs has gone that way. We're going to fight like hell to get any additional orders off of there and hope that those things are made available. The problem is, on the initial one, we haven't even seen a public disclosure of that.

No, I guess I'm partly thinking that, as you said, you went through an elected official, and this is very much a political animal. And you're talking about high unemployment in your district, and we're fully qualified. It would seem to be a question probably of spreading the government gravy, which you're trying to do.

I can't comment. I don't know what they're trying to do, to be frank with you, because without seeing a public disclosure of why they did what they did, I just can't tell you.

Okay. Thanks so much.

Gregg Hillman, First Wilshire Securities Management.

I guess I'm a little bit new to the story, but I was wondering, in terms of the larger strategy, what could you do to get a business that was kind of a cash cow that would cover -- that would at least get you to breakeven every quarter that wouldn't be subject to the vagaries of the ups and downs in the economy or the defense budget?

So you're asking how we get a business that way, or --

Yes, how can you develop a business as a cash cow that you can really count on that's steady cash flow that allows you to go out and develop other opportunities without worrying about whether you're going to be breakeven or not?

Well, that's a good question. I think part of our motivation in developing a service sector is to do that. It just is going to take a little time to get there. But with standby power, backup power and service associated with those, that is a business where a good part of the value there is design and service. And I would amplify that by saying by bringing technology that we have to that business, we can make the service very much more electronic oriented and less people oriented in terms of the monitoring service. So that has always been our goal and that is why we embarked on that part of the business.

Still there? Is anybody still there?

(Operator Instructions). Kerry Dukes, Ardour Capital.

Just one little piece of clarification, because just sitting back here and listening, it came off a little different in my mind. Looking forward towards the rest of 2009 and obviously all of 2010, you do feel pretty good about the opportunities out there on the smaller size contracts that you're going after, correct? You just don't feel comfortable specifically pointing to any individual one that you're going after?

Yes. I got to be -- I'm a little puzzled by this. In our history, we've built this business by building relationships and chunks of business that had to do with our technologies solving people's problems. And we had one large order for the MRAP program and we should've had one large order for the MATV program. And unfortunately, it appears as if the first part of that we're not getting.

But we have every day new opportunities in new areas, things that we're doing -- just Satcom alone, just because the US government -- the US government is not the only people who are outfitting vehicles. We happen to be the largest spender in defense areas. Everybody looks to this as the business. But if you go look around the world, every time the US deploys some new capability, everybody else in the world is looking at it, and especially when it is effective.

So Satcom has been very effective. We think the tacticals repeater is in that same space. Some of our amplifier products, which go to the same thing -- we have an in-line amplifier for hand-held radios where somebody puts it on their -- it's a 20 watt amplifier. It's a pocket amplifier that came out of AMTI, where the individual soldier can boost his range by four to five X.

So all of those things are big, big opportunities, but they are not $100 million in one fell swoop. They're going to be $2 million, $10 million, $5 million opportunities, but that's how we built the business and that's the way were going to build the business.

Okay, thank you.

Stuart Shikiar, Shikiar Asset Management.

A couple of questions on the stock price. The shares are currently trading at $4.06. From the call, you indicated that there is a goal to be debt-free by the end of next year. The book value of the Company is approximately $4.50, sales to market value 0.3. At what point does the Company employ its capital in share repurchase?

As you know, Stuart, we did a share repurchase program last year and deployed -- I don't know, $6 million or $7 million in capital to do that. It is something that we would consider in the same way we considered it there, discuss it with the Board and decide whether we want to do it.

I would kind of like to -- we'd like to get our balances down a little lower on our debt facility. And then as it was the last time, it'd be a strategic discussion between management and the Board and see what we want to do there. So right now I don't have a specific comment on it, but if we do, it would be a Board discussion and we would do it the same way we did it last time.

Well, I hope it's an active discussion.

It appears there are no further questions at this time. I would like to turn the conference back over to Mr. Kavazanjian for any additional or closing remarks.

Thank you. We would like to thank all of you for joining us today and we would really look forward to sharing our progress with you again next quarter. Thank you again.

This concludes today's conference. You may now disconnect. Thank you for your participation.