Ultralife Corp (ULBI) 2009 Q4 法說會逐字稿

Good day everyone, and welcome to this Ultralife Corporation fourth-quarter earnings release conference call. At this time for opening remarks and introductions I would like to turn the conference over to your host, Ms. Jody Burfening.

Thank you operator, and good morning everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for the Ultralife Corporation earnings conference call for the fourth quarter of 2009.

With us on today's call are John Kavazanjian, Ultralife's President and CEO; and Phil Fain, 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 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 and pricing pressures, and the possibility of an intangible and asset impairment charges that may be taken should management desire -- decide to retire one or more of the brands of acquired companies.

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, 2008.

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 now like to turn the call over to John. Good morning John.

Good morning Judy, thank you. Good morning, and welcome to the Ultralife Corporation conference call for the fourth quarter of 2009. With me today is Phil Fain, our Chief Financial Officer; and also joining me is Julius Cirin, our Corporate Communications Officer.

Today we reported revenue of $50.4 million for the fourth quarter of 2009 and an operating profit of $1.6 million with an adjusted EBITDA of $3.2 million.

Quarter-over-quarter, revenue was up from the third-quarter revenue of $42.4 million.

The operating profit was as a result of continued growth in gross margin and decreased operating costs as a result of the initiatives we started earlier this year -- or earlier last year. It was hampered by a $600,000 provision connected with inventory of our older amplifier products that are now considered to be slow-moving because of the strong market reception for our new amplifier line added following our AMTI acquisition last March.

Revenue was led by strong battery sales in both defense and commercial markets and by the initiation of shipments on the communications systems orders that we announced in mid-October.

Gross margin improved as a result of a favorable mix of engineered products and strong operating performance in both our US and our China battery production facilities.

The amplifier products that we acquired when we purchased AMTI are now an important part of our offerings both as components and as part of our advanced communications systems. Although we've only owned that operation for the last three quarters of 2009, sales levels for the year were more than three times the sales level of the previous year, and we expect to further expand this business in 2010.

At the end of the quarter we commenced shipments of lithium-ion batteries to the UK MOD under a contract with General Dynamics UK. This new line of products has the potential to be a strong contributor to revenue growth in 2010.

In the first half of this year we also expect to be shipping initial units of the new version of our tactical repeater for hand-held radios. By incorporating one of AMTI's new compact amplifier products, the new version increases the power and range by 30% to 50%.

We will also be starting trials on a new lithium-ion backup product based on scalable 1 kilowatt modules, it is able to be managed and monitored remotely and operates over a wide temperature range with three to five times the lifetime of traditional lead-acid products. Utilization of these capabilities enables reductions to total cost of ownership by 20% to 50% in the applications that we've targeted.

During the second quarter we also expect to have fully qualified the new version of our 9 volt product. Designed and manufactured in our China facility, it has improved performance over our current product, and by the end of the year we expect to be producing half of our 9 volt demand in China and ultimately producing 75% of our 9 volt product there.

Our China operation continues to see revenue growth in our line of lithium-thionyl chloride products. Much of the growth has been from the growing markets of automated meter reading in China, a key focus of their economic stimulus program. We see this market growing in 2010 and also see opportunity for growth for our thionyl chloride products in Europe and the United States.

New offerings and geographic expansion are our keys to revenue growth in 2010 and beyond. In our battery products our major thrust will be in deploying larger scale lithium-ion products for energy storage. Our energy services segment will complement this by providing a channel through which to deliver complete solutions based on the total cost of ownership model.

In communications systems we see further expansion of SATCOM systems in mobile communications, and as one of the two qualified sources, we expect to get our share. We will also expand this market internationally as our allies see the importance of extended communications capability beyond line of sight. And our pocket amplifiers and tactical repeaters will be a portable and instantly deployable range extension to the fast expanding world of handheld radios.

One of the issues that we face in growing our company has been the variability of orders. The markets that we serve, government defense, commercial, and standby power, all have elements that contribute to lumpiness in the revenue flow. Diversifying our business and increasing our service component helps but will not eliminate this dynamic.

Over the past year, dealing with this effect together with the general economic slowdown has caused us to change our approach to budgeting and planning. We've consolidated operations and focused our business planning and management around the models of three segments. We've reduced our overhead to match the revenue level of our sustainable base while retaining the controls required of a public corporation and sustaining important investments.

As we have sharpened our disciplines to ensure -- and we sharpened our disciplines to ensure that as we generate higher returns on the investments we are making in operations, products, and markets, with the greatest amount possible flows to profitability.

As a result, the plan that we have committed to reflects only the base business. In 2010 our base plan calls for under $177 million in revenue, $4.6 million in operating profit, and $11 million in adjusted EBITDA. While it is relatively evenly loaded through the year for planning purposes, we caution that in practice there will be some quarterly variation caused by the timing of orders, shipments, and acceptances.

Our goal for 2010 is to exceed this plan and slow any incremental returns to profitability. The management team and I consider this plan to be at the low end of acceptability, and as a result it is the starting point for any incremental management rewards. We will continue to be aggressive in working to capitalize on the investments that we are making to grow our business.

In summary, our goal for 2010 is simple. We will improve gross margin, further expand sales of communications systems, increase penetration of new markets and applications for power products, and grow the total revenue and the service component of our energy services business.

Before turning the call over to Phil, I'd like to say a few words about him. Last November we asked Phil to assume the role of CFO. Phil had joined us in February of 2008 as the Vice President of Strategy and Business Development, after working for us as a consultant on evaluating and completing acquisitions. The past two years Phil has been intimately involved in the development of our strategy and with all of our acquisitions.

More recently he orchestrated the changes in our budgeting and planning processes and led the effort to secure the asset-based facility with the Royal Bank of Scotland. He has also brought his extensive finance experience and broad set of skills to the job, and we're fortunate that he answered the call to become our CFO when we needed it.

So now I'd like to ask Phil to cover the financial summary, after which we will return an open it up for questions.

Thank you John, and good morning everyone. A great deal of my time over the past several months has been dedicated to restructuring our credit facility, and I'm very pleased to report that we have closed on a new $35 million asset-based lending facility with RBS Business Capital. After evaluating numerous potential financial partners, we selected RBS Capital to support our global financing needs.

Financial terms of the arrangement include a three-year term with very competitive interest rates.

I am very satisfied with the relationship we have forged with RBS and look forward to a long and prosperous partnership with them.

Earlier this morning we released our fourth-quarter and full-year results for our year ended December 31, 2009.

Consolidated revenues totaled $50.4 million for the fourth quarter, versus $49.2 million in the same period a year ago. The increase resulted from SATCOM-on-the-Move systems shipped under the $20 million order we received last October as well as sales generated from our AMTI amplifier business, which we acquired last March.

This favorable performance of our communications system segment offset year over year sales decline in our non-rechargeable and rechargeable segments. These declines were primarily attributable to lower shipments of military cylindrical products and the timing of a large, fourth-quarter 2008 charger order, respectively.

Gross profit amounted to $11.9 million in the fourth quarter of 2009, an increase of $2.2 million from 2008. As a percentage of total revenues, consolidated gross margin was 23.7%, compared with 19.8% in the fourth quarter of 2008. A good part of the improvement in the overall gross margin was attributable to the communications system segment, which achieved a 30.8% gross margin, compared to 27.4% last year. This improvement was primarily driven by sales of SATCOM units at favorable margins as well as the continued strong performance of our AMTI business.

During the fourth quarter we booked a $600,000 provision for slow-moving amplifier components remaining from our former Seattle amplifier operation. Since acquiring AMTI and closing our Seattle operation in the third quarter of 2008, we have been using AMTI amplifiers in more and more of our products. Our tactical repeater is one example of a product that we are now producing using the AMTI amplifier.

In our non-rechargeable segment, gross margins improved 4.4 percentage points to 22.3% in the fourth quarter, versus the year-earlier period, due to operating efficiencies, favorable production volumes and product mix.

The gross margin for rechargeable products declined 2.3 percentage points to 17.5%, resulting primarily from startup costs relating to initial production runs of new products.

We experienced lower gross margin percentages in our design and installation segment due to ongoing intense price competition with component suppliers and the completion of lower-margin jobs.

Operating expenses totaled $10.3 million compared to $10.0 million in the same quarter last year. The cost reduction and consolidation actions we took in the latter half of the year virtually offset the increased expenses resulting from our acquisitions of U.S. Energy in November 2008 and AMTI in March 2009.

Our fourth-quarter operating expenses were $500,000 below third-quarter, and $2.8 million below second-quarter 2009 levels.

Fourth-quarter noncash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses amounted to $1.8 million, compared to $2.1 million a year ago.

Operating earnings for the fourth quarter were $1.6 million, after three quarters of operating losses in 2009 and a $300,000 operating loss in the fourth quarter of 2008. Higher revenues coupled with the actions we have taken to lower our cost basis and improve operational efficiencies are reflected in our improved fourth-quarter performance.

Net interest expense for the quarter was $500,000, compared to $100,000 last year, reflecting higher average borrowings under our revolving credit facility.

In addition, we incurred foreign currency losses of $200,000 due to the weakening of the US dollar against the British pound. This compares to a foreign currency gain of $500,000, as well as a $300,000 gain related to a grant received from the state of New York in the fourth quarter of 2008.

Our fourth quarter tax provision amounted to $100,000, reflecting booked tax differences related to the amortization of intangible assets.

Net income for the quarter was $800,000 or $0.05 per share, compared with $200,000 or $0.01 per share last year.

Adjusted EBITDA, defined as EBITDA excluding noncash stock-based compensation expense, amounted to $3.2 million in the fourth quarter.

Our laser like focus on our balance sheet is clearly reflected in the reduction in both our accounts receivable and inventory levels and our improved cash position. Our accounts receivable balance of $32.4 million decreased almost $4 million versus the third quarter, despite higher fourth-quarter sales. Likewise, our inventory decreased $7.4 million from the third quarter and $15.7 million from the second quarter to $35.5 million.

We ended 2009 with a cash balance of $6.1 million, compared to $1.7 million at the end of the third quarter.

With strong cash flow generated from our operations and favorable improvements made to our balance sheet, the opening outstanding balance on our new credit facility is $10 million, and our net borrowings today stand at $5 million. By comparison, at the end of the third quarter our outstanding revolver balance was $26.6 million for net borrowings of $24.9 million, and at the end of the fourth quarter the revolver balance had been reduced to $15.5 million for net borrowings of $9.4 million.

The progress we made in strengthening our balance sheet during the fourth quarter has put the company in a much improved position as we commence our asset-based lending agreement with RBS.

During 2010 we intend to continue to focus on improving gross margins across all segments and controlling our operating expenses to leverage them as we grow in the future. With a stronger balance sheet and a solid banking relationship now in place, we expect to generate positive cash flow that we can reinvest in growing our businesses.

Finally, I'd like to remind you that beginning with our first quarter of 2010 we will be realigning our reporting segments to more closely parallel how we operate our business. Our new reporting segments will be battery and energy products, communications systems, and energy services. A detailed description is included in our earnings release.

I will now turn it back to John.

Thank you Phil. I hope you can see that we really are focused on continuing to improve on what was a solid quarter. And with numerous opportunities for growth and a new credit facility in place, we are ready for 2010.

Now I would like to open it up -- ask the operator to open it up for questions.

(Operator Instructions). Steve Sanders, Stephens Inc.

This is [Trey] for Steve. If first we could start with the sales and operating income outlook. Just to be sure we are on the same page. So the $177 million is just your base level business, and you feel comfortable hitting the $4.6 million in operating profit on that top line?

Yes. That's the base on which we did it. We really wanted to meet -- we have been bitten in the past by trying to anticipate or plan, and we've got a lot of opportunities out there, but we just really said let's look at what we feel comfortable with as a base and size ourselves that way, be profitable that way, generate a bunch of cash that way, and then go get the other stuff.

So are we to assume that any sizable communication orders for tactical repeaters, SATCOM, etc., would provide sales upside with the incremental margins of 30% plus?

Yes. That's a very good assumption.

And then given the cost reductions and your current mix, how should we think about breakeven from a topline perspective?

Good question. Well -- last quarter I think is a fairly representable quarter. We ran at 22.7%. If you back out the provision we took, it was more like 25%. We certainly are mix sensitive, we have a pretty wide range of product margins.

But I can also tell you we have opportunities. As we start producing our 9 volt in the second half of the year in China, there is a cost reduction associated with that.

We are -- our rechargeable gross margin was low, because we have a startup on some major projects going on where we are really getting our processes in place. There's -- we're not as efficient as we would like to be there, but we really believe ultimately that's a profitable -- a very profitable product line. So we have opportunities they are.

So we have enough -- we have a pretty good balance of things to grow the gross margin, or at least ameliorate any mix issues we might have over time.

And of course standby power, we have been growing that pretty well. Last quarter was not a good performance. A lot of that had to do with we'd made purchases of lead-acid batteries in a market where prices were coming down, and we got caught on some margin there, so that some of jobs it ends up closing and getting accepted and flow into revenue in that product line with a low margin. We expect to improve that as well.

So I would say last quarter was pretty representative, and our goal is to -- is we think we have a lot of opportunities to better that.

That's helpful. And then you mentioned the standby market. What do things look like there in terms of activity? I think in your comments there you've mentioned pricing pressures still persist. Do you see that improving as kind of 2010 progresses?

We think so. It's a tough market for people making capital expenditures. People have delayed capital expenditures and improvements in that market. We have been able to keep the revenue pretty steady, keep our crews working. Like I said, there have been some pricing and margin pressures, but we think we have a pretty good quality product and offering there and in bringing our customer service.

So we think it will improve. We haven't counted on a lot of that in terms of being very careful with how we project on the revenue and profit side. It's another area where we want to take improvements and really flow them to the bottom line.

And then kind of shifting to telematics, we all know how tough 2009 was for the auto industry, but this business seems to have nice growth potential. If you could maybe just talk a little bit about your view of this segment and the potential contribution given the current environment.

We have seen growth, both -- telematics is very much tied obviously to the auto industry. And we've had some customers who have gone up and some customers who have gone down. We've seen growth in the platforms that it's gone across, but car sales have been down. So saw a pretty good, strong order flow in the fourth quarter. I think auto has picked up. We have pretty good bookings this quarter.

It's just a hard one to project. It's -- I wouldn't say we are counting on a huge growth for this year, but we have a decent plan in place. I think we have pretty good visibility in that marketplace.

Thank you guys.

Walter Nasdeo, Ardour Capital.

I kind of want to follow up a little bit on where Trey was before. Obviously you're making great strides on the financial side, the balance sheet is getting stronger, your costs are coming down, margins look like they can get where they need to be going forward. As you're billing -- what I'm trying to get a little bit or clearer picture on is how we grow revenue kind of corporate-wide to the levels that it previously was and then beyond. Obviously there have been some tough economic times, but that being said, what are your plans to really go out and just really kind of drive revenue in larger clumps going forward?

Well, we're -- I can do it by segment for you and tell you where we are driving it.

In the battery area there's really three main thrusts.

Number one, in China we have a good product line there that we finally have to the point where we think we have a world-class product with thionyl chloride products. It goes mostly into applications like meter reading, tire pressure monitoring, a lot of applications that are growing pretty fast worldwide. The meter reading market in China is the major part of their stimulus package. It's going to grow this year from last year, and it's going to grow the next year also. We are seeing similar things in other places in Asia. So that's number one in batteries.

Number two in batteries is we have this opportunity with UK MOD, General Dynamics where we are actually -- we're redesigning the battery and charger line of the UK military. And as we get those out there and get the new products out there and execute on them, that's a growth opportunity during the year.

And then the third opportunity is we have seen a real resurgence in some of the programs we're working on what the US military, and one in particular is the Land Warrior program. Land Warrior was defunded last year, but it was fielded based on the year before's budget and to really good reviews. They killed the Future Combat Systems master program, but they left some of the spin-outs of it that were really bringing value, and this is one of them. We are seeing very enthusiastic reception there, and we expect to see that program rolled out this year. So in batteries we have some real areas for growth there.

In communications systems it's pretty simple, which is systems. All right? And we are going to grow our amplifier line, the AMTI pocket amp, which goes in line with a handheld radio, and start to market that worldwide. A lot of opportunities for that. We've grown it this year -- in '09, I mean -- and we are going to grow it in 2010.

And the systems side, you might have noticed, but they placed an order the other day for 1358 new MRAPs. We are the supplier of choice in the MRAPs. Yes, we got burned on the MATV program, but the fact is, they're buy -- we are the supplier of record there on MRAPs, and again, we are not going to get ourselves in a bind by counting on something, predicting something, but we are working real hard with our prime contractor that we work with to ensure that we get the SATCOM systems that are assuredly going into those products.

Who is that prime contractor, John?

I'm sorry?

Who is the prime contractor?

I don't think we've named that prime contractor. We don't have their permission to name them.

I know you didn't name them. That's why I was asking. But okay. Please continue. Thank you.

Good try, but it wouldn't be hard to figure out, by the way.

We have our ideas.

All right. And so they -- they're -- we're actively engaged with them on that, getting into that program. And it's not just in MRAPs. The orders that we're doing now are going on Bradleys, they're going on Strykers, they're going on Humvees, they're going a lot of places where people are starting to figure -- there is no line of sight in Afghanistan. With 30,000 more troops in there and more vehicles to move them around, that business is there.

Again, it's the government. It's hard to predict. We could get a call tomorrow -- quick, we need them now. We could get a -- it might be second half of the year, it might be later, so we are being real careful with how we forecast and plan that business.

And then the third area is the tactical repeater. It's another product again where we took a step back last year based on feedback from our first customer, special forces guys in the UK, who loved the product and decided that -- to put the AMTI amp in there. And that's going through all the shock and vibration and EMI and such testing on there that we are going to do that.

And across all these lines I think you'll see, the first two instances here are batteries and communications, the emphasis on international, because the US military has really shown in Iraq and Afghanistan the power of some of these offerings, and taking them internationally it's going to be powerful. And then some of the battery products, again, in the commercial world, China is growing and Asia is growing, and we want to be part of that.

And then in energy services it really is what we have done all along, which is servicing national accounts. We really believe that as the economy improves, as people loosen up on cash, which has not happened now, financing is tough, that that will move forward.

And that really gives us the base for our real future in the battery and services area, which is energy storage. We are not coming along saying -- and I know you are very familiar with this market, but we are not coming along saying we're building a 1 megawatt hour battery tomorrow for a wind farm. I think it is foolish to assume that somebody who doesn't have experience building lots of smaller batteries and building those up in scale can do that instantly. There's a lot of learning along the way. We've learned that the hard way.

So our entrants in that marketplace are going to start with standby power, which really is energy storage, bringing it back later when the grid goes away, and start with standby power. We are going to the places where the power source is either -- either/or unattended or a non-controlled environment, because lead-acid batteries do not do well in high temperature, and you can't monitor them remotely, so they are preemptively changed in remote environments. And there's lots of those out there. Every time you see a green box at the curbside, think that there could be a lead-acid battery in there backing up a communications hub for some kind of network or telecom gear. That's the kind of market we are going after initially, and we're going to scale it up to really take on energy storage.

And we have the channel for it, and we have a unique ability to go to a customer and not just sell a commodity battery but sell them a cost of ownership battery and service over a period of time, because that's really where the benefit is to the customer. So that's how we are going to grow the business.

Our dilemma is, how much of that happens in Q1, Q2, Q3, Q4 2010? And we stepped back and said, we can't predict that. We're going to go after that stuff. We have the investments to do it, but we are not going to disappoint people or ourselves, or -- we want it only to be upside for 2010. That's the way we're approaching it.

(multiple speakers)

Does that help?

Appreciate that clarity. Yes. That was helpful, thank you.

Okay.

Talk to you later.

Ted Kundtz, Needham.

What's the -- what did you ship in the fourth quarter out of that $20 million contract that you received? And how much of it carries over? I know you talked about it being shipped partially in the fourth and partially I guess in the first quarter. Can you split that out for us?

Yes. We're -- we'll give -- we do report by segments, and the problem is I just can't do that, because then I end up reporting orders shipped by things, and we just have decided not to set that precedent. But a little over half of it -- is the best I'll tell you.

Okay. Could you -- oh, okay. It was shipped in Q4. Okay. Can you mention what the backlog was going -- is going into the year? Or at year-end?

I am not sure. And it's not just that it's inattentiveness. We don't really run a backlog business. I'll tell you that going into the year we were pretty well booked for the first quarter, but we still have -- still had work to do. So nothing unusual. There was nothing unusual in terms of more backlog than we expected, or less.

(multiple speakers) we don't have the luxury we had three years ago where somebody (multiple speakers) where you had a one year of orders (multiple speakers) and frankly, especially with the government -- most of our commercial customers, especially telematics and 9 volt, are pretty well -- are pretty good about placing orders two, three months out. They know what our lead times are, they handle them, they are really good at it.

The government's another story. The government, because they manage both commitment capability and cash, is a little hard to gauge. Sometimes they place orders out a long time, sometimes they don't. They seem to be in a mode right now of not placing long-term orders on things like batteries that we cover regularly. DLA seems to kind of go month-to-month, look at the min/max, decide what they're going to order and order it. So -- in the battery world.

And then in the program/project world, like at SATCOM, you'll know when we know. We follow the programs as much as any of you guys do.

Just getting back to your kind of implied gross margin assumptions, which looked to me to be in the range of 26% plus for the year on your target operating profit there, on $177 million in revenues, I just wanted to go back over that and how you actually think you can get there, because that will be a new high for you guys. It would be at levels that would be higher than your fourth quarter with -- on lower revenue numbers per quarter (multiple speakers) this fourth quarter.

Well, actually I think you have to go back just a little ways, but there were times in the past we were up to 27% I think, 28% gross margin.

Maybe for a particular quarter but never for the year. At least (multiple speakers) as I remember, but in any event, it is a new level for you, certainly from recent levels, and what really takes us there?

Well, in the past -- I'll make a couple of comments about that. In the past we had a very different business model. When we were -- we've really tried to make the transition from component supplier to more of a system supplier. We went from components, cells and -- really cells and low-end batteries to making more complex products, batteries and charger systems and more complex batteries to systems. And along the way, if you look at our R&D spend for example, it's required a lot more R&D spend. It's required a lot more process control spend in manufacturing and things. So -- and we were on that curve where you had to make the forward expenditures.

And frankly we are still doing it to some extent. You can't amortize R&D on a lot of these things, where we are spending R&D for programs that are yet to come.

And so for us it's really -- this has been a year, last year, second half of the year, and this year, a year where we are kind of saying it's time to capitalize on some of these things. Not that we are not making those forward spends, but we've made -- we've picked up a couple of million dollars in R&D -- million dollars plus in R&D per quarter when we acquired AMTI. And by consolidation we were able to keep the same scale of work going on and bring our R&D back down. It took us a couple of quarters to do that, but that's the way we approached it. (multiple speakers)

Yes. No, I see the operating expense. Yes, that is impressive, very impressive. I was just thinking (multiple speakers) focusing on the gross margin number.

Well, it's a similar thing in operations. When we start up production, we've got (multiple speakers)

No, I know all that. But I'm just looking at -- this is a -- to get there on lower volume is -- seems to me a difficult path. I was just wondering (multiple speakers)

We get a better price for the product when we sell (multiple speakers)

So what you're saying is there'll be a better -- a bigger -- a much bigger mix of systems business on higher-margin systems business going forward than there has been in the last year or certainly prior years.

Answer to that is yes.

Yes, okay. That's what gives you the confidence that you can drive these margins?

The answer to that is yes.

Yes. Okay. Because (multiple speakers)

And China. I mean, (multiple speakers) our China facility had higher -- a higher gross margin than the company had. And we still have a ways to go there on that product line. And so that's a real efficiency for us.

How much of the total company revenues will be coming out of China this year?

Oh, it's between 5% and 10%.

So it's starting to contribute. Right. Okay. Okay. And then just one other question. Could you back go back over the debt -- the current debt levels? I was a little confused on your comments there.

Sure. I'll make it very simple. At the end of Q3 the outstanding amount on the revolver was almost $27 million. At the end of Q4 that was reduced to $15.5 million.

But we had $6 million in the bank.

Yes. But we had -- and that's in my comments. When I talk about the net borrowings, I'm netting that versus -- with the cash that we have in the bank.

Okay. And then you've got some other short-term debt that brings it back up to the $19 million?

Yes. Yes.

Okay. That's where I got confused. Okay. So your revolver is $15.5 million, plus some other short-term debt brings it up to $19 million?

Right. We still have a note outstanding to somebody that we bought a company for (multiple speakers)

Oh, okay. Got it. (multiple speakers)

$3.5 million note there.

Which becomes -- which goes from long-term to (multiple speakers)

To short-term. Got it. Got it. Okay. Okay. Got it. And that's where that stands. Okay. Terrific.

And you think you'll be cash flow positive throughout the year, for each quarter?

Well, that certainly is our goal. But I have to go back to John's comments about what may transpire on a not only quarter-to-quarter basis but a month-to-month basis. But that certainly is our goal.

We would be disappointed if we weren't. I mean, (multiple speakers) not a -- we've got kind of $6 million in noncash expenses on an annual basis. It's spread pretty evenly so (multiple speakers)

Okay. No, you did a great job on the balance sheet then. That looks -- that was terrific.

Okay. Thanks a lot.

(Operator Instructions). Jim McIlree, Merriman.

Can you talk about how you get to the $177 million base, either in terms of the old segment reporting or the new segment reporting?

It's not a whole lot different than what we have said before. It's about -- I would tell you it's about -- about 10% of the business is the energy services business. These are kind of in round numbers. And we are about -- let's see. We have run about 1/3, 1/3, 1/3 -- commercial batteries, military batteries, and communication systems. And so kind of 60/40, batteries and communications. And that's the -- or 60/30/10, if you want to say it.

So under the new segments it's in the ballpark of 60/30/10 -- percent. It might be a little more in the services and a little less in the batteries than that. But that's a decent rule of thumb for us.

So that would be about 55-ish or so of the -- of com systems?

Yes. I'm not allowed to do the math for you, so --

(laughter) Okay. So the -- okay. But the base com systems business is expected to increase to hit that $177 million baseline guidance?

That's reasonably close to what we did last year in that business, if you take out the SATCOM, for example.

Okay. And I missed the first part of the call, so excuse me if you've already answered this. But what was the reason for the large sequential and year-over-year drop in primary battery sales in Q4?

It was purely -- I would call it a timing issue. We finished off some shipments in batteries at the end of -- for the US military kind of in the middle of Q4. And then the year before, 2008, we had a very large charger order that made that battery and energy products segment higher than it had been.

So I don't understand the first part of your answer where you said you had a -- you finished something off in the middle of the quarter.

We were on a -- there was a timing issue with battery and energy products in quarter four. We got to the end of one of the decent, good-sized orders we had for DLA.

So does that mean that (multiple speakers)

It was the quarter-to-quarter timing between Q3 and Q4, but a little more in Q3 and a little less in Q4 on the battery product line. And this is what we are trying to point out, with lumpiness and timing sometimes it just has to do with acceptances and lots and ordering patterns. (multiple speakers) Nothing unusual made that different year to year happen other than some timing this year between Q3 and Q4, and in oh -- sorry, this year, I wanted to say -- in '09, and in '08, the quarter that's comparing it to, right, we had a large charger order that -- I think to Mexico or somewhere that boosted that number.

Got you. Okay. Great. And then is there any need for or is there any reason to expect large changes in working capital ratios in 2010, either positive or negative, versus what you exited 2009?

One of the areas that Phil has done a lot of work on has been in emphasis on inventory control and emphasis on material planning. So we actually -- a lot of our success in improving the balance sheet has been improving our material planning and our approach to that. So yes, we think that we would like to improve that. Right now the ratios are a pretty good assumption. But I think there is room for improvement.

Okay. Great. Thank you.

(Operator Instructions). With no further questions in the queue, Mr. Kavazanjian, I'd like to turn the conference back over to you for any additional or closing remarks.

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

This does conclude today's presentation. We thank everyone for their participation.