Ultralife Corp (ULBI) 2010 Q2 法說會逐字稿

Good day and welcome to the Ultralife Corporation second-quarter earnings conference call. At this time I would like to turn the conference over to Ms. Jody Burfening. Please go ahead.

Thank you and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn and Associates. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the second quarter of fiscal 2010. 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'll 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 to pricing pressures and the possibility of intangible asset impairment charges that may be taken, should management decide to retire one or more 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 report on Form 10-K for the period ending December 31, 2009.

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, Jody, thank you and welcome, everybody, to the Ultralife Corporation conference call for the second quarter of 2010. Joining me today is Phil Fain, our Chief Financial Officer.

Today we reported revenue of $37 million for the second quarter of 2010 with an operating profit of $400,000 and an adjusted EBITDA of $1.8 million. Despite the lower revenue we showed an operating profit due to the continuation of strong gross margin performance and disciplined financial and expense control. Revenue was flat due to government contracting delays along with continued weakness in the Energy Services market. We expect a sequential growth in revenue for the third quarter and have shipped over $21 million worth of product in July already. We also expect energy services revenue to start to grow in the third quarter as capital equipment expenditures start to recover.

In Battery and Energy products we have continued to see delays of contracting and order activity for standard battery products with the Defense Logistics Agency. Despite order history and contract estimates that are significant, we have seen no orders on standard battery products since the fall of 2009 as contracting efforts continue. The international defense business and commercial business continues strong, however, and operational improvements continue to affect margins positively.

Communications system sales were on target at $11.2 million with a gross margin performance at 35%. We commenced shipments on our Satcom-on-the-Move order in the first week of July and expect to complete this order in the fourth quarter of this year, which will contribute to further revenue growth this year in Communications Systems.

While Energy Services revenue continued to be week, bookings have seen a significant pickup which will result in a return to revenue growth in the third quarter. Activity is strong for the second half of the year, and we see signs that could indicate a permanent recovery in this sector as deferred capital projects have been reactivated.

With our continuing work on operational improvement and overhead costs firmly entrenched, we are also focusing on new product development. In Energy Products much of our work is on international variants of our Land Warrior product line. Initially developed for the US military, we are now in discussions with a number of international military organizations interested in adapting this product line for their use. With the US now deploying the system and others looking to adopt our power system, we see this area as a major growth sector of our defense business.

On the commercial side we have several new medical applications either starting production or in final development qualification testing. Utilization of our SmartCircuit technology is capturing interest and design programs in the medical space as designers of advanced medical equipment start to utilize smart battery technology.

As we finalize the contract process with the state of New York, we have gotten the go-ahead to start some work on our large-scale energy storage batteries. Interest in this work is high as both the wind and solar industries start to understand that energy storage is integral to the long-term success of both of these alternative energy technologies. While we do not expect to have finished megawatt-sized product until next year, we expect to apply the intermediate-sized products that we will develop on the way to have applications in many of our existing markets.

In the Communications Systems business we have just launched two significant new products. Our new A-321 amplifier, based on our industry leading A-320 amp, now brings that compact technology to a new form factor. The A-321 has a low-noise amplifier capability which enhances satellite communications and allows operation at as low as nine volts for vehicle operations, while also supporting manpack operations from a single battery.

We also launched our new dual-port adapter for our pocket amplifier family. This adapter allows for the connection of two antennae, for instance allowing land-based communications and satellite communication from the same radio through the A-320 amplifier without swapping of cables, providing maximum flexibility to the operator.

As we move forward, our focus on highly engineered products is fundamental to further increasing gross margin. Combined with our embedded efforts on cost control, it is a critical component of widening the operating margins of our business. This is how we will run our business, with positive EBITDA, decreased inventories and a solid business model which puts a net positive cash position in our sights.

Now I will ask Phil to cover the financial summary, after which we will open it up for questions.

Thank you, John, and good morning, everyone. Earlier this morning we released our second-quarter results for 2010. Consolidated revenues for the second quarter totaled $37 million versus $39.6 million in the same period last year and $38.5 million for the first quarter of 2010. The year-over-year variance reflects revenue decreases for Battery and Energy products and Energy Services of $3.2 million and $0.2 million, respectively. This was partially offset by a $0.9 million increase in Communications Systems revenue.

Despite lower consolidated revenues, gross margin was significantly higher in the second quarter of 2010, $9.4 million compared to $6.8 million for the second quarter of 2009. As a percentage of total revenues, consolidated gross margin was 25.4% in 2010 versus 17.1% for last year's second quarter. As we noted last year, the gross margin for 2009 was negatively impacted by 4.6 percentage points, due to the recording of inventory reserves of $1.8 million in that period. Gross margin for our Battery and Energy products segment rose almost 6 full percentage points from 16.8% to 22.6%, primarily reflecting manufacturing efficiencies and higher selling prices realized for some of our products.

Gross margin also increased in our Communications Systems segment, by 12.7 percentage points, going from 22.4% to 35.1%, benefiting from favorable product mix, improved manufacturing efficiencies and the impact of inventory reserves recorded in 2009.

The gross margin for our Energy Services segment increased by 7.8 percentage points to 12.3%, despite lower revenue caused by continued customer delays of large capital projects in the standby power industry. Our consolidated gross margin of 25.4% for the second quarter was slightly higher than the 25.3% achieved in the first quarter.

Operating expenses totaled $9 million compared to $13.1 million in the same quarter of last year and $8.9 million in the first quarter. The across-the-board cost reduction and consolidation actions we commenced in the latter half of 2009 were fully realized in the first quarter of 2010 and have been sustained throughout the second quarter. These actions more than offset the increased expenses resulting from our acquisitions of US Energy in November 2008 and AMTI in March 2009. Operating expenses for the second quarter of 2009 included approximately $1.2 million of nonrecurring costs associated with staff reductions as well as legal expenses relating to litigation that was successfully resolved.

Second-quarter non-cash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.6 million versus $2 million for the year-earlier period, primarily resulting from lower stock compensation expenses in 2010.

Operating earnings were $0.4 million versus an operating loss of $6.3 million reported for the second quarter of 2009. The $6.7 million year-over-year improvement absent the $3 million of nonrecurring items recorded in the second quarter of 2009 reflects the higher gross margins across all business segments, coupled with our lower cost space and improved operational efficiencies.

Net interest expense for the quarter was $223,000 compared to $349,000 last year, reflecting lower levels of borrowing. Our average outstanding revolver balance was $7.7 million for the second quarter of 2010 versus $20.2 million for the year-earlier period. Our second-quarter tax provision amounted to $51,000, reflecting the alternative minimum tax on US taxable income and booked tax differences related to the amortization of intangible assets.

Net income for the second quarter amounted to $20,000 or $0.00 per share, compared to a net loss of $7 million or $0.41 per share for the same period last year. And adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $1.8 million in the second quarter versus negative $4.5 million for the second quarter of 2009. With continued cash flow generated from operations and the favorable improvements made to our balance sheet, the outstanding balance in our new credit facility was $9.3 million, and our net borrowings were $6.7 million at the end of the second quarter. By comparison, at the end of the fourth quarter, our outstanding revolver balance was $15.5 million, and net borrowings were $9.4 million. Our second-quarter financial position reflected an increase in inventory by $3.1 million over year end to $38.5 million. This increase was attributable to fulfilling our Satcom-on-the-Move orders, for which shipments have commenced in July.

During my comments to you on February 18 when we presented our fourth-quarter results, I stated that 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. We now have made considerable progress, as gross margins have exceeded 25% in both the first and second quarters and we continue to strive for additional operating efficiencies and the introduction of higher-margin new products.

Although our operating expenses have been significantly reduced, we continue our everyday focus to ensure the critical balance between providing the necessary funds for product development and revenue generation and keeping our business model right-sized to deliver value for our shareholders. We now focus our attention on leveraging the improvements we have made over last year to generate strong incremental returns on revenue growth.

Regarding our outlook for the full year, we are revising our revenue guidance to a range of $177 million to $182 million. Our guidance now assumes that shipments of Satcom-on-the-Move systems, valued at approximately $21 million, are completed in the fourth quarter. However, because visibility for orders of batteries from the Defense Logistics Agency remains very low, we have excluded any such revenue from our outlook for 2010. With the improvements we have achieved in gross margin and our reduction in operating expenses, we are raising our operating income outlook from $4.6 million to approximately $7 million for the full-year period.

I will now turn it back to John.

Thank you, Phil. Now, operator, I would like to have us open it up for any questions.

(Operator instructions) Steve Sanders, Stephens.

This is [Zach Larkin] on for Steve Sanders. Congratulations on the quarter. First off, I just wanted to talk a little bit, see if you could provide a little more color on your guidance. Looks like you've increased it a little bit, but with the Satcom order being included but nothing else, what are you seeing on weakness in all of the other divisions?

Yes; I think we referred to this in the release, and Phil and I were a little more specific in our comments. I'll be real specific. There are a couple of battery types that we buy that are standard military batteries, through the Defense Logistics Agency. We have been on contract for most of them for six, seven years now.

The contracts expired last year, and they commenced a process of contracting for them. It's -- actually used to be done by the Army Communications-Electronics Command; it moved over to DLA a few years ago. But this is some of the first real major ones that they've done. The contract for one group of batteries was awarded, finally, in May-June time frame. We announced those; I think we talked about it on the last conference call, possibly.

But we have seen no orders for those yet. There are some minor re-qualifications that have to be done, but usually we give some guidance on what -- there were estimates. They have to give you their best good-faith estimates of volumes. The volumes and volumes we coded against were substantially what they had been running, no big surprises. But we haven't seen orders yet, and so -- and we are not -- for whatever reason, we haven't been able to get any guidance on what's coming. They are very busy, they have a lot of things going on. But we haven't gotten an answer on that.

Second, the biggest battery test, the BA-5390, that contract expired at the end of last year. The last order we got for that was in September of 2009, September of last year. And toward the end of the year they were talking about a stocking order to get them through this year while they did the contracting. They said, oh, no, no I'm all right, we are going to get the contract out fast. They did a proposal, they had asked for proposals, we put it in.

And they just, a couple weeks ago, came along and extended it another 60 days with really no visibility. They are basically saying, in the middle of this contract process, they don't want to make any comment. So, with no visibility, this is -- these two batteries together have run easily anywhere from $3.5 million to $5 million a quarter in volume for us -- very steady, very predictable. But we haven't had an order since September of last year.

The rest of our business has been very strong. We know that there's deployed troops that are using product. There is inventory in the pipeline, so they have periods of time where they can draw down inventory and then correct. We had assumed and I think we said in the last conference call that they would start ordering in the second half of the year. We just haven't seen it. We don't have any visibility to it. At least we knew somebody was saying yes, yes, we are going to order them soon, we need them. We just want to get through this contracting process. That would be one thing. But it's pretty much silence.

Now, I know you mentioned in the prior calls that they were having a bit more competition on some of the contracts, with potentially bringing in a second party to bid. Do you have any sense that that has impacted, or is that on one of the other battery contracts? Or is that potentially impacting stuff going -- the delays in contracting?

Well, there is at least three people who were awarded in the last contract. We were awarded part of it, the ones that were awarded in the second -- in the spring. I think it was the 5347 and the 5368 and 5372. And so we were awarded part of it. SAFT, who has been in this business for a long time, was awarded part, and Bren-Tronics was awarded part of 5347. Bren-Tronics actually was awarded part of the 5347 five years ago, when that was awarded, and they never qualified. So we will see if they get qualified this time or not.

But those were the competition. I expect no different competition this time in the 5390, although Bren-Tronics is not a cell manufacture. They may, for all we know, have started to try to do that, but it takes more than a year to manufacture these things and meet the spec, actually, which I think, even for us, it took a couple of years to get it down. So I don't make any comments about that other than the fact that it's always been us and SAFT, and certainly I would expect Bren-Tronics probably did it.

We don't have any visibility. I don't know if there's anybody else or not. Anybody can bid these; it's really a question of who can actually perform against it and get qualified. We have been qualified and been the only qualified source for this, and it actually requires you to do fairly high-technology D-cell and a fairly high technology product to get qualified. But even when this is awarded, if somebody new were to get it awarded, it would take a minimum of six months and as much as a year for them to get qualified. So now the question is, well, what do you do for supply during that period of time?

We, again, have the only qualified product. And so we fully expect that there would be some volume this year. They used a pretty good clip of batteries last year. There's 30,000 more troops deployed in Afghanistan. We know they are using the product. But like I said, Zach, we don't have visibility. So we thought the prudent thing to do was to say, let's back it out of this year. We think there's some pent-up demand coming there, but we've got to wait and see.

Right, that makes sense. Turning to OpEx assumptions for the second half -- congratulations, you have been doing a great job in really lowering expenses across the board. Is it reasonable to assume that current levels of R&D and SG&A continue throughout the year? Do you see any need to ramp up at all, or should we look for what was seen this quarter?

I'll ask Phil to talk to that.

I would expect there to be a ramp-up in R&D spending. I would peg our OpEx between where they are right now and a rate of no higher than $10 million a quarter. With higher sales, I would anticipate higher commissions. And of course, with our international penetration, it does require some additional selling expenses.

But I reassure you, as I reassure the folks I work with every day, that the expense side of the equation is very much under control here.

I'll echo what Phil said. He's really working with the general managers, put a very good system in place for controlling expenses. But we are going to -- and it's built into our guidance on -- although we took up our guidance on profitability, on operating (technical difficulty) although we took up our guidance there, it does anticipate spending more on R&D. We have additional work we are doing in the Communications Systems business. We have a lot of work going on there. On the battery side we do expect we'll be doing variance of the Land Warrior for one or more international governments.

And when we do that work, sometimes they pay for it, but sometimes we pay for it because we want to own the design like we did with the UK MOD. And so we have to expense those. But, like Phil said, we're firmly committed to being between $9 million and $10 million while still making the right investments and keep it as close to $9 million as we can. But when we do have some of these NRE expenses, $100,000, $200,000, we can cause a little bump up.

One final question -- I wondered if you had any updates on the China facility's manufacturing, how things are proceeding with that.

We are doing real well in China. Their margins continue to climb. Their volume has been strong. They had a really good second quarter. We are starting -- we started production on our new version of our nine-volt there. There's a little bit of a lag because we sea-ship that product. So we started our first sea shipments -- did we make our first shipment yet? I think we did. We started our first sea shipments of that product, so there's like a 45-day lag to get it to the US. So we will start putting that product in the marketplace, supplementing the nine-volt that we make in the US. And we expect to have, by the beginning of next year, half the volume will be in production, about half of the volume in China for the fourth quarter. But there is a lag, like I said before, that flows through the system.

So that's going real well. It costs us less to make it. It's a smaller product, in terms -- physically smaller, so it fits into more places. And it's a better product. It's a little higher performance. So that's going along well.

And then the other thing is we moved our thin cell a couple of years ago to China, and we've actually started getting some fairly substantial volume with thin cell, which is really good for RFID type applications and asset tracking. We've done some pretty good business there. So it's going along real well.

Fantastic. Well, I'll jump back in the queue. Congratulations on the quarter.

Walter Nasdeo, Ardour Capital.

I have a couple of questions. A bunch of mine have already been answered. But if we can touch on the military side of the business for a little bit, other than the Land Warrior, are you guys looking to do any other types of sales with them, as far as pure battery sales or any of the Satcom type of equipment also?

You are talking about the US military?

No, worldwide.

Well, I'll cover it all. In the US we have substantial sales of the A-320 pocket amp We're also selling that worldwide; that product is starting to do really well. It is the only real portable pocket option for somebody with a hand-held radio who wants to increase their range four to five X. And that just continues to increase both in interest and sales and distribution agreements, and it's doing really, really well.

Our accessories business has been very strong. That was kind of a -- that business runs, I don't know, $30 million or $40 million a year now. And that's all kinds of different products that are components that surround, whether they are transit cases or mounts, or antennas or cables or power supplies, that augment the use of radios. We started selling those internationally, and we are starting to see good sales internationally, but also at the US military. The US military -- we sell some of that direct, which has done well, and we've opened up additional channels through VARs or prime contractors. We make some product that's in the [Karras] catalog, made some product for people like L3, ITT, people like that, that go with the stuff that they sell.

So that's been strong and continuing to grow that product line. We are actually -- part of the R&D investment we want to make is to invest some more there. And we've done a lot of work in the last year, as I've said before, in reducing the cost, production costs, of some of that product through engineering.

And then, on the battery side, we continue to work with UK MOD. We have another battery, a charger that's in development and qualification work that will further expand that. We continue to supply them. And, like I said, we have multiple -- it's two or three right now with a couple more in the initial stages of people that we are working on, putting together agreements to adapt our Land Warrior battery charger cable power distribution system for use for their soldier programs. Virtually every military in the world that's of any size has had plans to put in future soldier programs, kind of wearable portable power, because everything is power, whether it's thermal or night vision or GPS or radio communications, whatever it is, it just uses power, on the soldier.

And they were all going to go their own way, and nobody has the money anymore. A lot of them are looking at that, saying, boy, why should I have to do a power system when the US has done it already? We are already deploying that system in the US with several brigade combat teams. We announced in order for that, and there's going to be more business there as that thing gets deployed further. And we are going to adopt it for international use. So that's probably where most of our activity is.

And then we have ongoing business of rechargeable batteries in the US and elsewhere with our 2590, UBI 2590, which is the highest-capacity 2590 in the world. It is the battery that's designed into the JCREW system, the portable IED jammers that they are still using, but it's also used in a lot of other applications where somebody wants the capacity and the smarts that we have there.

So -- I don't know; that's pretty much what we are doing there, Walter, which is a lot of things.

Yes, it is, okay, good. Now, out on the horizon, are you guys seeing any pickup or any large type of Satcom-on-the-Move orders possibly out there, larger ones?

Well, everybody focuses on the large orders, but the fact is last fall we got a $12 million order. We just got a $22 million order. That one large order -- well, two large ones -- was the initial deployment of the MRAPs that went out there. But in the defense budgets for 2011 and the plans looking forward, they are going to buy 25,000 vehicles a year, all right? And about a third of those are planned to be MRAPs, I believe. We see -- latest things we've seen is that the Marines are starting to ask for MRAPs in place of the M-ATV's -- not that we wouldn't have liked to have won that program -- have gotten that program. But we think the MRAP is still the most popular mine-resistant vehicle out there. But also Bradleys and Strikers and Humvees, up-armored Humvees, a lot of those have satcom systems in it. That was where the $12 million order we were made to understand at the end of last year went to.

So there's continuing business there. It just tends to come in lumps, as vehicle programs get deployed. But there's going to be more vehicles in 2011, and when and if we get out of Afghanistan and Iraq, there's going to have to be a reset of pre-positioned vehicles as well. And those are all going to have -- we think a high percentage are going to have satcom systems in them.

So this is a continuing business. It's not one-time shots, it just tends to come in chunks. So we expect more business in this area.

And then, just as a final from me, you briefly mentioned some of the medical work and development work you are doing there. Can you expand on that a little bit as to what we see on the medical devices side?

Yes. We have seen that in wearable medical devices, that people are starting to move to lithium batteries and smart lithium batteries because, if somebody is going to wear it all day and have it all day, they are going to want to know the state of charge and manage the utilization of the power on that system because it's part of their everyday life, not something that's occasionally used by somebody.

So nerve and muscle stimulation, oxygen concentrators, things that -- markets we're engaged in -- what am I thinking of -- wearable devices that drip some kind of a drug into somebody's system, infusion devices -- those are starting to move to smart batteries. And we've got several new ones that have just come into the market that we are making product for. And there's others we are doing designs for. Really, the niche is smart battery pack and smart charging.

Thank you very much, I appreciate it.

Jim McIlree, Merriman.

The inventory increased quarter to quarter. Phil, did you say that that was a function of the Satellite-on-the-Move order that you're delivering on?

That's correct, completely out the door.

And that stuff went out the door in the first week of July.

Okay, good. And then the Communications Systems business this quarter -- is it safe to assume that that's a normal base level of business, excluding these lumpy satellite-on-the-move orders that -- let's call it $10 million to $12 million per quarter?

It's generally lower than what I would expect in the second half of the year with the Department of Defense spending. That usually occurs in the second half of the year, so we're looking at an uptick in the second half.

But that's mostly due to the $21 million, to the $21 million sat --

No; it's absent the satcom.

What happens, Jim, in the accessories business, is we find that people end up with end-of-year money they have to spend by September 30. And then, there's some deferrals in other places where people get their money on 1 October, where they come in. So the second half usually is stronger in that business. It's not huge, but it's a couple of million.

And, John, the services pickup that you referred to -- is that a specific customer-driven or market-driven, or is it broad-based? Can you characterize that pickup a little bit more?

We've seen it broad-based. We don't deal -- I'd say it's in two places. We have a couple of major customer accounts, and we've seen them start to release projects much faster that were deferred, quite honestly. And then, on the smaller ones where it's the either municipalities or utilities or computer rooms or stuff, not the larger accounts, which tend to be telecommunications in nature, we see them -- we just see pickups of people replacing, whether they are replacing strings of batteries or banks or particular locations, that we know probably were deferred for the same types of reasons. So it's both on the major project side and on the smaller, more numerous site side.

I think the longer-term goal of that business was to replace the lead acid batteries with lithium ion. Is that taking place in this pickup, or is it just a replacement of the existing lead acid?

Right now, it's just a replacement of the existing lead acid.

Okay. Lastly, I think I'm going to mess up how I phrase this, so please be patient with me. The $75 million in revenue you did in the first half generated, I think, $1.2 million of operating income. Self we just annualize that, we get $150 million in rev and $2.5 million of operating income. In order to get to your guidance, that would be an incremental $30 million of revenue and an incremental $4.5 million of operating income, which seems like a relatively modest incremental operating income margin. Am I missing something? Is the incremental revenue that's coming from the satellite-on-the-move low margin, or the incremental revenue coming from the energy systems low margin, or is my math just wrong?

It's the combination of the mix we anticipate in the second half of the year. Now, we carefully chose our words; we said approximately because, again, it's contingent on the mix of the orders coming in. But it's based on strong margin we expect in the second half of the year and continued control of the spending. It's the mix factor that is the variable here.

And what would drive -- let me ask it differently. What are the low-margin or the poorer mix products that could drive margins lower?

I don't want to use the word poor mix because we are -- poor margin products, because we have seen margins generally increase throughout our entire portfolio. So let me attack the question from the other end. The higher gross margin products that we are looking at right now would be the amplifiers coming from AMTI, it would be the communication accessories. It would be the higher-volume batteries that we are selling.

With that, there's always a mix of the lower-margin items that still are providing us a good return on the sale. And when you look at Energy Services, there is a wide mix between the type of job that you are doing, whether it's a lead acid replacement project, whether it's service, which certainly carries a higher margin, or whether it's getting much more heavily involved in servicing wireless applications, cell towers, that carry an even better margin.

So that's something we are working through with our second-half forecast that we deal with day in and day out.

And, Jim, just to be clear, I think Phil is saying that there is some variability, depending on mix. We just want to make sure that we don't get caught on the bad end of a mix change. We don't see it, but we just have to be careful about that.

I appreciate that, that's very helpful. Lastly, the tax rate for the rest of the year -- is it reasonable to assume that you are just going to be paying this let's call it $100,000 per quarter AMT?

Yes.

And pretty much nothing beyond that?

Yes. We have our NOLs that we are utilizing, that we would utilize.

Sam Bergman, Bayberry Asset Management.

Several questions I have. Hopefully, I won't hog the lines too long. Can you give us an idea of what the pipeline looks like for RFPs, maybe quantifying the highest particular award that's out there and going down, if at all possible, or the range of bids?

Well, Sam, I don't have that in front of us, in front of me, right -- I can talk in general terms. We don't have that in front of us right now. And frankly, for competitive reasons, we wouldn't disclose that kind of information. But I'll just start from the bottom up. In the Energy Services market there's probably two to three times the level of activity in RFPs than we've seen if you go back to the beginning of the year. It increased in the second quarter, it has increased again in the third quarter. And so you have to make some assumption about what your hit rates are or if our RFPs do draw some competition, but that's why our forecast about certain revenue growth again there is out there.

That one -- those businesses have very large range. We do projects that are $30,000, all service, we do projects that are $1 million. And there's a whole range there. In the Communications Systems business, those are mostly -- a good part of that business is sold off the GSA price list. It's very widely dispersed, a lot of different product types. A lot of them are combinations of different power supplies and cables and different charger configurations and stuff. But a lot of that is just off the price list.

With amplifier sales of handheld amplifiers, again, that's -- while there's one or two distribution agreements -- and I just caution, there distribution agreements, they are not direct sales -- at the companies where we talk about, which are worth millions of dollars, primarily those are, order of magnitude, $100,000 acquisitions where somebody will buy 20 -- and sometimes bigger, $500,000, 20 to 20 to 100 amplifiers at a time. It will be a particular military unit. It's bought with their discretionary funding because, on handheld radios there's no -- in the US and in most of the countries, it's more unit based; there's no blanket programs to buy those kinds of things.

So Communications Systems sales go that way, except in satcom, and the satcom program are ones that are driven by, again, vehicle deployments. Typically, there are some spare parts. There are some things that they add to the vehicle. But they are really, typically, driven by new vehicle deployment. And that's what this last one was based on. There's not anything out there that we could talk about that's a plan, committed deployment or anything like that. We get asked all the time, what would it take to do another 100,000, 200,000, 500,000 systems. We have no way of gauging until we get an order because we buy that, we supply those through a prime contractor who also supplies the radios and the service around those. We have no way of gauging what that prime contractor's pipeline looks like on Communications Systems.

In batteries, we -- again, batteries are something -- almost all the batteries we sell are driven by qualification. The exception is the nine-volt battery that we make. We actually had to work some Saturdays to keep up with nine-volts. We are trying to -- that business is going very well. We're trying to hold the line there, not add capacity here because we are bringing up -- in the US because we are adding capacity in China to accommodate that. So that's one where we basically are pretty much scheduled out for the quarter on that. We schedule 60 days in advance on that, no more than that because we've conditioned our people -- because we found that if people order past then, it's usually prospective. So we can react fast enough that we want to know when they really just need them, order them from us.

So -- because it caused some ups and downs in the past. And by doing it that way, we smooth it pretty well. And then in the stuff that requires qualification, we have a pretty decent pipeline. This quarter is either booked or we have pretty good visibility. We know that an order is coming, and we are starting to fill up quarter four. Those, again -- there's just a whole range of things there. The one absent from all that is DLA, where we typically get releases of $0.5 million to $1 million or more on different battery types. We haven't seen anything since September of last year. They have been in the middle of a contracting process. They finished one, and we haven't seen orders from that one. And we haven't seen the contracting process finish on the other one.

So is there any, Phil, on the -- because of the DLA delay, to try to drive your costs even lower, knowing that that hasn't come in yet, for the past couple quarters? Or do you feel that the Company's costs are exactly where they should be?

We think they're exactly where they should be. If you've looked, we actually brought SG&A down further this quarter, and we spent a little more on R&D, meaning a couple hundred thousand, maybe. But that production line is running, still, because we make products for other people on it. But we have a depreciation bill that comes in every day on that product line, capital that was bought three, four, five, six years ago, or longer, that we have depreciation on, and you can't make that go away.

Can you also tell me, what industry has the most growth potential, going from cadmium batteries to lithium?

Well, ni-cads very much. You must be talking about lead acid?

I mean lead acid; excuse me.

Like we've always said, energy storage -- the broad area of energy storage, everything from backup power all the way up through storage for wind and solar, has the biggest potential. It's a huge potential market. There are parts of that market that aren't served at all. Spinning reserve is an example, where utilities have to hold back 10% of their capacity on a regular basis that you can't even do it with lead acid batteries, that you're going to start to see lithium batteries move into. Those are either grid applications, energy storage for backup power or energy storage for alternative energy are the biggest opportunities (inaudible) solar.

When do you foresee that kind of move?

I think we've been pretty clear that this is the year where we get to trials on the low end to backup power. 2011 is where we think you will start to see revenue from it. And it's 2012 or beyond where you really see it deployed in large energy stories applications. It just takes that long.

Are you doing anything currently on projects, lithium projects for the automobile industry?

No, we are doing nothing there.

And in the future, you are not expecting to do any?

No. We don't think that the value that you can get from that -- if you're not making your own cell, the value that you get from that is not worth it for somebody like us.

And the last question I wanted to ask you is in terms of the guidance. So there is a delay in the Defense Department with orders -- basically, orders were filled in September-October, and nothing has come through since then. Have you had any communications that something will take place this year, or not at all?

All I can tell you is we have had communications, but right now we are backing out of our plans and the assumption of volume there. If it comes in, we will be more than happy.

And John had mentioned, I guess, some business internationally or several countries are looking at your batteries internationally. How far along in the process has it gone where we should or shouldn't expect some type of order maybe in the fourth quarter or first quarter 2011?

I think that's 2011 place. In some cases we're talking about what contract terms would be. In some cases we are talking about what development would be because everybody wants this adopted in some way. So there will be some development required, so I think a fair assumption is 2011. When we have something definitive we'll let you know.

Jim McIlree, Merriman.

Can you help me understand the delivery schedule of the $21 million satellite-on-the-move? Is that equally divided between Qs three and four, or is it skewed towards one of the quarters?

Right now, the plan is that we will have a little bit more out in Q3 and finish it off in Q4. But I have to caution you it's highly variable because, like us in keeping inventories lean, the government is keeping inventories lean. And so we have a prospective schedule, but we thought we'd ship some in the last week of June and we didn't because we got held off, and it shipped in the first week of July. So I don't want to get in that same kind of predictivity in the second -- try to predict what's going to happen in the second half of September. But right now it's a little more weighted towards the third quarter. But that's just what the plans are now.

It will at least be -- worst case, it will be 50-50. But we may ship a little more in the third quarter, depending on how they -- as they firm up their schedule, how they want them.

And are you shipping that to the truck maker or to the government in South Carolina or to theater?

I believe these go to South Carolina. The other issue with schedules -- and I know this sounds kind of funny -- is our fiscal quarter ends on September 24. And the government is driven -- our customer is driven by September 30. So sometimes we get into that a little bit, too. But these are going to South Carolina.

Okay, that's very helpful, thank you.

(Operator instructions). At this time, there are no other questions in the queue. I will turn the call back over to John Kavazanjian for any additional or closing comments.

Well, thank you. We'd like to thank all of you for joining us again today. We look forward to sharing our progress. We think we're going to have a real good second half of the year, and we'll talk to you again next quarter. Thank you.

This does conclude today's conference. Thank you for your participation.