Ultralife Corp (ULBI) 2010 Q3 法說會逐字稿

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

Thank you, operator, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter fiscal 2010.

With us on today's call are John Kavazanjian, Ultralife's President and CEO and Phil Fain, Ultralife 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, pricing pressures, 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 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 reports 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.

Morning. Thank you, Jody. Good morning, everybody, and welcome to the Ultralife Corporation conference call for the third quarter of 2010. Joining me today is Phil Fain, our Chief Financial Officer.

Today, we reported revenue of $53.3 million for the third quarter of 2010 and an operating profit of $4.7 million with an adjusted EBITDA of $6.9 million.

Gross margin was 28%, and this was led by a 35% gross margin in our communications systems segment, primarily because of a mix of highly engineered amplifier products. Battery and energy products are on track at 22% gross margin with a very strong showing by our China operation, and despite a year-over-year sales decline due to a lack of shipments of standard military batteries to the Defense Logistics Agency. With the award of a new contract and several new orders, we expect this revenue stream to return in 2011.

In Battery & Energy Products, with the award of a contract of new order placements, we can now see activity with standard batteries for the US Department of Defense coming back in 2011. Even without this business, strong international defense order activity, growing demand in the medical sector, and strength in our China operation led to growth in our non-DOD business. China made its first volume shipment of the new version of our 9-volt lithium battery and saw continued activity in its lithium-thionyl chloride line, particularly in the automated meter reading segment.

Ultralife China is also seeing several new customers as well. It's very strong interest in our thin cell product. The thin cell packages are industry-leading lithium manganese dioxide chemistry in a foil laminate package with total flexibility in size and thickness down to as low as 0.6 millimeters. This unique offering had seen great interest in tracking, RFID and smartcard applications.

Communication system sales were a robust $30 million, fueled by shipments on the SATCOM-On-The-Move order that we received early in the second quarter. Shipment on this order will be completed early in the fourth quarter.

In Energy Services, while we have seen increases in project activity, capital expenditure delays late in the quarter caused revenue to be lighter than we had expected. We still expect to see some pickup in what is traditionally a slow fourth quarter in Energy Services.

New products continue to be an important part of our sales and margin growth. We recently released our newest version of our 2590 family, a high-capacity version. We now can fill the rechargeable battery above the capacity of a nonrechargeable sulfur dioxide BA-5590 battery, over 7 amp hours. And to keep our nonrechargeable products ahead of that curve, we also released our new 13 amp-hour D-cell, with a capacity more than 15% higher than our already industry leading D-cell.

And we now can construct versions of our BA-5390 with that cell, bringing its industry-leading capacity from 11 amp hours to 13 amp hours, and do the same with other products to take advantage of this new capability.

In Communication Systems, we've also extended our product line. Our A-320 pocket amplifier for handheld radios has now passed JEDEC communications security testing, including the DAMA SATCOM protocol. And together with the Harris Falcon radio, it now comprises the first handheld radio system ever to be certified by the US military for use in satellite communications. This will enable the soldier on the ground not only the extended range that the pocket amplifier brings, but the ability to access SATCOM capability that previously could only be gotten from vehicle systems in the mobile environment.

We've also taken the A-320 pocket amplifier and packaged its technology in our MBA-21 amplifier form factor, thereby ruggedizing it for use in vehicles or mobile applications. Designated the MBA-21R+, is now certified for use in our MRC-200 tactical repeater, bringing better RF performance and low noise amplification to this important product.

With the fielding of the Land Warrior system now in Afghanistan, we are in regular production of power system components, including the production of a newly fielded nonrechargeable battery for the system. Together with our AMTI pocket amplifier, it comprises a major part of any new soldier system. We expect our unequaled ability to combine high density smart power systems, power distribution, and compact multi-band power amplifiers to be the centerpiece of future soldier systems in many of our allied military partners. We are in active contract negotiations on multiple international agreements to do just this and hope to be able to announce at least one of them before our next call.

In our China operation, we commenced volume shipments of our thin cell product for toll passes in the Wuhan area and increased shipments of thin cells key RFID and shipment tracking applications. This quarter was an example of how we see our business progressing.

While our quarter-to-quarter performance may vary with mix and volume, over the long run, we set our sights on even more improvement. Operational efficiencies and more highly engineered products will drive our gross margins upward; increases to revenue will generate strong incremental returns; and disciplined expense control will yield consistent profitability.

I will now ask Phil to cover the financial summary, after which we will come back and open it up for questions.

Thank you, John, and good morning, everyone. Earlier this morning, we released our third-quarter results for 2010. Consolidated revenues for the third quarter totaled $53.3 million versus $42.4 million in the same period last year. The $10.9 million or 26% year-over-year increase reflects the strong performance in our communication systems segment, which increased almost $18 million over the third quarter of 2009 to $30.2 million. This increase primarily reflects shipments of SATCOM-On-The-Move systems to fulfill orders from the US contractor for use in MRAP armored vehicles. These orders will be completed in the fourth quarter.

Revenues from our Battery & Energy Products segment of $20.6 million were negatively impacted by the lack of orders for our BA-5390 military batteries from the Defense Logistics Agency in 2010 as compared to shipments of approximately $9 million in the third quarter of 2009. However, revenues from all other products in this segment, most notably rechargeable battery products, increased $5 million or 32% over the year-earlier quarter.

As we announced in September, Ultralife was awarded a five-year indefinite quantity contract from the DLA to supply our 5390 batteries over a five-year period. Orders totaling $6.5 million have already been placed for shipment in the first half of 2011.

General economic conditions continue to impact our Energy Services segment. Revenues for the third quarter of $2.5 million were down almost $2.9 million from the same quarter in 2009. Revenues in the year-earlier period reflected the completion of some large capital projects, the magnitude of which we have not seen thus far in 2010.

Our consolidated gross margin was significantly higher in the third quarter of 2010, $14.9 million compared to $10.4 million for the third quarter of 2009.

As a percentage of total revenues, consolidated gross margin was 27.9% in 2010 versus 24.5% for last year's third quarter. The gross margin for the 2009 period included the recognition of a gain on litigation settlement totaling $1.3 million.

Gross margin for our battery and energy products segment rose from 21.2% to 21.7%, primarily reflecting manufacturing efficiencies, higher selling prices realized for some of our products, and improved performance from our China operation.

Gross margin also increased in our communication systems segment from 34.9% to 35.3%, benefiting from favorable product mix and continued strong performance for our acquired AMTI amplifier business. The 2009 gross margin for this segment includes the $1.3 million gain on the litigation settlement.

The gross margin for our Energy Services segment decreased from 15.7% to negative 10.2%, due primarily to the significant reductions in revenue caused by continued customer delays of large capital projects in the standby power industry. Our consolidated gross margin of 27.9% for the third quarter compares very favorably to the 25.4% achieved in the second quarter.

Operating expenses totaled $10.2 million or 19.1% of revenues compared to $10.8 million or 25.4% of revenues in the same quarter of last year.

Operating expenses increased $1.2 million over the second quarter of 2010, due primarily to the timing of certain R&D expenses to coincide with new product development as well as higher sales commissions.

The impact of the across-the-board cost reduction and consolidation actions which we commenced in the latter half of 2009 are still reflected in our cost base and will be sustained going forward.

Third-quarter non-cash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses, amounted to $1.7 million versus $1.4 million for the year-earlier period.

Operating earnings were $4.7 million versus an operating loss of $0.4 million reported for the third quarter of 2009. This $5.1 million year-over-year improvement reflects the higher gross margins for our battery and energy products and communications systems segments coupled with our lower cost base and improved operational efficiencies.

Net interest expense for the quarter was $253,000 compared to $454,000 last year, reflecting lower levels of borrowing. Our average outstanding revolver balance was $10.0 million for the third quarter of 2010 versus $26.1 million for the year-earlier period.

We also realized foreign currency gains of over $0.4 million in the third quarter of 2010, which more than offset our interest expense for the period.

Our third-quarter tax provision amounted to $0.4 million, reflecting the alternative minimum tax on US taxable income and book tax differences related to the amortization of intangible assets.

Net income for the third quarter amounted to $4.5 million or $0.26 per share compared to a net loss of $0.6 million or $0.04 per share for the same period last year.

And, adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $6.9 million in the third quarter versus $1.4 million for the third quarter of 2009.

For the year-to-date period, adjusted EBITDA was $11.4 million, an increase of $15 million over the comparable 2009 period. With continued cash flow generated from operations and the favorable improvements made to our balance sheet, the outstanding balance on our new credit facility was $8.6 million, and our net borrowings were reduced to $1.1 million at the end of the third quarter. By comparison, at the end of the third quarter in 2009, our outstanding revolver balance was $26.6 million and net borrowings were $24.9 million.

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.

Today, we have shown that we now have made considerable progress as gross margins have exceeded 25% in all three quarters of 2010. Knowing that the timing and mix of our revenues are subject to lumpiness in the market, 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 reaffirming our revenue guidance to a range of $177 million to $182 million with operating earnings of approximately $7 million for the full-year period. I will now turn it back to John.

Thank you, Phil. I would like to now turn it back to the operator and open it up for questions.

(Operator Instructions). Zach Larkin, Stephens, Inc.

Hey, gentlemen. Congratulations on a fantastic quarter. The first question I had was on the SATCOM orders. With those coming pretty much due in the December quarter, finishing up, what are your guys' expectations going forward on the pipeline with additional orders on that line?

Yes, there's continued business there. We know that they are funded in the budget for next year, 2011 budget for SATCOM systems. They're out there. They're coming through the system. We don't have visibility on the mix right now because we don't deal directly. We go through a prime on those contracts. But I think this year, we've done, what, about $25 million we'll do in SATCOM systems this year, Phil? It's -- we just think this is continued business. I think the worst year we had we were $12 million or $14 million in SATCOM.

So it's out there. It just -- it doesn't come necessarily smooth flow. It comes when they do budgets or procurements. But there's business out there for 2011. It's just hard to say, Zach, what it is.

It's a function of how many vehicles they're going to buy and which ones they are going to deploy it to. But in the environment in Afghanistan where there is very little line of sight, there's going to be pretty heavy deployment of these systems.

Right, no. That makes sense. And then, with the DLA orders, it's exciting to see those coming back. Are you assuming they get back to historic levels in 2011, maybe more towards the second of the year?

Yes. I mean we -- when they put out the contract, their estimate -- the contract went from September to September. Their estimate was $5 million September to September which isn't quite a full year, being on the government's fiscal year. But, they've already ordered $6 million worth of them that they would like in the first half of the year.

So, our -- we've been in the range of anywhere from with the 2590 -- I'm sorry, 5390, anywhere from $3 million to $5 million a quarter. That's kind of right in that same range. And then, there's other batteries which we expect them to start ordering also, that were given out on contracts in the second quarter, I think earlier in the second quarter, the end of the first quarter also. So I think the answer is yes.

Great, fantastic. And then also wondered if you could provide a little bit of color around some of the new products, what your end what expectations are for some of the grid scale storage and the Chinese operations, and what expectations -- how should we think about that going into 2011?

I think I've talked a little bit about some of the comps products that we've done, which is really taking the real compact amplification product we have and deploying it in other areas other than just handheld radios or -- putting it in our tactical repeater, putting it in a package that is ruggedized for vehicle operation and stuff.

On the battery side, I would say the area -- the three areas we're the most excited about is number one, just deploying our smart power into other areas. We've seen over the last few years a lot of markets have traditionally bought nickel metal hydride and ni-cad batteries and went to lithium batteries. And now we are seeing those people start to gee, we really want the battery to communicates with the application to get best use of it, and so they are going to smart batteries. And that plays right into what we do, and we are seeing that in medical products primarily, but also in other areas. So that's number one.

Second, you mentioned China. The -- we're seeing more and more penetration in automated meter reading. That's not that visible in the US here. It's more visible in other parts of the world which are developing rapidly, which don't have an infrastructure for collecting money for people for gas, electricity and water. And so, metering in South America and in developing countries, China, India, is big because it is all prepaid. You pay your money, you get it. When the money runs out, you don't get it anymore because you don't have to have a billing infrastructure. So, the products we have there for those meters are doing real well in other parts of the world.

And our thin cell product, which, as I said, toll passes, RFID. There's one application we're in which tracks seafood shipments, which has to -- tracks the temperature and the location of seafood shipments to make sure that they don't cool down which you don't want. I'm sorry, don't heat up -- you want to keep them cold. So, we're just seeing very interesting applications that we never thought of before ourselves actually. We start to get that out there.

And then the last area again is like we said, energy storage. I think we've been pretty clear, it's a couple of years before you are going to grid-sized storage out of what we're doing. But on the weight of there, we expect to start deploying that in standby power and backup power.

At the low end, kind of unattended, distributed low end first, obviously, and then scaling it up. So those are the things that we think are -- that's where our R&D dollars are going. Let's put it that way. So that's where our new products are.

Fantastic. Thanks for the color and congratulations, again, on a great quarter.

Ted Kundtz, Needham.

Just wanted to focus a little bit on your guidance and what that implies for the fourth quarter. It sounds like the fourth quarter is, even though revenue seemed to be in the $51 million range probably, it sounds like your targeted gross margins would be quite a bit lower as your operating income guidance is for only $7 million.

So I just wanted to clarify that, to see if you could comment as to why that would be dropping off like it seems to be, like you are implying with the guidance.

Sure. Good question, Ted. And I kind of knew somebody was going to ask this. You know, we went to an annual guidance because we have a business that's inherently -- I don't like the word lumpy. I mean no business comes in smoothly. Companies for years have tried to do things to smooth it out. We made a decision a couple of years ago to just -- to run efficiently. And the way it comes in is the way it comes in. And the way it goes out is the way it goes out. Satisfy our customers and run as efficiently as possible in our operations.

It kind of boxes us in, in the fourth quarter, to a quarterly number. We're trying to give numbers -- some people characterize that, by the way, as erratic. I would characterize it more as just the ups and downs of the way the business really happens.

So as a result, we're trying to make sure we can get people numbers that they can count on. And it does cause us to be a little more prudent in the way we do it.

Right now in the fourth quarter, we have a real good pipeline. We have a very funny thing every fourth quarter that goes on with the government because it's dependent on a budget. Congress isn't going to vote on a final budget till after the election.

And as a result, what happens is, and this even happens when there is a budget, that it takes time does take time for a new budget to get handed down. So we usually see a flurry of activity in September at the end of the government's fiscal year, and then not again until November because it takes time for the services to get their budgets from the Pentagon and for them to pass it down to the unit.

So, we've got a lot of things in place, things that people want to order that they are waiting for their funding on. And as a result, we're not counting on all of it. We know we're going to get some and some we're not going to get. As a result, it's very hard to predict the mix. So, call it protection, call it prudent. We're just trying to be real careful and not count on getting as good a mix as we've gotten in the past. It's as simple as that.

There are a couple of other effects that happened also in our fourth quarter. We have a lot of orders that come in for the government that are FOB destination, especially GSA orders. We have very healthy GSA business. And nothing gets received in the government between -- I shouldn't say nothing -- but it's very hard to get parts received between Christmas and New Year's. And if a part is not received, it's not revenue. So rather than hold our breath at the end of the quarter, I think we have to just make sure that we give numbers that we know we can hit.

Same thing with completions and standby power. Some of our things are outdoor work that if we get a snowstorm in Nebraska, work that we think we're going to get done in December doesn't get done. So -- and we have to complete it and get certifications of completion before it's recognized revenue. So it's a long way of saying we just have to be careful and make sure we give you numbers that you can count on. Let's put it that way.

Okay, yes. So going to the low end of your sales would imply a little better margin than the one I gave you, the 23% -- 22% to 23% may be a little higher. But margins could be a little affected in the quarter just because of primarily mix you are saving. There's nothing fundamentally going on other than that.

No. We would be very -- we would be very disappointed if we didn't do better than that. But all we're doing is saying we can't count on it.

You are comfortable. Right.

Because we have a lot of mix variation here.

Right, okay, okay. And, how much of the SATCOM order was shipped in the Q3? I assume the bulk of it is -- what was it, $21 million order you got last May?

A good bit of it is, but we had to -- but the completion is in the fourth quarter. And it's just -- we don't want to start giving guidance and numbers on final breakdowns. It does gets us into something that we can't sustain, so.

Okay. Because I would assume that would be -- you guys had good margins in that segment. So I assume they would tend to hold up if there was enough product going through the revenue line.

Well, actually, to be honest with you, the gross margin on the SATCOM system brings the segment margin down a little bit.

Down a little bit. Okay.

So, yes.

Okay. And then, just if you could, John, go back to the Energy Services side a bit. What is really going on there? Is that segment really low across the board? Or are you guys just having -- just getting a little -- taking a little longer to get a market penetration in the segment for the standby power side? I would have thought that business would be a little bit better.

That segment is low across the board. Our best accounts, our best salespeople, as near as we can tell, it's running at about 50% of what it ran two years ago. All the industry reports say that; all the competitors say that. It is -- capital expenditures are down.

There's a -- we are -- there's tremendous, tremendous amount of deferred maintenance going on out there and deferred projects. They are going to come back. And I will give you two reasons why.

Number one, we see behavior where sometimes when people have multi-string backup systems, multiple strings backing each other up where people would have things go bad in one string where they are just coming in and asking us to patch it. They done want to make the expenditure. They don't want to do it. Sooner or later, we just know if you let too much of a string go down for too long, you are going to end up replacing everything. And so, we just see it.

The second thing I will tell you is that we are seeing a big, big upswing in contracting starting in the fourth quarter and going into next year in the wireless business. That's going to come back first. Historically that's what's happened.

A tremendous amount of 3G and 4G deployments across the US, and we see it coming. The contract -- we're talking -- lining up contracts. We're getting a pretty good backlog. We actually have much more demand than we can execute on there on the wireless civil work side. And once they deploy that, batteries just follow. And we think that's just the start there.

So we're keeping our infrastructure in place. We are economizing and utilizing -- getting our utilizations up as best we can, but we just think there's a tremendous amount of infrastructure there that's required. Surprisingly enough, we think we are gaining market share. I know that sounds kind of funny when you look at the numbers.

The easiest thing in the world for us to do is say well, cut it out, put another $1 million on the bottom line (inaudible). We fundamentally think it's important to our deployment of large-scale lithium ion or lithium ion into semi-power, but we also know that that business is coming back. This has happened before in that industry.

Okay. And is that the major reason for the year-over-year and year-to-date decline in that business? Because it's down quite a bit from last year.

We had a huge Q3 last year in that business -- came from kind of the end of some big projects. So, yes. It's big year over year. We try to do a running average. We're down 40%, 50% in that business.

Okay, okay. And all of that is with this -- just this push out of the standby business?

Yes. We had stuff even in the quarter that -- pretty good-sized projects that just moved out a month or two. People just -- well, let's put that in next month. They weren't there before. Now they're there and deferring. We really think this is coming back.

Okay, okay. Terrific. Thank you.

Jim McIlree, Merriman.

It sounds like -- I'm sorry -- let me restart. So Q4 looks like it's, on the top line, kind of equal to the Q3 numbers give or take. Can you explain how you get to that? The satellite on-the-move kit seems like it comes down. So what makes up that difference?

Well, we actually, we have pretty good communications business going into this quarter -- SATCOM business. But our energy products, our power -- I'm sorry, power products, energy and -- Battery & Energy Products is really going. We've got several overseas military contracts that we are delivering on. We've got programs in the US, things like IED jammer program doing reorders; strong Land Warrior deployments.

Even -- I can't complain too much about 5390's being down because we are shipping barriers in the Land Warrior. And if those guys are using that system, they're not using the 90, they're using our Land Warrior batteries and chargers. So Battery & Energy Products is getting even stronger into this quarter.

And is that something where you have most of the orders in hand? Or there's still a fair amount of book and ship that you have to do?

Those are in hand.

Okay.

Those are in hand. The business that I said we still have to do is really kind of our price list business, more communications, GSA price list business, which is a pretty healthy business for us.

We've got piles of quotes out there of people actually we know they want to gear; they're qualified. They just have to get their money flowing through. The money distribution system that's there.

Right. Okay. And I know that you were asked this question about the Q4 operating income. But it seems like that you are being incredibly conservative on maintaining a $7 million operating income for the year.

We're trying to make sure that we give you numbers that you can count on. It really is that simple, Jim. Just -- we just have to be careful of it. That's all.

Okay. And I know you haven't spoken about 2011 yet in terms of quantifying it. But can you just talk about what would be positive and negative relative to this year? I think you've already said that the Energy Services business should be better.

We think Energy Services will be better. We'll have our DLA business back. We don't see any letup on the Communications side. There may be a little less in the US, but the international business is just lining up to be really strong.

Remember that a lot of what we did when we bought the AMTI amplifier line, it wasn't just amplifiers; it was [stats] results; it was really aimed at handheld radios. And, if you went -- I don't think -- I didn't see you at AUSA this year, but if you went to AUSA, you would have seen in our booth, we could have put a SATCOM system on a person. I mean with a Falcon or a MicroLight or a Thales [Mbidder] or an IPT radio, you had our amp, a push-to-talk, a headset and a small antenna that we have that's a very easy-carry, deployable antenna, you have SATCOM on a person.

And most of the overseas militaries use hand-held radios. They're not using the vehicle or the backpack radios as much. So, it just really plays to that market. So that will be -- that we see as a very strong market for next year.

We anticipate keeping our operating expenses between $9 million and $10 million. It may go up if we have big sales quarters because of sales commissions. That's a good reason to have it go up. So, but we think $9 million to $10 million, we think 25% -- while we may have a quarter or two because of mix that will drop to 23% or 24% gross margin, we think 25% to 30% gross margin is the range we target. It's very sustainable. It's just on a quarter-to-quarter basis, it's very hard because we have a very diverse business here to predict mix sometimes.

But, as we look to next year, we are trying to build a good strong base, predictable profitability and then just capture the upside in a very strong incremental way, which is kind of the way this quarter happened. That's what we're trying to do.

If we got a great mix next quarter, yes, we could -- like we did this quarter, we could really -- we can have a similar type of situation. But we just can't count on it. So when we're forced into where we have to project -- we're down in the last quarter, we're boxed into a quarter projection, we just want to be careful. That's all.

Right. It doesn't sound like there is anything that would make the let's call it $50 million to $55 million in quarterly revenues decline dramatically.

Well we still have some orders, Jim.

Yes.

Oh you mean over the year?

Yes, yes, for 2011.

Well this year, I think we thought our base this year was in the $40 million to $45 million a quarter range. Right now, we think we're in a $45 million to $55 million quarter range. But hopefully more stuff comes into it and nothing drops out. But that's something that we are assessing as we do our budget now for the board for December and we're just not prepared to talk about it now. But we are trying to build a good, strong base with the right business model.

And I think this is my last question. Can you talk about the backup power for telematics? Is that a potential for 2011?

Well, we have an ongoing program. You're talking about some of the additional?

Yes.

You know, there are other people who are putting telematics systems in their cars. I think Ford has a system now. Whether they require backup or they are talking about backup, we've done designs for numerous people overseas. We have done designs for other domestic auto makers. I just can't tell you when they are going to deploy them.

We're getting to the cycle where they tell us what the deployments are for next year. The way the auto industry works is, for -- with our products, we see them get tested usually in the fall. They line up their distribution lines in the spring for the 2012.

2011 is pretty well set for now, 2011 model year, they are starting production already. But, so I don't see anything additional in 2011. The question is, is somebody going to put anything in 2012 or after that? I just don't know. I've given up trying to forecast the auto industry.

But we have done designs for people, and if they're going to make crash notification a feature of their system, they're going to need a backup of some type, so.

Okay, great. Thank you.

Walter Nasdeo, Ardor Capital.

Thank you. Good morning, guys. Most of my questions have obviously already been addressed. One of the things though that I -- or kind of one and a half of the things I would like to ask you about are -- stepping off of the telematics but over into the medical devices. We haven't talked about that for a while and to see how that is developing; if it's something that you still are aggressively working on or if it's kind of taken a backseat to some of the things that you think offer greater potential nearer term?

And then, how are you moving through Europe? How is that geography developing for you? Or are you more focused in Asia now?

Well, first on -- you asked about medical devices. I would tell you that we've been working at this for about six, seven years. It's a long development cycle. We have done designs for products that never made it to market. Then, when you do get something that is going to get fielded, you have at least some level of FDA approval generally required on it. So, it does take time.

The products that are -- that we're fielding this year, we have some new products coming out next year to market that we started probably four years ago. So, we have decent visibility on it on one hand because we start the designs early, but it's got to get out there; it's got to be successful.

So it's, again, it's not a new effort, Walter. It's just we've seen people over the last few years really start to move to the smart lithium-ion battery with intelligence and circuitry and that's what we do. So I expect it to continue. We've got some pretty good projects coming to market next year. I just -- we want to see them get out there. And we want to see them be successful.

You asked about Europe. We still sell a fair amount of product to Europe. Actually, our Chinese -- our operations in China actually sells a fair amount of product in Europe into the meter reading market. We have some business there in France. We have business in Turkey, several other countries with meter companies for meter reading. So, we already have business there. We have some other work going on in rechargeable in Europe.

And then military. We -- you know we do a lot of work with the UK MOD. But we also work with the other allied militaries there. And especially with the new -- with the AMTI amplifier line, there's hardly a country there that we're not working with not just in Western Europe, but Eastern Europe.

I think that with the Eastern European countries in NATO now, we're starting to see some good-sized opportunities there. So, a lot of our military business -- military business is not Asia. Certainly, Australia, Japan, Singapore, we do work -- Korea. But a lot of that work is -- new work is being done in Europe.

Very good. Thank you.

Does that answer your question?

Yes. That's good. Thanks.

Sam Bergman, Bayberry Asset Management.

Congratulations on a very nice quarter. A couple questions. Can you give me an idea, if you looked at the newer products that have come out in this quarter and what's coming out in the fourth quarter, what would you consider the percentage of higher-margin products this quarter, next quarter versus what you started with in the beginning of the year?

Well, you know, when you do a component product, Sam, generally, component products' margins are kind of in the 20% range. And we haven't had that many of those because most of our component products now are aimed at going into systems. So, almost everything we have is kind of 30% and up types of margins.

When you get into -- so some of our amplifier products, they are very software intensive, they're very engineering intensive, and some of those are 40% and above.

So the best thing I -- the best answer I can give you is that nothing we have coming out of any substances is under a 30% margin. That's really been our target.

Great. And facilities in China, how many facilities do you have currently? And what's the capacity utilization at this point?

We have one. We have a factory in Shenzhen, a village called Guanlan, and its utilization is kind of 100% right now. We can sell every thin cell that we can make. In fact, our new 9-Volt is based on our thin cell product as well, and so we're adding capacity as fast as we can. We're adding shifts, and we are automating.

Wage rates are going up in China, although, we're really not talking about big numbers, but every penny counts and we're finding that it is worth automating for a lot of reasons. For one is that people don't do -- people aren't as repeatable as machines are. But, we are pretty well utilized on capacity there and we're working hard to increase that capacity.

And the last question in terms of the SATCOM orders internationally, when would you expect to start seeing some of those become announced for orders? Is it more first quarter 2011? Or do you think you will see something in the fourth quarter 2010?

Well, you are talking about -- I think you are talking about what I talked about the amplifier products and power together in kind of a future soldier configuration.

Right.

That's what I said internationally -- all right. Yes, I don't want to put an artificial deadline on myself because then I'd disadvantage myself in a negotiation, but we're going to have a couple of deals here in a reasonable amount of time. It's purely a matter of -- negotiating with governments isn't that easy. And so, we would like to have an agreement soon, but I'm not going to put artificial pressure on ourselves.

We have a unique product offering that people need and want. I think stay tuned as I said. We'll have at least one of them done before the next conference call.

And just on the medical design products, have there been any design wins this quarter that you will start ramping up product in a quarter or two or not?

Well, I think what I said to Walter was you get a design win and sometimes it takes several years before you see that product to market. We have a -- there is at least one, probably two new products of note coming to market next year. But, we have to be -- they have to be successful obviously. We have to depend on the manufacturer saying yes, they're bringing this product to market. Yes, they're going to order this part, and then there's volume. But there's two designs that we have done over the last three years, and gotten through the qualification with the manufacturer on that are coming in next year. So, we are doing designs all the time.

We call it design wins, but in the medical field, the product actually has to get fielded and then it has to be successful to get the revenue. It's a multi-year, at best, lead time.

Without knowing how well those are going to do, what's the market potential for those two products next year? Do you have an idea or not on volume?

The medical products we do, have the potential to do kind of in the $1 million to $10 million a year range depending on how well the product does. So it's a big range.

Okay. It certainly is. Thank you very much.

Ted Kundtz, Needham.

Yes, John, just a follow-up, I just wanted to see, what was the breakdown -- your estimated breakdown of revenues this year? If you do like $180 million of revenues, say, how much of that is going to be commercial versus military? Is that like a 60/40 split still?

I think that's probably right. We're running about -- again, I've said this multiple times. Our business still looks like about a third communications, one third commercial batteries, and one third military batteries, so 30%, 30%, 30% and then 10% Energy Services, all right? And so don't hold me to the decimal points on that, but that roughly looks like our breakdown.

Okay. Would you expect any change in that next year? Or is it just too early to tell? We've talked about a lot of the potential commercial applications as well as military applications, but --

I don't expect a big change. The big change we're trying to affect us to grow the commercial segment.

Right.

The problem is we keep doing so well in the military segment that it keeps raising the bar for the commercial segment. But I think between medical, some of our China products like thin cell and the lithium ION going into backup power applications, we can get a good run on it next year so that 2012, those can really take over a little more.

But having said that, we're fielding so many great things to the US military like the pocket amp and the Land Warrior system, now the overseas guys are all saying geez, we would like to have that too, so.

Okay. So growth prospects in both areas look equally promising.

Yes. We kind of really focused down a year ago and it's paying off.

Okay, terrific. And then just quickly on the 9-Volt side, how is that business going? Is that a fairly steady business? Or are you seeing some growth out of that as well?

That's a steady business that we have seen some growth from. We are -- we've increased our distribution agreements. There's some low-end competition coming along, which is actually good. The competition coming along with about two-thirds the energy that we have in the product. And so, what it does is it's -- our goal has been to grow the market there.

We're only about -- last I looked, I think we were like 5% of the total 9-Volt market maybe. So, I wouldn't mind if lithium batteries were 15% of the market and we only had 60% market share instead of 100%. It's kind of a grow the market thing.

Right, right. Could you remind -- could you tell us of what you are doing in 9-Volt? I don't know if you have revealed that or not.

We're -- we haven't said. It's about 10% of our business.

10% of your total business?

Yes.

Okay. And it's growing -- you say it is growing roughly GDP rates or --?

Well, we've been growing kind of single-digit (multiple speakers)

Single digits. Okay.

We have been growing bigger percentages before, but we're growing about single-digit percentages now.

Okay. Terrific. Thanks very much.

Sam Bergman, Bayberry Asset Management.

Just one last question on the thin cell product. What are the largest products that thin cell is used for, number one and two in your business?

You mean volume?

In volume, yes.

We have one RFID application that's asset tracking application that is used in -- that's pretty good-sized. And the other one is a toll pass project.

Okay.

The way the toll passes work in China is, instead of like an easy pass you put in your windshield, you have a unit mount on your windshield and you put a card in it. The card has got the power and that's where we are.

Is that particular technology being adopted anywhere else in the near future?

Yes. We are seeing smartcards being a very interesting market. There are smart cards with encryption on them, with moving encryption codes on them that people are looking for more and more power on. We're seeing that be -- let's put it this way, there's a lot of people asking about the product in that market. We will let you know when it becomes a big part of our volume.

Thank you, John.

(Operator Instructions). There are no other questions coming in the queue at this time.

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

This concludes today's conference call. Thank you for your participation.