Ultralife Corp (ULBI) 2011 Q3 法說會逐字稿

Good day and welcome to the Ultralife Corporation third-quarter 2011 earnings release conference call. For opening remarks and introductions I would like to turn the call over to Mr. John Heilshorn. Please go ahead, sir.

Yes, thank you, operator, and good morning, everyone. This is John Heilshorn of LHA. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the third quarter of fiscal 2011.

With us on today's call are Mike Popielec, Ultralife's President and CEO, and Phil Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy I invite you to visit the Company's website, www.ultralifecorp.com, where you will find the release under the Investor News in the Investor Relations section.

Before turning the call over to management I would like to remind everyone that some of the 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 certain global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring actions and delays. The Company cautions investors not to place undue reliance on forward-looking statements which reflect the Company's analysis only as of today's date.

The Company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. A more detailed description of such uncertainties is contained in the Company's filings with the Securities and Exchange Commission, such as the Company's report on Form 10-K for the period ending December 31, 2010.

In addition, on today's call there are 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 the corresponding GAAP figures.

With that I would like to now turn the call over to Mike. Good morning, Mike. Thank you.

Thank you, John, and thank you, everyone, for joining the call this morning. As we have done on the last several calls, I am going to start today by making some high-level observations about our third-quarter operating performance; and then I will turn the call over to Phil, who will take you through the detailed financial results for the third quarter. After Phil is finished, I will take the call back to give you a progress report on the top 2011 priorities that we laid out at the beginning of the year and share with you our thoughts on the full-year financial outlook for 2011. Lastly, we will open it up for questions.

Going into the third quarter of 2011, we knew we were faced with a difficult year-over-year comparable given the $20.5 million SATCOM shipment that occurred in the third quarter of 2010. Further softness in Communications Systems revenue, and a legacy amplifier component inventory writeoff also negatively impacted our third-quarter results. On a positive note, our Battery & Energy Products business and China operations continue to do very well, and each added another strong quarter of year-over-year growth in the third quarter.

On the reported basis, total Company revenue decreased by 29% year-over-year driven by the Communications Systems business headwinds just mentioned. Adjusting for last year's $20.5 million of sales in SATCOM systems, total Company revenue actually increased by 19% as a result of the strong growth in our core Battery & Energy Products business, where sales increased 27% year-over-year, reflecting solid demand from our defense customers, both in the US and overseas, and another strong quarter from our China operations. Without the impact of the large previous year's SATCOM contract, the underlying Communications Systems business revenue was down 6% year-over-year due to lower sales of communications accessories.

During the third quarter we made good progress towards our goal of exiting the year better positioned to deliver consistent, profitable growth. We're improving our operating productivity, product value propositions, and mix to improve gross margins and retooling our business structures to reduce G&A costs. We're also transforming to a more lean company in terms of customer fulfillment, new product development, and sales force go-to-market capabilities, to ensure a high level of satisfaction and retention within our existing customer base and to provide us the competitive advantage to pursue new markets and market segments.

I will comment further on these efforts in a few minutes, but I would like to first ask Ultralife's CFO, Phil Fain, to take you through additional details of our third-quarter financial results. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning we released our third-quarter results for the period ended October 2, 2011. Consolidated revenues from continuing operations for the third quarter totaled $36.0 million, representing a 29% decrease over the $50.8 million reported in the third quarter of 2010, which benefited from SATCOM shipments of $20.5 million. Excluding sales of SATCOM shipments, revenue increased $5.7 million or 19%.

Revenues from our Battery & Energy Products segment were $28.8 million, up by $6.2 million or 27% over last year, reflecting higher sales of rechargeable batteries and chargers to the defense industry and the further penetration of our batteries into the utility metering business in China. Communications Systems sales of $7.2 million declined by $21 million or 75% from the prior year. When adjusting for the 2010 SATCOM shipments, sales decreased by $0.4 million or 6% due to lower sales of communications accessories, partially offset by higher shipments of amplifiers.

Our consolidated gross profit from continuing operations was $9.6 million in the third quarter of 2011 compared to $15.1 million for the third quarter of 2010. As a percentage of total revenue, consolidated gross margin was 26.8% in 2011 versus 29.8% for last year's third quarter.

During the 2011 third quarter we recorded a $1.1 million non-cash charge, which equates to approximately 290 basis points of gross margins, to write off components for legacy amplifiers that the Company has discontinued. Our amplifier portfolio is now comprised of high-technology AMTI branded products that hold greater market growth and margin potential.

Gross margin for our Battery & Energy Products segment was 27.5%, a 450 basis point improvement over last year, reflecting the continued trends towards higher-margin rechargeable batteries and charger systems as well as productivity improvements resulting from our Lean initiatives.

For our Communications Systems segment, gross margin was 23.8% compared to 35.2% for the prior year. Excluding the inventory charge, gross margin for this segment was 38.4%, or 320 basis points higher than the prior year due to the favorable contribution of AMTI amplifier sales.

Operating expenses from continuing operations totaled $8.1 million for the third quarter of 2011 compared to $9.1 million for the year earlier period. The overall decrease from 2010 was primarily a result of our continued actions to reduce general and administrative expenses while investing some of the savings in new product development and the expansion of our sales force to increase our geographic coverage and penetrate new markets.

Third-quarter 2011 operating expenses also reflects the favorable impact of the G&A actions, including reductions in force, completed earlier in the year. As a percentage of revenue, operating expenses were 22.4% for the third quarter of 2011 compared to 17.9% a year ago. The percentage for the 2010 period would have been 30% excluding the SATCOM shipments.

Third-quarter non-cash operating expenses from continuing operations, including depreciation and tangible asset amortization and stock compensation expenses, amounted to $1.4 million, equal to the amount reported for the year-earlier period. Operating profit from continuing operations was $1.6 million representing an operating margin of 4.4%, compared to $6.1 million or an operating margin of 11.9% for the same quarter last year. This comparison reflects the volume benefit of the 2010 SATCOM shipments.

The impact of the inventory writeoff was equivalent to 290 operating margin basis points for the 2011 third quarter. Other expenses, primarily comprised of interest expense and foreign currency, amounted to $0.1 million for the third quarter of 2011 compared to income of $0.2 million for the year-earlier period, resulting from a reduction in our borrowing levels, which was more than offset by favorable foreign currency gains in 2010 due to the strengthening of the British pound to the US dollar for that period.

Our third-quarter tax provision was $0.1 million compared to $0.3 million, primarily reflecting book tax timing differences related to the amortization of intangible assets. Net income from continuing operations for the third quarter of 2011 was $1.4 million or $0.08 per share, compared to $6.0 million or $0.35 per share for the same period last year.

The impact of the non-cash inventory charge in 2011 equates to $0.06 per share. And adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $3.1 million in the third quarter versus $7.9 million for the third quarter of 2010. The net loss from discontinued operations for the third quarter of 2010, which represents the loss from the Energy Services business which we exited in the second quarter of 2011, was $1.5 million or $0.09 per share.

The Company's liquidity remains solid. As a result of careful working capital management and cash generated from operations and Lean initiatives, we further reduced our revolver balance and ended the 2011 third quarter in a net cash position of $2 million. At that time, we had $2.5 million outstanding on our revolver, which we have subsequently paid down in its entirety. This represents a reduction of over $8 million since year-end 2010.

We have also reduced our inventory by almost $4 million or 11% from 2010 year-end. Although our operating expense base has been significantly reduced over the last 18 months, we have and will continue to reduce non-revenue-producing operating expenses and further consolidate our operations and drive operating efficiencies. We remain mindful of the importance of striking the critical balance between making ongoing cost reductions and exercising strict expense control, on the one hand, and providing the necessary funds for product development and revenue generation, on the other.

We are focusing our attention on executing our top priorities. Over time, these will allow us to leverage the business model improvements we have implemented thus far and those in process, to generate strong incremental returns on revenue growth and to achieve our interim goal of a 10% operating margin. I will now turn it back to Mike.

Thanks, Phil. As we have said before, Ultralife possesses the elements to achieve sustainable top- and bottom-line growth by applying a disciplined, focused execution and a more deliberate approach to new product development and sales. To that end, at the beginning of the year we established several specific priorities. I would like to now recap with you the progress that has been made against each of those during this year.

Our first priority has been to optimize the Company's profitability. The near-term goal is to grow our total Company gross margins to 30% and build an operating expense cost structure of approximately 20% of sales that allocates between 10% to 11% of sales on new product development and selling expense, and 9% to 10% of sales on G&A, which will lead to an initial total Company operating profit margin goal of 10%.

Year to date, our Lean implementation has generated annualized COGS savings of $2.7 million or 180 basis points, while our G&A focus has resulted in a reduction of $3.5 million or 210 basis points, of which we have reinvested $1.2 million into product development and new selling resources. Combining these actions with the exit of the Energy Services business at the end of the second quarter and the inventory writeoff in the third quarter, we see total business gross margin crossing over 29% and approaching our interim 30% gross margin goal.

With regard to operating expenses, our current 22% of sales run rate reflects the decision to make some upfront investment in accelerating new product development and increasing our sales force deployment to drive top-line organic growth. That said, as we achieve and surpass our near-term 10% operating margin goal, we would expect to continue to target our operating expenses as a percent of sales at the 20% level.

Our next priority has been to develop and execute a growth game plan. We recently completed our internal strategic growth plans for the Battery & Energy Products business and the Communications Systems business. Both of the plans placed a heavy emphasis on accelerating new product development and increasing the effectiveness and reach of our sales force, not only to further expand penetration of our global government defense customer base, but also to diversify and more aggressively grow our commercial presence. In the case of the Battery & Energy Products business we will also be leveraging our China operations to access attractive commercial markets in China and throughout the rest of the world.

One of our objectives with respect to accelerating the new product introduction cycle is to become more proactive in developing pilot products ahead of clearly defined customer specifications. Armed with a functional prototype, we will then work closely with our end-user customers to gain real-time voice-of-the customer feedback in order to fine-tune the designs before broader introduction.

One recent such example is the patent-pending Ultralife GenSet Eliminator that we announced in September. This product leverages the use of lithium ion batteries and proprietary control systems to work seamlessly with a generator set in order to save 25% to 30% in fuel and maintenance costs while providing more operating flexibility to the user versus traditional generator set configurations.

Normally, generator systems are sized for peak demand and hence run most of the time at inefficient, reduced output load points. In the Ultralife GenSet Eliminator configuration, the generator runs at full load to serve the demand and also charges standby battery systems, which once fully energized enables the generator to be turned off while the demand is served by the battery.

As the battery is discharged to a preset level, the Ultralife control system then turns on the generator set to run at full load to serve the demand and recharge the battery. This cycle repeats automatically, maximizing efficiency of fuel consumption.

We showcased the system's capability in early October at the STAR-TIDES demonstration site at Fort McNair, and then one week later launched another version of the product on the floor of the annual Association of the United States Army Meeting in Washington, DC. We received some terrific feedback from the many evaluators present and are incorporating several user-suggested design enhancements over the next few months. We're developing separate systems from the military and commercial markets and for off-grid and/or weak-grid standby power needs.

In developing the complete Ultralife generator set Eliminator system, we designed some exciting new individual battery system components that are applicable as building blocks for other standby power applications. We look forward to making those new product announcements in the coming months.

We are also redoubling our efforts with customers to develop unique solutions for their power needs in the form of new cells and package the cells. Currently we are finalizing products to meet the needs for lighter, higher-density mobile energy solutions for our soldiers while also developing new products for our utility metering, medical devices, and safety and security commercial customers. Many of these developments require proprietary engineering activity alongside the customers involved, and we look forward to continuing that close collaboration with these valuable business partners to become their preferred choice for niche mobile power and energy storage applications.

Our goal is to introduce meaningful new products several times each year, leading to broader market access and increased organic growth potential. Lastly, to take full advantage of these emerging new product opportunities, we continue to enhance our delivery mechanism, creating a world-class selling organization.

We have made structural changes in the sales leadership, invested in sales tools and training, and expanded sales coverage both with our major OEMs and internationally. Year to date, we have increased the number of salespeople by 20%, and we are targeting to increase that number to over 40% by the early part of 2012.

Our third priority this year has been to closely look at all the products and business segments in our portfolio and make an assessment of each of their potential mid- and long-term contributions to the sustainable growth and profitability of the Company. We continue to measure each product or business against other new technology and growth opportunities that come across our screen. We're also addressing some overhanging issues.

Recapping the year, at the end of the first quarter we announced the exit of the Energy Services business and completed the exit on time and under budget by the end of the second quarter. Also in the first quarter we decided to set settle an outstanding audit adjustment with the US government. In the third quarter, we made the decision to exit a lower margin and limited growth legacy amplifier product line.

Though tough calls, addressing these issues this year will aid our quality of earnings objectives going forward and allow us to concentrate all of our efforts and resources on delivering innovative new products across a broader range of markets and geographies.

Finally, our fourth top-level priority this year has been to more fully leverage our China operations to access commercial markets in China and throughout the rest of the world and to improve our cost competitiveness. The Ultralife China team again delivered in the third quarter, achieving year-over-year growth of 25%, which translates to 48% year-to-date.

Roughly 20% of our B&E Products business growth is coming from our China operations, and approximately 60% of our current China operation sales are actually into China, where we are seeing nice penetration in electric, gas, and water metering applications.

We also have a China presence in RFID tollroad passes. Globally, the China team is gaining traction not only in metering but also in safety and security applications.

Lastly, the Ultralife China team is expected to contribute fully to our gross margin improvement objectives. And their first round of completed Lean projects this year is expected to generate over 150 basis points of savings for us in 2012. We look forward to China continuing to play an integral role in helping the Battery & Energy Products business grow both its revenue and margins.

Regarding the financial outlook for the rest of 2011, we have revised our guidance and now expect total year revenue of approximately $150 million, with the reduction from the prior forecast entirely attributable to lower expectations for our Communications Systems business. Although we continue to see a high level of activity with our global defense customers, timing uncertainty in the US government funding for some large radio upgrade programs has caused us to revise our revenue outlook for the Communications Systems business.

Accordingly, we now expect total Company operating income of approximately $5.5 million, including the impact of a third-quarter $1.1 million non-cash write-off. We're still on track to deliver high single-digit year-over-year revenue growth in our Battery & Energy Products business, driven by strong demand for rechargeable batteries and chargers, and increased business from our China operation. In Communications Systems, we now expect sales excluding SATCOM systems from both periods to decline 7% year-over-year.

Our mission for 2011 continues as we stated at the beginning of the year. We will continue to refine our business model for increased profitability and position the Company for sustainable sales growth, with more dynamic and deliberate plans for new product development and sales coverage expansion. We are confident that the actions taken this year will continue to drive profitability improvement and revenue growth in the coming year.

Operator, this concludes my prepared remarks and we would be happy to open up the call for questions.

(Operator Instructions) Jim McIlree, Dominick & Dominick.

Yes, thanks and good morning. So in order to hit the revenue guidance for the year you need a pretty big uptick in Q4 revenues. Where is that coming from? Is that from specific contracts that you have identified, or what are you seeing that is giving you confidence you can hit the Q4 numbers?

When we look at our two business segments, we have made a judgment based on where we believe we stand with an existing backlog and very high probability opportunities in our Battery & Energy Products business, versus where we stood at this point in prior years' quarters. We have a high level of confidence in the Battery & Energy Products business achieving our expectations there.

Where we've been more conservative has been looking at our Communications Systems business, which has been troubled a little bit this year with the delay in the funding at the beginning of the year, and with the nature of its products following some of our major large radio programs. As those projects slide right, it has been more and more difficult to see some of that conversion occurring in 2011.

We look currently at (technical difficulty) in terms of flow business and existing projects, plus looked at our probabilistic approach to some of the other activity that we have on our screen. And when we combine those things we thought that it was prudent to reduce our guidance because of Comms Systems.

But where we stand right now, we feel very comfortable with the balance of risk and opportunities to meet the -- to be able to make that year-end revenue target.

You said that without the big satellite-on-the-move order in the numbers you would be down about 7% in Comms Systems; did I hear that right?

That's correct. That's correct.

Okay, so you are still looking for a relatively large increase in Comms Systems revenues in Q4 versus what you have seen in the first three quarters.

That's correct. If we look at our front-half to back-half distribution of revenue, historically that indeed is usually the case. In the case of this year, again given the staggered start to the funding -- granted some of the earlier guidance reflected a pretty steep curve in the back half, even above and beyond traditional disproportion -- and I think that our revised guidance is a more reasonable expectation for that business.

The $1.1 million charge, was that all in Comm Systems or was there a charge elsewhere in the cost of sales line?

No, that was 100% in Comms Systems.

Okay, and how much did you have in the legacy amplifier sales in year to date as well as in Q3?

Phil, would you like to (multiple speakers)?

Yes, sure. Jim, it was sporadic at best. The decision we faced was to go forward with a product line that was low margin, versus putting all of our time and effort into higher technology and better margin products under the AMTI branding, and that was the business choice that we made.

So we don't lose anything by going with the AMTI line. We feel that we gain by doing that, in replacing those sales in the past from the legacy line with AMTI branded product.

Okay, so it is possible that a customer says -- no, we don't want the AMTI brand; but you feel like that is a low likelihood of probability?

That is correct.

Okay. Great. That's it for me. Thank you.

Zach Larkin, Stephens.

Hey, gentlemen. Thanks for taking the call. First question, just to kind of follow up on the Communications stuff. So if we do see the uptick in 4Q with just not really a huge downtick year-over-year, what are you guys thinking about in terms of 2012 and a resumption in orders? Is overall revenue going to be fairly flat year-over-year do you think in Communications? Or are you expecting some sort of a rebound?

That is a very, very good question. In the face of some of the Supercommittee activity, which everybody is talking about a November 23 date, I think it is almost impossible to project what the budget climate is going to look like at this point. Maybe we will get better visibility to that by the end of the year.

But that being said, when we look at the overall Communications Systems business, we have a very unique high-technology product line which in many cases has a clear competitive advantage and value proposition, as evidenced by some of the margin rates we are able to achieve. That being said, that product line follows large radio projects.

So many times due to the gestation period for those large projects and their size, we are tracking a number of these projects for a long time; and then they hit, and it is a hurry-up offense to get shipments out. So when we look at the overall participation level of us in the number of different projects, we feel extremely positive about our long-term forecast. But until some of these budget situations resolve and become a little more clear, I think it is very difficult at this point to make some kind of a qualitative or even early quantitative assessment of what 2012 would look like. But we really like our position.

All right, understood. Then also if we look at the tick-up in Communications in the 4Q, that is going to imply a decent pullback in Battery & Energy for just a one-quarter pause; is that an adequate way to think about that?

I think a better way to look at it -- a more balanced risk and opportunity list.

Okay. Then just one final question. If we look at the -- your overall profitability targets and thinking about having 9% to 10% of sales in R&D -- or sorry, 10% to 11%, then 9% to 10% in G&A, those longer-term targets. Currently if we take what is currently going into those two buckets, we are not too far off at an absolute level; but the distribution is quite a bit different, with SG&A taking a larger portion of that percent of sales allocation.

In order to get it more to -- let's say it's a 10% and 10% for each of those buckets, do we need to see a volume increase to get the leverage out of the SG&A? How should we think about that?

I mean of course volume is always the preferred way to go. But as we continue to go broader and deeper with our Lean initiatives, we are finding more opportunities to eliminate ways and reduce costs. So clearly it is more palatable to get that SG&A leverage by increased volume; but at the same time you have to be pragmatic and look at things in terms of the uncertainty of budgeting cycles of some of our key customers, and wanting to control our own destiny.

We will continue to reduce discretionary spending to get closer to our 20% to target. But as you know, on a size of the business we have right now, it is either $7 million of top line or $1.5 million of cost reduction. So we are managing both of those sides of that equation.

Okay. Understood. Thanks very much.

Walter Nasdeo, Ardour Capital.

Thank you. Good morning, guys. If I could, I would like to talk a little bit about your sales strategy and the niche markets that you were mentioning, doing a little bit of working with the customers to develop products and things like that.

What sort of quantities are you going to require from these customers and for what length of time in order for you to put the effort into designing or sculpting, customizing products for them?

And are those types of product something that then could fit on the shelf for the next customer that walks in the door?

Yes, that's an excellent question. I think if you look at it on a continuum, I think we are really evolving from a Company that was almost 100% deployed in responding to government defense specifications. And whereas each of those products was in itself sort of a new product, it had one customer and one use, and we had to do it all over again for the next project.

When we look at trying to get a little bit ahead of the curve and control our destiny a little bit broader, the new product development focus is obviously trying to create a more repeatable opportunity to sell our products that we develop. And in the face of a significant portion of a business being government and defense, it is logical and practical to believe that expanding our overall commercial side of the business is the right thing to do.

We have Lean-ed out our new product development activity to create bandwidth for being able to develop products and prototypes, as I mentioned in my prepared remarks, to go out and get good validation from our customers before we make any broad launches (technical difficulty). In the areas of particular cells and packages of cells we are working closely with those customers to develop unique cells and form factors for those applications.

Ideally we'd like to be able to be very focused in that regard. We would probably not do this on just a broad scattershot approach, but focus on particular markets we feel we have a clear value. Some of the high cost of failure type of applications which would tend us to lead us to things like utility metering, medical devices, and other safety and security type applications.

We have been very successful in working sort of under the radar with a number of OEMs now in developing those cells. But given their relative magnitude to the overall government defense business we don't get a chance to talk about it too much.

But at this point we are not looking for massive volumes to make a decision to go into that particular product line, but rather very sticky business partner customer relationships, where we are willing to make smaller quantities on a rapid prototyping type basis in exchange for a long-term mutually beneficial relationship.

Okay. Thanks. As far as the sales strategy that you are pushing towards now, increasing the sales force by 20%, looking to do it by 40%, what sort of training, development, market penetration strategies are you working on? That is a dramatic increase in a sales presence. How are you focusing that so that it's a very efficient cost-effective way for you to build the business up going forward?

Perfect question. We entered the year, our sales approach was -- as is typical of a lot of small companies and trying to do a lot of things with a very small headcount -- we had, I would say, more of a geographically deployed pooled sales force. That is fine in terms of covering a region geographically. But if you are really looking to try to create value with the end-user customers, developing unique solutions for unique opportunities, a pooled sales force makes that very challenging to serve that customer that well.

So we went to a, I would say more line-of-sight approach where we split the sales forces between our two business segments. As a result of that, we identified some gaps in terms of coverage from a standpoint of just manpower as well as skill sets.

So we have told our sales people that we are going to continue to invest in their skill sets and their development. And we provided third-party professional training. We're working on continuing to provide them with new tools to do the job more effectively.

We are doing all the traditional time studies as to where they are spending their time and how do we free them up to spend more time talking to customers as opposed to talking to us inside our own four walls. We are also recruiting sales professionals that have, if you will, sub-vertical market knowledge in some of our target markets.

So we are not going in and having to learn it from zero. We are hiring people that have a particular expertise, at least in terms of how transactions are won and lost in our targeted market subverticals.

So as we continue to grow the breadth and depth of our sales force we will be very rigorous in our visibility to that performance; make corrections as well in terms of how we deploy and individuals at hand. But at the end of the day, as we continue to give them more tools and give them new products to sell, the momentum that we are creating I think is one of the large reasons why we may [be] successful even for the short period of time that they have been in place this year.

Very good. Okay. Listen, thank you for explaining that. I appreciate it.

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

Good morning, Mike and Phil. How are you? A couple questions. In terms of the SATCOM business, can you give us -- or do you have an outlook for 2012 where you think that business is headed? Or will you see a lot of ebb and flows just like you did this year?

We would certainly expect things to be better than this year, at least on a year-over-year basis, given the absence of some of the headwinds that we carried over from 2010. I think that the other major difference from the prior year is that we're expanding the number of opportunities we are able to play in.

We have a very highly trained and experienced expertise in a very specialized field. As I mentioned earlier, the technology level of the products is very unique. There's not a lot of competitors.

But to this point, we have been not playing as many different opportunities as I think we would have a good shot of winning. So part of our deployment of the sales people in that business are to be playing in more opportunities.

We look at that not only from the standpoint of the US primes but also in terms of some of our global customers. So in any given time now as we look at the megaprojects that we're tracking, we get giddy with excitement at times looking at the size of these projects. But the gestation periods are painstakingly long.

So at this point we have had a challenging year in 2011, but given the breadth and quantity, I would say, of some large projects that we have been involved with, I can't help but be optimistic for 2012.

And with R&D, I know you are going to be increasing the sales staff. R&D was a little bit lower this quarter. Where do you expect R&D for the next -- for this next fourth quarter and perhaps 2012?

As I mentioned in our prepared remarks we are looking for a regular cadence of product introductions over the next several years. So what that means to us is a couple times a year looking to try to make an announcement of some major new product family.

So to that end, we will probably spend a little bit at the levels we're at now and maybe even a little bit more as we start into next year, modulating that a little bit by what our overall revenues look like. But we don't look at developing new products that we are able to sell across multiple customers and markets as a bad use of our money.

So when we make a decision as to where we are planning to spend the precious -- these cost dollars that we have, we are going to favor the R&D, provided it's efficient, as well as our sales deployment; and throttle back on more of the nice-to-do G&A overhead-type expenditures.

What was the percentage of commercial and defense business this quarter?

You know, as much as the inner workings of them seem to change, the overall top level mix still seems to be the same. Generally speaking, it is around 65/35 and has been that way for as long back as I have seen the numbers.

If you look at the R&D programs that are out right now, and the ones over the next 12 months, what percentage is related to commercial and what percentage is related to defense?

You know, it's difficult for me to -- and I don't know, even appropriate for me to disclose that. But I think your question suggests something that we have to be very disciplined in making sure happens. It would be very easy for us to fall back into always focusing in on government defense type product developments at the expense of commercial. I think in the past, given our pooled approach to sales and the need to meet individual quarter deliverables, it became somewhat self-fulfilling.

So when we look at our expenditures -- and we talked about in some of the earlier calls the development of growth council that I chair every Monday morning at 8.30 with some good bilateral thinkers. We are disciplining ourselves to try to allocate between government defense and commercial's projects such that we continue to actually expand our overall mix of commercial projects.

So I can't give you a hard number like we are trying to split it 50/50 or 65/35, but we are definitely holding and pushing forward some of the commercial projects because of our long-term diversification goals.

Do you have a direct sales force for the commercial projects, the new ones that are coming out?

Yes, we do.

You do? Thank you very much.

Gary Siperstein, Eliot Rose.

Good morning, guys. Hi, Michael. Hi, Phil. Michael, could you tell us -- I know some of the salespeople you hired over the last nine to 12 months have been former military. Are you satisfied with their progress? Have you had to let any go and recycle in some new guys? Or is it too early?

Yes, the numbers we are talking about are net adds, and so there is going to be a churn. Being in sales and by the nature of that profession, it is somewhat Darwinian in that regard.

I think if we are going to be successful we want to be able to provide them with all the tools and training they need to be successful; and at the same time, after a reasonable amount of time, if they are not performing we have to be honest with each other and head in a different direction.

So to this point I think that we have changed out a few people and brought some new people in. But the numbers that I provided are actually net increases.

Okay, that's helpful. On the medical side I don't think we have seen much in terms of announcement. Is that due to the OEMs or the major companies you are working with? That due to the slowdown in the FDA, or is it a slowdown in their decision to get these new products out that we might be designed into?

I think it's more that -- we are not really able to disclose the names of the people we're working with, really at their request. As there are some prominent announcements of new product development and new products we are hopeful that some of those end-users will either announce it themselves or allow us to announce it.

But at this point, there isn't any structural reasons why we are not announcing who those customers are and what those projects are. It is more just, I would say, more relative to the confidential nature of that relationship.

Do you expect some of these products to roll out in 2012?

Absolutely. Absolutely.

Okay. In terms of the government, you mentioned the committee coming up for Thanksgiving and the continuing resolution and so forth and so on. But do you feel your -- the major contractors that you supply batteries too and other products, do you feel they have enough visibility in the programs we're in? Or is it still a function of what comes out of those committees later this month?

I think everybody is inherently confident, because the overall modernization of the communications system and products within our military is one of the top priorities of the military. So when we talk to our end-user primes it is always somebody else's project that may get delayed; it is not theirs because theirs is so important and so positively solid and needed.

So I think there is just generally more malaise caused from the uncertainty overall, without necessarily any specific programs that are on the bubble or are going to be canceled or at risk.

Okay. The batteries that we supply to Harris for the radio on the individual soldier, what is new there? How do you look at that in terms of Washington priorities?

I really can't get into too much details about that relationship, other than to say that we feel we have a very solid supplier-customer-partner relationship with Harris, and we are trying to work diligently to make all of our end-user OEM or prime customers as successful as they can be in their spaces. We are going to be agnostic to many of the very successful primes that are out there, and Harris is a very important one to us.

In terms of that agnosticism, are we supplying batteries for individual radio communications to any other primes?

Yes, yes.

Okay. More than one additional from Harris or just one?

At any given time we're working with several different partners.

Several? Okay. Lastly, I know you have a little bit of color on new products for 2012. I think one time you said a couple; another time you said several times during the year.

So just to clarify, are you expecting at least two new products next year, or at least four new products?

I am hoping for four, but I don't know if I would say it that quantitatively. We introduced in September and integrated system for a particular application. We mentioned in our prepared remarks that some of those components are applicable for even broader new product introductions.

We have some products that are being built very specifically to be incorporated in OEMs-types products. And we have a very vibrant rechargeable and chargers business that we'd like to continue to be stronger in.

So we are never going to put all our eggs in one basket, but at the same time we don't want be trying to do 10 different things all at once and not get anything done. We are trying to put together very intensive focused development activities several months at a time and get it actually done, to get some more good field verification and then have a commercially viable product, before jumping too deeply into the next one. With the theory being that over a 12-month cycle that you have several new products that are actually done, out, and validated -- and not just some great ideas that are always going to be next year's new product.

Okay. That's helpful. Last question, in terms of metering you mentioned the success and the traction you are gaining in China. Can you give us some color on how you are making out with the meter business in the rest of the world?

First of all, we believe that the smart-metering business, if you want to call it that, is still very early cycle. We have a very strong position in China. We recognize that each country has its preference for who they want to work with.

One of the things we are trying to do as opposed to having a US business and a China business and have them be separate, just combined up at the corporate level, we are trying to look at this more as a global business. So we can benefit from best practices and lessons learned that we develop in China, and apply some of those concepts and techniques into other places, even if we decide to manufacture them in the United States.

So to that end, we actually have some very good relationships emerging outside of China in electric metering business -- and I will just say at this point, across the Americas.

Okay. Super. Good progress. Congratulations. Thanks for all your answers.

Thank you.

And we have no further questions in the queue at this time. I would like to turn the call back over for any additional or closing remarks.

Great. Thank you very much. Well, thanks again, everybody, for joining us on our third-quarter earnings call. Once again, I look forward to meeting up with several of you in person over the next week or so, and again to share with you our quarterly progress in each quarter's conference call in the future. Thank you very much and have a nice day.

That does conclude today's conference.