Ultralife Corp (ULBI) 2011 Q4 法說會逐字稿

Good day and welcome the Ultralife Corporation Fourth Quarter and Year-End 2011 Earnings Release Conference Call. At this time, for opening remarks and introductions, I'd 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 & Associates. Thank you for joining us this morning for Ultralife Corporation's Earnings Conference Call for the Fourth 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.ultralifecore.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 uncertain global economic conditions, increased competitive environment, pricing pressures, and 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. Further information on these factors and other factors that could affect Ultralife's financial results is including in Ultralife's filings with the Securities and Exchange Commission including the latest annual report on Form 10-K.

In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures.

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

Good morning, Jody, and thank you, everybody, for joining the call this morning.

Today I plan to start by making some high-level observations about our fourth quarter and total year operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results for the quarter and the year.

After Phil is finished, I'll take the call back to provide a recap of the achievements towards the top 2011 priorities that we had laid out at the beginning of last year and then talk about what expectations we have along those lines for 2012.

Lastly, I'll share with you our thoughts on the full-year financial outlook for 2012 before opening it up for questions.

In the fourth quarter, we continued to grow gross margins across all of our business units. Total Company gross margins in the fourth quarter were 30%, up 240 basis points year-over-year and reflecting the productivity gains from our lean initiatives and a favorable product mix.

Revenue in the fourth quarter decreased year-over-year driven partially by a difficult year-over-year comparison in our Battery & Energy products business. However, both B&E products and our Communication Systems businesses saw additional softness in the US government defense demand in the fourth quarter and, in fact, several shipments were delayed into 2012.

On a total year basis, Battery & Energy products delivered a 6% increase in revenue excluding the first quarter DCAA settlement aided by strong double-digit revenue growth through the first three quarters of 2011.

At Communication Systems, the nonrecurrence of a large SATCOM award in 2011 impacted revenue comparables all year. However, additional softness was experienced through the year in its non-SATCOM business where revenue was down 23%.

Given the headwind space by both businesses in the fourth quarter, we were pleased that in addition to the strong gross margin improvement realization that actions taken by the teams throughout the year led to a reduction of our run rate operating expenses in the quarter of $2.3 million, which was 25% lower than the prior year and helped us achieve a fourth quarter operating profit of $2.1 million, or 6.8% to sales.

This represents a 20 basis-point operating margin improvement year-over-year despite much lower volume. In a few minutes, I will talk further about our specific 2011 progress and 2012 plans for sustainable revenue growth but first I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of our fourth quarter 2011 financial results. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter and full-year results for our year ended December 31, 2011.

Consolidated revenues from continuing operations for the fourth quarter totaled $31.4 million representing a 32% decline from the $45.9 million reported in the fourth quarter of 2010.

Revenues from our Battery & Energy product segment were $23.9 million, a decrease of $8.9 million, or 27% from last year. This decrease was attributable to the completion of a telematic battery contract in the fourth quarter of 2010, which resulted in higher shipments for that period and the timing of shipments of rechargeable batteries to a large customer, which was delayed into the first week of January 2012.

Otherwise, the segment continued to experience growth for rechargeable batteries and further penetration of our primary batteries into the utility metering business in China.

Communication System sales of $7.5 million declined by $5.6 million, or 43% from the prior year. When adjusting for 2010 SATCOM shipments, sales decreased by $1.1 million, or 13% due to delays in the government funding approval for amplifier orders.

Our consolidated gross profit from continuing operations was $9.4 million in the fourth quarter of 2011 compared to $12.7 million for the fourth quarter of 2010. As a percentage of total revenues, consolidated gross margin was 30.0% in 2011 versus 27.6% for last year's fourth quarter, an increase of 240 basis points.

Gross margin for our Battery & Energy product segment was 29.1%, a 340 basis-point improvement over last year reflecting the tangible and permanent benefits of the Company's ongoing lean initiatives and the continued trend towards higher-margin rechargeable batteries. The 29.1% is the highest gross margin every reported for this segment and represents a 160 basis-point improvement over the third quarter.

For our Communications Systems segment, gross margin was 33.0%, an increase of 40 basis points over the prior year, reflecting a higher mix of AMTI amplifier sales.

Operating expenses from continuing operations totaled $7.3 million for the fourth quarter of 2011, a reduction of $2.3 million, or 25% from the $9.6 million for the year-earlier period. The overall decrease from 2010 was primarily a result of our continued actions to reduce discretionary expenses while investing some of the savings in new product development and the expansion of our salesforce to increase our geographic coverage and penetrate new markets.

Fourth 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 23.2% for the fourth quarter of 2011 compared to 21.0% a year ago. The percentage for the 2010 period would have been 23.3% when excluding the SATCOM shipments.

Fourth quarter noncash operating expenses from continuing operations including depreciation, intangible asset amortization, and stock compensation expenses, amounted to $1.4 million, virtually unchanged to the amount reported for the year-earlier period.

And adjusted EBITDA, defined as EBITDA including noncash stock-based compensation expense, amounted to $3.4 million in the fourth quarter versus $4.2 million for the fourth quarter of 2010.

Despite a 32% reduction in sales, our 30% gross margin and 25% reduction in operating expenses helped drive operating profit from continuing operations to $2.1 million, representing an operating margin of 6.8% compared to $3.0 million for an operating margin of 6.6% for the same quarter last year.

The improvement in gross margin and the reduction in operating expenses versus the fourth quarter of last year contributed over $3 million to operating profit for the 2011 period. The improvement in gross margin and the reduction in operating expenses versus the third quarter resulted in a 240 basis-point sequential improvement in our operating margin.

Other expenses, primarily comprised of foreign currency translation and interest expense, amounted to $0.3 million for the fourth quarter of 2011 compared to $0.4 million for the year-earlier period. The 30% reduction is a result of no draws on our bank revolver throughout the entire fourth quarter of 2011.

Our fourth quarter tax provision was $0.2 million primarily reflecting book tax timing differences related to the amortization of intangible assets. The 2010 fourth quarter tax provision was a credit of $0.7 million resulting primarily from a refund pertaining to our 2008 tax return enabled by subsequent retroactive legislation.

Net income from continuing operations for the fourth quarter of 2011 was $1.7 million, or $0.10 per share compared to $3.4 million, or $0.20 per share for the same period last year.

The Company's liquidity remained solid with cash of $5.5 million and no debt. As a result of careful working capital management and cash generated from operations in our lean initiatives, we had no draws on our bank revolver during the fourth quarter. The outstanding balance on our revolver at the end of 2010 was $8.5 million.

Our inventory levels at the end of 2011 increased by $1.8 million over year-end 2010 due to delays in the shipments of rechargeable batteries into January and building amplifier inventory to help fulfill our recently announced international Communication Systems contract. Although our operating expense base has been significantly reduced in 2011 to align with our business model, we will continue to drive operating efficiencies and prevent non-discretionary spending creep with revenue growth.

We remain mindful of the importance of exercising strict expense control on the one hand and providing the necessary funds for product development and revenue recognition on the other.

We have spent 2011 focusing our attention on relentless execution of our top priorities. We have made significant progress, and the Company ends 2011 with a more profitable business model than we had a year ago. The improvements made and those to follow will generate strong incremental returns on revenue growth and will allow us to achieve our interim goal of a 10% operating margin.

I will now turn it back to Mike.

Thanks, Phil. As we have said many times, Ultralife possesses the elements to achieve sustainable top and bottom line growth by applying a disciplined focus execution and a more deliberate approach to new product development and sales.

In early 2011, we established several specific priorities to drive efficient execution and reposition the Company for growth. I'd like to now recap with you the progress that has been made against each of those during the past year and talk about our plans for 2012.

The first priority has been optimizing the Company's profitability. As Phil has mentioned, we have set achieving a 10% operating margin level as our initial goal. The framework to deliver on this goal consists of growing our total Company gross margins to 30% and building an operating cost structure of approximately 20% to sales that allocates 10% to 11% to sales on new product development and selling expense and 9% to 10% to sales on G&A.

During the fourth quarter, we achieved a 30% gross margin level based on successful implementation of the lean principles and favorable mix. In the fourth quarter, our reported operating margin rate was 6.8%, and for the total year, 1.8%.

If one were to make adjustments for several of the one-time charges taken throughout 2011, that total year operating margin level would be approximately 4.4%. Whereas, we know that there will still be some variation quarter-to-quarter in our operating margin rate, we are well positioned for the significant total year 2012 operating margin improvement that is reflected in the guidance provided today.

In 2011, not only have we focused on the variable cost components of our margin improvement, but we have also taken a hard look at the infrastructure costs associated with our business model. As we have looked closely at the allocation of financial and human resources, we have made the tough calls, like the decision to exit our Energy Services business in the first quarter of last year and the recent decision to divest our RedBlack Division of Communication Systems. Despite the growth potential of each, when evaluated against our new product development-driven manufacturing business model, we felt exiting these businesses was necessary to reach and pass through our 10% initial operating margin quality of earnings goal.

The next priority has been to develop and execute a growth game plan. As we pursue our revenue growth initiatives, we are looking for both magnitude and consistency. Looking back at the Battery & Energy products business revenue performance in 2011, which, by the way, represented over 75% of our total revenue, we saw year-over-year growth rates of 11% in Q1, 23% in Q2, and 27% in Q3 before the dip in revenue of 27% in Q4. Their total year revenue was up 6% excluding the impact of the DCAA charge.

Our China operation also represented a key component of the Battery & Energy products 2011 growth each quarter and was itself up 34% for the total year. And in the case of the Communication Systems business, its vulnerability to the timing of large projects is well documented.

So -- to more fully control our own destiny and drive consistent growth, the internal strategic growth plans that we developed last fall for the Battery & Energy products and Communication Systems businesses, place a heavy emphasis on accelerating new product development and increasing the effectiveness and reach of our salesforce. Our intent is to not only further expand penetration of our global government defense customer base but also to diversify and more aggressively grow our commercial presence.

In terms of new product development, we are now being more proactive in developing pilot products ahead of clearly defined customer specifications by building functional prototypes, then gathering real-time voice to the customer feedback in order to fine-tune the designs before a broader introduction.

The patent-pending Ultralife GenSet Eliminator announced in September is now in a prototype rev 2, which incorporates all of the terrific feedback we received from the October STAR-TIDES demonstration site at Ft. McNair and then one week later on the floor of the Annual Association of the United States Army meeting in Washington, D.C.

The next round of customer field demonstrations is occurring this week, and we have several other field demo units now available and earmarked for specifically interested domestic and international customers. The next steps would usually include internal customer testing yet, once completed, we could enter into full production within six to eight weeks from initial order.

Another new product that we have developed in conjunction with the GenSet Eliminator Systems is something we call internally the multi-kilowatt module, which is essentially a large-format rechargeable battery. This product is well beyond the Power Point phase, as we have built several prototypes incorporating different lithium iron battery chemistries, depending on the application.

In addition to it forming an integral part of the Ultralife GenSet Eliminator system, we are generating a wide variety of interest for other types of off-grid, standby, and backup power needs. The product has been designed to be manufactured in pre-defined form factors allowing customers to easily increase or decrease the number of batteries used to meet different demand needs.

In the area of new cells and battery product designs, we have completed prototype products now available for initial voice of the customer feedback that served the military's stated need for lighter, higher-density, mobile energy solutions for our soldiers. Specifically, these products deliver similar power as the currently used products yet with one-half the size and weight and will be available for both rechargeable and primary applications. The initial customer testing process will begin within the next several weeks.

Each of the above new products has been under development for years. What's different is that now we have working prototypes of each. In addition to setting clearer priorities, we also needed to redesign our engineering processes to free up additional bandwidth for new product development, and our technology team has clearly stepped up to the challenge. We all look forward to progressing the previously mentioned products to the requisite testing procedures, fine tuning the designs, and entering into full production.

We intend to continue to add to our new product pipeline and introduce meaningful new products several times each year. As such, we are optimistic that in the face of decreasing military budgets and troop withdrawals that the expansion of our product offerings through close collaboration with our customers will, indeed, enable us to more proactively control our own destiny by providing meaningful organic growth opportunities both in the government defense and commercial markets.

To take full advantage of these emerging new product opportunities, in 2011 we made structural changes in sales leadership, invested in sales tools and training, and expanded sales coverage, both with our major OEMs and internationally.

Year-over-year, we start 2012 with a 66% increase in the number of salespeople versus the beginning of 2011, each specifically aligned and trained for the markets they serve. Whereas we know it will take some time for the new salespeople to reach 100% effectiveness, our opportunity funnels for both large government defense and mid-size commercial projects are expanding quickly as a result of the focused attention and new product developments.

We are delighted that the Communication Systems is off to a strong start for 2012, having received a major international contract for 2,319 A320 amplifiers as announced in January. Although we are unable to disclose the actual contract terms or customer for this transaction, the list price for a single unit of this type of amplifier is generally around $6,500 per unit.

The third priority of 2011 was we closely looked 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've covered the actions taken in 2011 several times already during this call. In 2012 we will continue to evaluate the present allocation of financial and human resources against other potential uses. Although we won't carry this product and portfolio assessment activity any longer as a top priority item subject to comment in each earnings cycle, you can be assured that it is ongoing and that we will communicate any material impact of decisions taken as a result of this process.

And, finally, the fourth top-level priority for 2011 was 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. Our Ultralife China team performed strongly through the entire year 2011 and ended with sales up 34% year-over-year.

For reference, roughly 33% of our B&E products business growth is coming from our China operations and approximately 60% of our current China operation sales are into China where we are seeing nice penetration in the electric, gas, and water metering applications as well as in RFID toll road passes.

In conjunction with our lean efforts, in 2012 we expect to continue to invest in our China operations, to increase productivity and throughput without expanding our manufacturing footprint. In addition to the gross margin improvement these activities will bring, we look forward to China continuing to play an integral role in helping the Battery & Energy products business grow its revenue on a global basis.

With regard to the financial outlook for 2012, we expect to see year-over-year percentage revenue growth approaching double digits.

Operating income growth is expected to outpace revenue growth and generate an operating margin rate of between 7% and 7.5%.

As we look forward, our opportunity funnels for both large government defense and mid-size commercial projects are expanding as a result of additional salespeople and focus, and the new product development. However, as experienced with fourth quarter revenue, our goal of minimizing the effects of variability in shipments and orders still has a ways to go.

The operating cost model we developed in 2011 supports profitable, single-digit revenue growth rates while positioning us for favorable operating leverage as we scale up the business.

In the Battery & Energy products business, we are expecting modest growth rates early in the year driven by growth in our rechargeable and charger projects, China, and other international business tempered somewhat by the slowdown in the US government and defense business.

Acceleration of the growth rate is expected in the latter part of the year, subject to the timing of testing completion orders for the newly introduced products and traction from the new members of our sales team.

In Communication Systems, despite a tough financial year in 2011, the team continued to aggressively position its high-technology amplifiers and equipment in a wide range of attractive opportunities. As such, we are anticipating a solid rebound to positive growth rates in 2012 based on this high activity level, and broad participation in both domestic and international projects for fully integrated vehicle systems, vehicle and man-packed radio amplifiers, and power systems to support and extend the communications range in tactical environments.

Our RF amplifier product line continues to evolve and [maintain pace] with the latest technological developments, to include the newest communication wave forms improving speed and data throughput.

We have said that Ultralife could double or triple its current size over the next few years. That target remains. However, as a result of the restructuring of our business model and cost structure completed in 2011, we are also much better positioned to deliver more consistent earnings results despite revenue fluctuations.

So our mission for 2012 is straightforward, and that is to drive more consistent earnings performance and build sustainable growth momentum. As we execute in the business model adopted in 2011 for increased profitability and follow through on plans in place for new product development sales coverage expansion, we are confident these goals are achievable in the coming year.

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

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

The first question -- I wanted to just maybe follow up on the outlook for 2012. So it sounds like, Mike, we're going to be looking for a back-half weighted in the Battery & Energy products. On the Communications segment, do you expect that to be more of a linear growth trend or could you give us maybe a little bit of color on both the segments? Maybe how much we should look for the weighting on second half for Battery, and then just the overall trajectory in Communications?

Yes, I'd be happy to. I think the difficulty we have in the Communication Systems business, really is predicting when any particular large project can actually close. I mean, they tend to go fairly slow and then, all of a sudden, they speed up, and then we're in a hurry-up offense to deliver.

And in the past, we've had a smaller number of those projects at any given time on our screen, and so I think we were highly susceptible to the timing of those order placements in the subsequent shipments.

What we've done in terms of rebuilding our salesforce and expanding it, it has allowed us to [play in] a lot more opportunities at any given time. And so as we announced early in January, we were able to hit one early in the year. It's always nice to start off the year with a nice win like that. We have a high level of large projects currently being developed by our team. So whereas in the past, maybe there have been one or two projects, and then we try to manage the revenue cycle through the whole year, and it tended to be back-end loaded.

With some of the bigger projects we're looking at, and the number of different projects we're looking at, we hope that there's not as much front-to-back difference in the revenue volume.

Relative to Battery & Energy products, they have a little bit shorter cycle in terms of when you see an order to a sale. So they can see their volumes pick up and drop pretty quickly without a ton of visibility. As I said in my prepared comments, I expect them to be a little bit slower based on what we saw in the fourth quarter, at least initially in the year. But any time we introduce 66% more feet on the street -- and these are all highly capable, energized, trained, experienced salespeople, even if we get part traction on that, we think we'll still see some nice growth throughout the year.

But the combination of getting those people up to speed and fully contributing and some of the timing of our new product development, working through a testing cycle and actually be going into full production, I think would tend to weight some of the opportunities in Battery & Energy products until the second half of the year.

Okay, thank you for that color. And then also just looking at the softness in the Battery, you mentioned that you had the one large order that got pushed out into the first Q of 2012. If I assumed that the $1.8 million increase Phil mentioned on inventory is a reasonable representation for that, and it definitely takes the year-over-year decrease in Battery & Energy products down a bit to the high single-digit rates. Is that a reasonable way to think about what the impact of that large order might have been? And also I wondered if you could give some color if that was a government contract or a little color on it if it just goes with your commentary that delays in government issuance led to a lot of the softness?

Zach, you're spot-on with your assessment. That ultimately winds up being a G&D -- Government & Defense -- product.

With regard to the remaining variance, in large part it was due, as I mentioned, the difference being a large telematic shipment that occurred in Q4 consistent with the conclusion of a contract.

Okay, perfect. And then if we look at the OpEx, SG&A kind of -- I think the trends are fairly straightforward on that. R&D we saw a decent decrease in 4Q. Are you expecting that level to be kind of more of a run rate base? Or should we get back up into the couple of hundred thousand dollars higher that we saw earlier in 2011?

With the latter. I would expect, depending on the level of activity with the new product work, which certainly is increasing, as well as the scope of the projects, that you'll likely see it up a couple of hundred thousand in one particular quarter, maybe down a couple of hundred thousand in the other. It's really based on the timing. But I think the base has been established, and that's a much more focused look at our new product development process, which has also gone through the lean process as well.

Okay, all right, so basically just to make sure I got that right -- we're going to see the standard quarterly fluctuations, but the base, if it used to be above two, we're going to be closer to two as maybe more of a median level, going forward?

I would say so, Zach - 2.0, 2.2, in that range is a likely way to -- the best way to look at it.

Walter Nasdeo, Ardour.

I'd like to just, if I can, just kind of explore a little bit more the -- I've been covering you guys for many years, and it's hard for me to count how many times a contract has been pushed from the quarter -- one of your government contracts. And it's been a challenge because the quarters line up good, your margins are good, there's things that you're doing that are really advancing the business. But then we have a little blip like that.

Can you give us some comfort that as you move forward -- because this is not the first time we've heard that you guys are making efforts to diversify the business out a little bit -- to kind of -- not be at such a whim of the government budgeting/contracting process?

Right, Walter. I think it's an excellent point, and I'd like to make two comments in that regard. First of all, as a result of this dynamic that you're talking about, we felt it was absolutely critical to push through our business model in the position to make money despite these big revenue fluctuations. If the only time you make meaningful money -- I'm talking from a quality earnings perspective -- is when you get a big contract, that's really not achieving that much. I mean, anybody can really do that.

So when we look at our business model, we say, listen, we want to be able to have a very solid level of operating margin despite the revenue fluctuations. We right-sized for a business that we have high visibility to, and then as we get those large contracts, we're able to get some nice leverage on that and improve quality of earnings even higher.

So I think a lot of what we did in 2011 was sort of sizing the business to the current realities, and I think some interim success was achieved to the extent that we were able to get 6.8% operating margin in the fourth quarter.

Relative to being so vulnerable to these large -- these transactions, we're as, overall, we're 60%, 65% Government Defense. And we talk about diversifying commercial business -- when you look at the Battery & Energy products business, which is, as I mentioned, at least in the last quarter, was 75% of our total revenues. They're not that much weighted towards Government Defense. It's more balanced between commercial business and government defense business. It's more like a 50-50, or any given quarter, it may be one side bigger than the other.

And so where we expect to see -- if you want to call it a smoothing of some of that lumpiness, we really think that the Battery & Energy business is well to do that. As we added salespeople in the various parts of the Battery & Energy business, we increased the area of metering, we increased the area of standby power, we increased the area of medical. We are looking very hard at our safety and security.

So we think that we're going to be able, over time, to be a little bit less susceptible to those large government contracts and at the same time make money. If we have them, of course, we'll make a lot of money. If we don't have them, we still make a respectable level of profit.

Now, Comm Systems, the thing is, I mentioned earlier in the call, we have to have the installed base, and we have to have the focus on multiple large products at a time. So I don't expect for us to get out of the large project business in Comm Systems, but our efforts in our number of headcount we've added is focused on trying to increase the number of opportunities we are participating in so they're not as few and far between.

Okay, all right, all right, that's helpful. Let me ask you this -- you're getting rid of RedBlack, you got rid of the Energy Services. Do you see yourselves doing any acquisitions, going forward, or is this purely -- are you really focusing on just going organically?

I think at the right time we'll do acquisitions. I mean, at this point, we want to make sure we have stability in our financial results from a profitability standpoint. I think Phil and his financial team have done a spectacular job of managing our cash. We're starting to bank some cash. And as we generate more EBITDA, and we look and get more -- shall we say "sophisticated" in some of our strategic initiatives, I think acquisitions are certainly going to be part of our future.

Clearly, we believe there's a lot of runway for organic growth over the next couple of years, and we want to be able to prove that. But, for certain, there's some M&A activity that's on the horizon. It's nothing that's imminent, but certainly over the next 6, 12, to 18 months, if some unique opportunities would come across our screen, we would be very tempted to pursue those.

(Operator Instructions) Orin Hirschman, AIGH Investments.

The contract that you mentioned finally it did come in in Q1, which you gave us the average selling price, et cetera, where we can give an estimate as to what the size is. How many quarters is that shippable or estimated to be shippable?

This contract is a multiple-year contract nominally between 2012-2014. At the same time, it's only one of the early phases of a multi-phase contract. So, of course, we're going to do everything we can to meet the customer's needs for their shipments. If those happen sooner rather than later, that's always a good thing in a manufacturing business model. But we're also encouraged by the fact that it's just one of the early phases of a multiple-phase project.

In terms of meeting the number of deliveries is small relative to what the whole project could be -- in terms of units?

Yes. There's other follow-on business associated with this product line that could be very attractive.

Meaning larger than the initial contract?

I don't want to comment on that, but it would be material.

Okay. What you're saying is the way the project stands right now with the initial order, if we work through the math, I mean, whatever amounts we assume, that there might be a discount. It doesn't single-handedly move the needle for you guys in terms of a rebound in military business, per se?

Not single-handedly, but it's certainly a great start of the year.

And if you work it through on a quarterly basis, if it adds $1 million to $2 million a quarter for the next two to three years, that's not a massive needle-mover.

If it was to take that long to ship, that would be correct.

Okay. I guess what you're trying to say is you hope it's going to ship sooner.

Always do.

That kind of leads into my last question just for this morning -- I'm wondering if you could talk about hoping to have double-digit growth rates. Let's assume that means 10% or 10%, 12%, whatever it might be. And the other thing to talk about the opportunity to double and triple the size of the Company in the next couple of years. How do you -- are we supposed to assume that doubling or tripling the size of the Company over the next few years is just if everything just goes right? And then if everything doesn't go right, you're a 10% type of grower?

No, I think that there is -- when you justify the opportunity to do acquisitions by proving your ability to grow organically at a high rate, and then you follow that up with meaningful acquisitions, I think you very much can get to a double or a tripling of the size of the Company. As we take operating efficiencies to a new level, as you double and triple the top line of the Company, you even, more quickly, accelerate the bottom-line growth of the company.

Understood. I'm saying just in terms of organic growth potential, organic growth potential, we should feel it's doing great if you wrote 10%? Or there's lots more opportunity than that?

That's a good question. I mean, when you have end-user customers contracting their budgets, and you're getting a multiple of GDP growth, I mean, I guess I would always view that as good. If I can be high single-digit as we talk about in the guidance or beyond, I would say that's a pretty good accomplishment in this environment.

The only counter I'd say back is that it is a lot of the markets that you're in are growing at massive growth rates, whether it's backup power or smooth out of power or medical. These are big growers. You're not digging there yet, but that would be the opposite, I would say, almost care if GDP is growing or not, but you've got market power, et cetera, massive size markets that are just taking off right now. That's true, you have competition in some of those markets, as well, you have [SAS] and medical, et cetera, et cetera. But if you really do have superior chemistries, then you've got the ability to produce. I would think you'd be able to crawl back in those areas as well.

You're right. There's a lot of growth opportunities, and we're trying to make sure it's profitable growth. There's a lot of people that show rapid growth rates that aren't making any money. And we're trying to make sure that we're pragmatic in our top-line growth, and we do it in a very profitable fashion, and the decisions we've taken to divest some of the businesses that we did -- both showed growth, but it wasn't at a profitability level that we thought was consistent with our business model.

So we look at markets, we look at what their overall size is, we look at their growth rate. But we also look at the ability to make money in those markets, and it doesn't make sense for all of our core competencies. And, so far, that's been a pretty good compass to decide where we pursue business.

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

A couple of questions -- one regarding the SATCOM business -- if you look at what's funded and unfunded at this time, can you make any comparison to the level of activity in that area for quoting in the fourth quarter versus even the third quarter or versus the fourth quarter last year?

You know, Sam, I don't know if I can make an educated statement about it relative to -- specifically relative to SATCOM. But what I do know is that we have several more people working very closely with a larger number of OEMs. And so the overall product opportunities have increased.

Whether that's SATCOM or other product types, I don't think I could comment on, but I think it's more a function not so much of the budgets but the fact that we're playing in more opportunities.

Okay, now, I know in prior conference calls, there was mentioning that there were some good opportunities overseas. I have not seen, over the nine-month or a 12-month period, any announcements on any of those opportunities, if they still exist. Can you tell me if they still exist?

Do you mean in addition to the one we mentioned in January?

Yes.

Yes, they still exist.

And are they in an unfunded stage, and that's why they're not announced? Or which stage would you say they're at at this point?

We're trying to follow the money, Sam. I mean, we know that there's long gestation cycles for these mega-projects. But we have a finite number of financial and human resources, so whenever we meet with the sales teams, that's one of the first questions that we ask is -- not only do we feel we have a competitive position here that's meaningful, but what's the status of the funding? And we've been trying to put the majority of our focus on unfunded projects.

And the last question -- it seems like narrowed your focus quite a bit on R&D, which is a healthy thing. Going forward, though, in 2012, how should we model the R&D for the next 12 months?

The way you should look at it, Sam, is we break it down into three buckets. We break it down into 30% of the R&D is absolutely targeted at the initiatives of the growth councils that Mike spoke of -- building the new platforms that are going to carry us into the future.

50% to 60% of R&D is based on the requests that we constantly get from the military, from special forces, from a whole host of different customers that want something special with the base products that we have. The remaining 10% to 20% is new to the world, pure R&D expenditures.

And this is a far different model than what we had deployed in the past -- a healthier approach as we go forward.

And can you talk about -- a last question regarding the growth council and what R&D should be developing and putting out as new products? When should we see initial shipments or beginning the rampups of announced new products?

Well, I tried to indicate in my prepared remarks that we believe within one to two months after initial orders for the GenSet Eliminator we'd start to be able to see some shipments. So depending on how long internal customer testing programs take, the one- to two-month clock would start immediately thereafter.

We hope to -- the cycle for these things is that everybody has great ideas, but as we've learned, unless we have some kick-the-tire prototypes for people to really fine tune their thought process and let us know exactly what they're looking for, you just never get to that ordering stage without a very, very long approval and specification of [all the cycles]. We're optimistic that between the GenSet Eliminator product line and some of the other product lines we mentioned, that we'll be starting to see some traction in the latter part of this year.

It appears there are no further questions at this time. Mr. Popielec, I will turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you very much, everybody, for joining us on the fourth quarter 2011 earnings call. Once again, I look forward to meeting up with several of you over the next week or so and to sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much for participating today. Bye-bye.

That concludes today's conference. Thank you for your participation.