Ultralife Corp (ULBI) 2012 Q1 法說會逐字稿

Good day, and welcome to the Ultralife Corporation first-quarter 2012 earnings release 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, Jennifer. 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 first quarter of fiscal 2012. 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'll find the release under investor news in the investor relations section.

Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected, as a result of various risks and uncertainties. These include uncertain global economic conditions, increased competitive environment, pricing pressures, and disruptions related to restructuring actions or 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 included 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 and different from net -- 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, everyone, for joining the call this morning.

As we have done previously, today I'll start by making some high-level observations about our first-quarter 2012 operating performance, then I'll turn the call over to Phil, who will take you through the detailed financial results for the quarter. After Phil has finished, I will take the call back to provide a progress report on our top 2012 priorities with a particular focus on new product development, as well as our thoughts on the full-year financial for 2012 before opening it up for questions.

The first quarter of 2012 was characterized by lower Battery & Energy Products demand negatively impacting both revenue and gross margins, offset to some degree by a very favorable improvement in our Communications Systems business performance.

In the first quarter, we saw the softness in our Battery & Energy Products business that was experienced in the fourth quarter of late last year extend to this year. As we saw mentioned during our last call, revenue softness included a large recurring telematics contract that reached its life end late last year and the slowed U.S. government defense business due to overseas troop withdrawals and well-publicized budget constraints.

In anticipation of a slower first half for B&E Products, we reduced manufacturing output to bleed down inventory roughly 10%. In the first quarter, we also completed our 9 V lithium battery product line transition to our China operation. The combination of these two events, along with lower demand, led to approximately $1.9 million of negative manufacturing variances in Q1, which was higher than expected and hence impacted net gross margin rate.

We have implemented additional headcount right-sizing in Q1 to correct a large portion of these variances and have implemented a detailed sales and operation process planning to more quickly respond to demand fluctuations.

On a positive note, our Communications Systems business showed a nice rebound in its sales in Q1 by doubling year-over-year revenue, driven in part by the international project we announced in January. Comms Systems gross margin rate declined modestly as a result of the large project tender pricing; however, we expect to fully recover this slight erosion from lean productivity gains throughout the year.

Looking at operating expenses, we continue to knowingly spend ahead of revenue realization on new product development and increased feet on the street, but nevertheless were able to reduce operating expenses 6% year over year. In a few moments, we will talk about several exciting new product introductions we will make this month, which will expand our opportunities for organic growth despite the present and challenging government defense budget environment.

But first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through some additional details of our first-quarter 2012 financial results. Phil?

Thank you, Mike, and good morning, everyone.

Earlier this morning, we released our first-quarter results for the period ended April 1, 2012. As a reminder, I will provide you revenue, gross profit, operating expenses, and operating results from continuing operations for the 2012 first quarter compared to the 2011 first quarter.

Discontinued operations contain the results of RedBlack Communications. 2011 discontinued operations also contain the results for the Energy Services business, which we exited in the second quarter of last year.

Consolidated revenues for the first quarter totaled $27.5 million, representing a 1% decline from the $27.9 million for the first quarter of 2011. Revenues from our Battery & Energy Products segment were $20.1 million, a decrease of $4.2 million, or 17%, from last year. This decrease was primarily attributable to the completion of the non-U.S. portion of a telematics battery contact contract in the first quarter of 2011 that accounted for in excess of $4 million of revenue for that period.

The first-quarter performance was also impacted by a slower government and defense order rate for rechargeable and non-rechargeable batteries.

Communications Systems sales of $7.4 million increased by $3.8 million, or 102%, from the prior year. This increase reflects our broader focus on large global defense modernization opportunities, which resulted in higher amplifier shipments.

Our consolidated gross profit was $6.6 million in the first quarter of 2012, compared to $4.4 million for the first quarter of 2011. As a percentage of total revenue, consolidated gross margin was 24.0% in 2012 versus 15.8% for last year's first quarter, an increase of 820 basis points.

During the first quarter of 2011, the Company recorded a $2.7 million charge for the settlement of a matter with the U.S. government pertaining to exigent contracts completed between 2003 and 2004. Excluding this charge, gross margin for the 2011 period would've been 23.2%.

Gross margin for our Battery & Energy Products segment was 19.6%, a 710 basis-point improvement over the 12.5% reported last year. Excluding the 2011 settlement charge, the gross margin for this segment would have been 21.3%. The lower gross margin for the Battery & Energy Products segment resulted from our decision to reduce production levels in 2012 to more closely correspond to the rate of orders as part of our lean initiative. Although we incurred almost $2 million in unfavorable manufacturing variances, the decision advances our goals of increasing inventory turns and optimizing cash.

In addition, the necessary adjustments we made to our manufacturing operations over the past few months and continued refinements going forward give us more flexibility to achieve the business model goals that we have previously shared with you.

For our Communications Systems segment, gross margin was 35.7%, a decrease of 170 basis points from the year-earlier period, reflecting some large-project volume pricing. Operating expenses totaled $7.9 million for the first quarter of 2012, a reduction of $0.5 million, or 6%, from the $8.4 million for the 2011 period. The overall decrease from 2011 was the result of ongoing reduction in general and administrative expenses, partially offset by increased selling expenses associated with the expansion of the sales force to increase geographic coverage and penetrate new markets.

As a percentage of revenue, operating expenses were 28.7% for the first quarter of 2012, compared to 29.9% a year ago.

First-quarter non-cash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses, amounted to $1.3 million, compared to $1.4 million for the year-earlier period. And adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $0.1 million in the first quarter of 2012 versus negative $2.3 million for the first quarter of 2011.

We incurred an operating loss of $1.3 million in the first quarter of 2012, narrower than the operating loss of $3.9 million for the same period in 2011. The 2012 loss was driven by the unfavorable manufacturing variances that I described earlier.

Other expenses, primarily comprised of foreign currency translation and interest expense, amounted to $51,000 for the first quarter of 2012, compared to income of $144,000 for the year-earlier period. The year-over-year variance resulted from fluctuations between the U.S. dollar and the British pound.

Our first-quarter tax provision of $0.1 million primarily reflects booked tax timing differences related to the amortization of intangible assets, consistent with last year. Net loss from continuing operations was $1.4 million, or $0.08 per share, compared to $3.9 million, or $0.22 per share, for the same period last year.

The Company's liquidity remains solid with cash of $4.3 million, no debt, and a current ratio of 3.3. Our inventory decreased by almost 10% from year-end and 25% from the first quarter of 2011. By comparison, the outstanding balance in our revolver at the end of the first quarter of 2011 was $10.2 million and the current ratio was 1.9 at that time.

Knowing that the timing and mix of our revenues varies from quarter to quarter, we have significantly reduced our discretionary operating expense base over the last year, while continuing to provide the necessary funds for product development and expansion of our sales force. The actions we have taken further streamline our manufacturing operations, while increasing our inventory turns and enhancing flexibility to meet demand.

The introduction of higher-margin new products suitable for broader markets with a larger, more strategically placed and focused sales force will help us even out revenues in our resulting operating performance.

Based on the pipeline and opportunities, we are maintaining our guidance for 2012 that is year-over-year revenue growth approaching double digits with operating margin of approximately 7% to 7.5%.

We continue our attention on relentless execution of our top priorities. We believe that 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.

For 2012, we have said that our three top priorities are essentially, one, to optimize the Company's profitability; two, execute our growth game plan; and three, more fully leverage our China operations to access global commercial markets and to improve our cost competitiveness.

To optimize the Company's profitability, we have established a framework to deliver an interim operating margin goal of 10%, which is based on working towards a total Company gross margin rate of 30%, allocating 10% to 11% of sales on new product development and selling expense, and 9% to 10% of sales on G&A.

When we look at the mix and the pricing trends at both Battery & Energy Products and Communications Systems, we see a rebound path to high 20s gross margins this year, once the B&E manufacturing right-sizing adjustments are completed, with any upside to our revenue growth providing additional leverage on the way to 30%.

In terms of our new product development and selling expense, we have kept spending several points higher than the 9% to 10% of sales' stated target in an effort to drive our topline growth achievement for the year. However, we will start to modulate this spending back to targeted levels as the initial round of new products move into full production and the new sales force hire, on-boarding, and training processes stabilize.

One of the challenges we face in terms of our current business cycle is that we are in the awkward period in between the time in which we have made some significant changes to the portfolio and operating practices to better position the Company for higher-quality earnings growth and the time needed for the gestation cycle of new product development to result in meaningful organic revenue growth.

We continued to scrutinize all existing spending and aggressively seek new operating cost reduction opportunities, yet also continue to fund our new product development and focused sales force expansion efforts, which are the core parts of our organic growth game plan.

To be clear, we realize the importance of showing topline growth, but we also know that consistently growing our earnings at even a faster rate is the only way to improve our earnings quality. That's why developing high-value proposition new products is such an important part of what we are doing, and I'm very pleased with the progress that has been made to date.

Regarding the patent-pending Ultralife GenSet Eliminator announced in September, designed to increase operational efficiency of fossil fuel generators and/or facilitate renewable solar or wind power integration, we now have multiple demonstration units built and are using those to perform numerous demonstrations of the product's capabilities over a wide cross-section of potential customers.

In late February, we completed a demonstration at the Global Battery Japan trade show in Tokyo where we received strong reception and wide print media coverage. With the help of an existing channel partner in Japan, we're incubating several standby power application projects.

One of the GenSet Eliminators will be on demonstration at the upcoming Special Operations Forces Industry Conference in Tampa May 22-24, while another is scheduled to be demonstrated at the Disaster Response & Recovery Expo in Nashville, Tennessee, on May 23-24. This will be followed by it being shown powering water pumps at the Aid & International Development Forum in Washington DC on June 6-7.

The GenSet Eliminator is also presently progressing through the U.S. Army's Network Integration Evaluation process for laboratory evaluation, to be followed by live field trials at Fort Bliss, Texas, in October this year. The NIE soldier-led evaluation is designed to further integrate, mature, and rapidly progress the Army's tactical assets. Once successfully through the NIE process, new technologies are able to be immediately fielded, allowing for the military to realize benefits in record time.

We are also seeing very strong interest internationally for the product, as well. Specifically, we have European MODs requesting live demonstrations for late May, and we have active discussions underway in South America where the GenSet Eliminator is being evaluated to provide efficient power in remote locations.

And lastly, we have system integrators for the Middle and Far Eastern militaries evaluating our large-format lithium-ion battery, and are planning to utilize them paired with a diesel generator, attaining 30% increase in efficiency and thereby extending the mission time of its border patrols.

And finally, in addition to the GSE skid- and trailer-mounted versions, capable of coupling with either generator sets, solar panels, or wind turbines, we most recently have introduced a GSE products variation, which we call the man-portable power system, or MPS, which consists of ruggedized single-man portable gear, including portable power conversions, batteries, and solar panel components to add it to the users' flexibility for mobility and rapid deployment.

We have MPS systems that will be demonstrated in both the UK and in France in May and June, respectively.

As previously mentioned, we have developed, in conjunction with the GenSet Eliminator systems, something we call the multi-kilowatt module, or MKM, which essentially is a large-format rechargeable battery.

We are very pleased to announce that we have received and shipped our first order for an initial small quantity of new MKM large-format batteries to a major defense contractor for a standby power application. These initial installations will allow us to field-verify the final product design and position us well for larger follow-on orders, as this product can incorporates different lithium-ion battery chemistries, depending on the applications.

In addition to it forming an integral part of the Ultralife GenSet Eliminator system, we are also positioning the MKM and several other types of off-grid standby backup and motive power projects. Since the MKM is designed to be manufactured in predefined form factors, customers can 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 and are presently undergoing customer testing of a new half-size product for our well-known 5390 primary battery pack. This new half-size 5390 product directly addresses the military's stated need for lighter, higher-density mobile energy solutions for our soldiers.

Specifically, it delivers similar power as the currently-used products, yet with one-half the size and weight, which will provide the soldier the flexibility of a lighter, smaller battery for shorter missions or twice the energy in the same size and weight as the existing battery for longer missions.

Concurrently, we are also launching a half-size 2590 rechargeable battery pack in a new thin to body conformal battery as an additional lightweight option for today's soldier.

Our Communications Systems new product development efforts over the last year have resulted in three new offerings with a focus on vehicle and manned portable systems and instruments supporting multiple radio configurations in used globally in reducing SWaP-C, that is size, weight, power, and cost.

The lightweight portable amplification system, or LPAS, which is an upgrade of one of our existing products, now will support over 11 different radio configurations, while the older units supported only one. The system utilized our very successful A320 amplifier and an integrated rechargeable power supply, which allows for either dismounted or vehicle operations, using AC/DC or battery power.

This configuration provides the customer with maximum flexibility and operational usage with mixed yielding of radios and also enhances transition when upgrading to newer radio platforms. This product is currently under evaluation for use by key international customers in support of funded major program initiatives.

Our handheld vehicle adapter, or HVA, provides the ultimate solution for vehicle communications supporting Chicken Run communications, enabling the operator to use the same radio in the vehicle or during disk-mounted operations. Since capable of using several different voltages, this product can be used in commercial or military vehicles while supporting over 16 different radio configurations. The handheld vehicle adapter is currently quoted to several domestic and international vehicle programs with fielding planned in 2012.

Another known challenge in operational usage shortfall is a limitation of the number of antennas that fly on aircraft, vehicles, and maritime craft. In response, Ultralife has developed a satellite radio combiner which enables simultaneous transmission and reception of any two military UHF satellite radio channels. Designed for continuous operations and weighing less than 17 pounds, it provides significant operational capability at very low weight and power consumption, which support the military focus on improvements again in SWaP-C, size, weight, power, and cost. Two U.S. aircraft program opportunities are currently reviewing this product for use.

All of the above-mentioned products are cost effective and relevant to current customer requirements based on our direct engagement with key customers and our own extensive knowledge of power and communication system requirements, and result in improvements to existing operational capabilities. We are delighted to announce that each will be fully on display at the upcoming 2012 Special Operations Forces Industry Conference May 22-24 in Tampa, Florida, home of the Special Ops Command and many of the early adopters to new and cutting-edge soldier technologies.

We know that we face some tough headwinds in the current U.S. government defense budget and political processes. We are expanding our aperture for opportunities by leveraging our core competencies in this space to pursue international markets. That appears to be gaining traction in both of our business units.

We also 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 U.S. military budgets and troop withdrawals that the expansion of our product offerings through close customer collaboration will lead to meaningful organic growth opportunities with both U.S. and international government defense customers, as well as those in our commercial markets.

Lastly, 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, we're continuing to make investments in our Shenzhen facility. As an update, we are now producing 100% of our newly-designed 1200 milli-amp powered 9 V lithium batteries in our China facility, leveraging our thin-cell capability to produce superior technical performance and longevity than other competing products.

As many of our products are assembled in OEM products before shipment to the end user, it only made sense to consolidate that product line in China where most of that assembly occurs.

Regarding our successful thionyl chloride lithium batteries, which are known for their high energy and long operational life, we are building on our strong technical performance and economic position by taking the next step in the automation to increase throughput and tighten manufacturing tolerances.

We look forward to leveraging our increasing competitive advantage in our China-produced thin cell, 9 V, and thionyl chloride products to grow our global opportunities in RFID toll road and tracking devices, safety and security OEM products, and in utility metering applications.

With regard to the financial outlook for 2012, as we stated in our last call, the magnitude and quality of our business opportunity funnels for both of our businesses continued to expand as a result of additional sales people and focus and in new product developments.

In the case of our Battery & Energy Products business, the increase in the opportunity funnel is largely the result of the new products the team has developed, increased global participation, and initial penetration into new commercial markets.

We are expecting flat to modest decline in revenue through the first half, driven by softness in the U.S. government defense business; however, we are forecasting acceleration of the growth rate in the latter part of the year, subject to the timing of actual orders and the ramp rates for the newly-introduced products.

In Communications Systems, the opportunity funnel has grown dramatically over the last 12 months, primarily as a result of strong technical positioning in a much broader range of projects driven by the addition of several very focused and experienced sales team members, which has increased our reach of military and defense customers to a global scale.

Despite a tough upcoming comparable to a nonrecurring set [time] shipment in Q2 2011, the continued high-activity level and broad participation in both domestic and international projects gives us good visibility to a strong rebound from 2011 and positive total year growth rates in 2012.

Therefore, with regard to the total Company financial outlook for 2012, although we are starting the year flat, we still see the path for year-over-year percentage revenue growth approaching double digits, while operating-income growth is expected to outpace revenue growth and generate an operating-margin rate of between 7% and 7.5%.

Our mission for 2012 continues to be straightforward, and that is to drive more consistent earnings performance and build sustainable growth momentum. As we execute on the business model adopted in 2011 for increased profitability, realign our manufacturing capacity for the current demand profile, and follow through on plans in place for new product development and sales coverage expansion, we expect these goals to be achievable in the coming year.

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

(Operator Instructions). Walter Nasdeo, Ardour Capital.

You talked a lot about the military and the developments that you're seeing there, and also some of the slowdown. Can you kind of give me a little bit of a breakdown right now on how the military to commercial sales are breaking out? And then, what do you expect to see kind of going forward?

Yes, I mean, generally speaking, when we look at Q1 for the total Company, we're about -- close to 70% G&D, 30% commercial.

In that, obviously Communications Systems is 100% G&D. Battery products is probably more like 60%/40% at this time. The commercial piece is growing, certainly.

When I look at it, you know, the other split you're most likely to ask for is, how does that look on a global scale? And what we're really seeing in Communications Systems is that they're getting roughly half of their business from the United States, but half of it from international markets. So whereas it's a G&D, pretty much, centric business, we're seeing significant growth opportunities outside the United States.

Okay. And then, you were talking about increasing inventory turns. What are you at now?

We're at approximately 3 turns right now, and under our lean initiatives, we look at that as totally unacceptable.

What is your goal, then?

Our goal is to add at least 2 more turns a year to that to get into the 5 to 6 range.

All right. Thanks a lot.

[Mike Sista], Sidoti & Company.

I just had a couple of quick questions for you. Regarding the DCAA charge of $2.7 million relating to the three exigent contracts, what was that for?

We had a contract in the 2003-2004 timeframe which is done -- as you're working in parallel to execution of the contract, you're still defining some of the commercial parameters.

There were some costs that went down, some costs that went up. We had the opportunity to ask for increased costs. We looked at it as a net sum zero type of situation and just kept moving forward trying to support our soldiers in harm's way.

In a post-audit when people looked at the charges, the things that went -- costs actually went down. There was an opportunity for us to recoup that for things that went up. We didn't necessarily do that, as by the rules that results in a shortfall and we owe the government some additional monies with that.

There's a -- they have a lot of tools at their disposal to try to enforce these types of contracts. We felt that we negotiated in very good faith to try to resolve it, and for something that has been around since 2003-2004 and recognizing that the U.S. government is one of our biggest customers, we felt it was prudent to settle it and we did it quickly at the beginning of last year.

So all those charges were then in the first quarter of last year?

Right, about $2.7 million.

Okay. Another question for you, regarding the MKM product, and I don't know if you've done it before or if you could, but just -- as far as thinking about this product, what's the typical price range that you're looking for? Is it a higher-margin product compared to the products already offered by you guys?

You know, we certainly, when we look at products, we look for the [overall] need. We look at the niche, and of course, we're looking for the opportunity to make a reasonable return.

In this project, in the design of the project, we tried to understand what was the strength of the market, and where did it make sense from an application standpoint.

So when you look at various forms of power, many times you look at it from a dollars per kilowatt hour type of perspective, and we try to target prices based on that fit.

Now, when you look at it as far as replacement for, say, [let] assets, in some cases, and in environments where you have a lot of geography, unconstrained space, and a high ability to go and maintain on a regular basis those products and perhaps not very high temperatures, sometimes the economics wouldn't necessarily look so favorable. [We would have] very sort of remote locations or places you don't want to do a lot of maintenance, either from access or from an availability of the equipment that is part of indoor, very high temperatures where lithium-ion products tend to perform very, very well, then those economics swing in the favor of lithium-ion.

So at this point, they're over $1,000 a kilowatt hour type of price range, and for selected applications, those are very competitive levels.

All right, thanks for the clarification, then.

Also touching on the B&E business segment that you guys had seen some softness in the first quarter, carryover from the fourth quarter. Just to recap, that's mainly attributable, then, to the budget uncertainty we're seeing out there, as well as the troop withdrawals?

Yes, and then, as we mentioned, we had a longstanding recurring contract that ended at the end of last year, and there was a significant portion of that that shipped in the third quarter of 2011 and did not repeat again this year.

Okay, and how much revenue did that contract generate in the first quarter of last year?

$4.0 million.

Okay. And then, just two other things I wanted to ask you about. With the accounts receivables, you guys did a job -- did a great job bringing that down this quarter. Should we expect it to kind of echo the movements that you anticipate in sales where it will probably decline in the second quarter again because you're expecting sales in the second quarter of either flat to modestly down, and then Accounts Receivable will kind of increase in the third and fourth quarters as sales approach that double-digit growth that you're highlighting?

That's one way of looking at it. The way we look at it internally, it's based on DSO, and what you're seeing is both sales driven, causing the reduction in DSO -- in the absolute receivable balance, as well as a marked improvement in day sales outstanding to very, very good levels.

Going forward, as we increase the international portion of the business, there will be a tendency for the DSO to climb. I'm not saying significantly because we're very, very cognizant of managing our cash, but nevertheless I would expect an increase in DSO based on normal sales terms.

Alright. And one other thing was the sales force that you guys have. I know that you've added to it over the last year. Are you still adding to that force at this point, or -- I know that the training is an ongoing thing, but is the force itself expanding anymore?

You know, at this point we're not increasing the overall number of people, but what we're doing, sales is a very Darwinian type of a profession.

It's variably compensated, there's an opportunity for people here to be very, very successful, both for the Company and for themselves personally with strong performance. And there's also times, though, that when you have bad fits, you need to move people on.

So at this point, most of the activities associated with understanding the people that make it and understanding the people that don't make it, and being very human respectful about it but moving those people on that don't make it and replacing those with people that we think have a better shot at it.

But the overall quantity of people that we're looking at is where we'd like it to be relative to the current revenue size. But as we continue to grow our business and create more bandwidth for penetrating new places, we would continue to add more feet on the street at that time.

Okay, and then just one thing, to cycle back with the B&E business segment. So the growth that we're projecting, then, through the rest of 2012 was based on the fact that this telematics contract will drop out because the first quarter is now behind us, as well as the fact that you've expanded on your product offering, as well as the traction you're building up in the international markets and these new commercial applications that you do have?

Exactly.

Okay, alright. Thanks a lot, guys. I really appreciate it.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

A couple of questions. Are you pretty much saying Ultralife's earnings are geared more to the second half of 2012 from the pipeline that you see?

That's correct. That's correct.

And what can you tell me about R&D going forward over the next several quarters? Is it going to tick up or is it going to remain somewhat flat from the first quarter?

Sam, I would expect it to stay flat to down, and we're really trying to look at that in the context of the overall revenue.

We have a number of, like as I mentioned, very exciting introductions that are happening in the month of May, and so some of these efforts will result in new opportunities, which will, of course, drive additional engineering requirements, but of the good kind, of the kind that you're looking at in terms of real transactions and shipping products to customers.

But we'll be looking very, very closely at the overall expenditures for R&D, selling expenses, as well as G&A, to make sure that the hard work we did last year isn't really reversed this year by overspending in some of those areas.

And can you tell us, on the MKM system that you recently shipped to a defense integrator, what was that particular order in terms of dollar value? And what could follow-up orders be, in what range or parameter?

We don't provide and we can't provide any individual details of this particular transaction, but generally speaking, the products list pricing order of magnitude are in the $3,000 to $5,000 range per large-format battery, depending on its size and capabilities.

When a customer buys even large quantities, we'll be well suited to rapidly deploy a number of these units, which could create a very substantial part of our ongoing revenue stream.

But at this point, the initial customers are making sure that the product does what it says it's going to do. There's an abundance of brochure-ware on large-format batteries, but when you really boil it away and you take it in-house and you do all the detailed testing that our customers require, there's actually very few people that have a commercially-viable product out there. So, we're very excited about this big first step in this product.

And the other question I wanted to ask is in terms of the Chinese operation. Many companies are bringing manufacturing somewhat -- or back to the U.S. Do you find your costs in China pretty much remain the same or lower than what they were six months ago?

Costs have a way of moving up, no matter where you are.

Part of being a world-class manufacturer is continued to drive productivity to your operations to offset those costs. The costs that we see in China increasing make strong headlines because of the percentages. Then when you look at the actual dollars, they're not that big.

Nevertheless, just because maybe you have a different starting point doesn't mean that we want to waste money in China, either. So, we're working as hard on lean improvements in China as we are in the United States.

Now that being said, when we decide a product wants to be in China versus the U.S., what we're really making the decision is not the USA versus China thing, but rather, where's my end user? Where's my market? And we're trying to be closest to the customer.

So, that's really driving our decision to be in China or the U.S. or the other place more than some of the things that may hit the headlines.

(Operator Instructions). It looks like we have no further questions in the queue. I would turn the call -- turn it back over to Mike with any closing and additional remarks.

Sure, thank you very much, and thank you, everyone, for joining us today for our first-quarter 2012 earnings call. Once again, we look forward to meeting up with several of you in person over the next week or so, and also to be sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much and have a great day.

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