Ultralife Corp (ULBI) 2012 Q2 法說會逐字稿

Welcome to the Ultralife second-quarter earnings call. Now for opening remarks and introductions, I would like to turn the call 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 second 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. Anyone who 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 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 cause 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 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 thanks to everyone for joining the call this morning. Today I will start by making some high-level observations about our second-quarter 2012 operating performance. Then I will turn the call over to Phil who will take you through the detailed financial results for the quarter. After Phil is finished, I will provide a progress report on each of our top 2012 priorities as well as our thoughts on the full-year financial outlook for 2012 before opening it up for questions.

In the second quarter of 2012, we had expected continued soft Battery & Energy Products demand and knew we were up against some difficult year-over-year comparisons. However, several communication systems transactions that were delayed into Q3 caused Q2 revenue to fall well below our internal forecast, leading to a disappointing result.

For Battery & Energy Products, in view of the challenging revenue comparison where we renew approximately $9 million of Q2 2011 revenue would not occur this year and had not been offset with new business, we aggressively addressed our manufacturing variances despite lower volume and achieved a 460 basis points improvement in gross margin from Q1 to 24.2% while total Company annualized COGS cost reductions year to date are approximately $3.5 million.

With respect to Comm Systems gross margin in Q2, our lower volume on the units shipped, unfavorable mix and a key customer concession to modify products shipped in prior years resulted in the lower gross margins reported. As an update on key contract awards, in the second quarter, we received an IDIQ award from DLA for chargers and radio power supplies that could be worth up to $9 million over the next five years with the potential for just under $1 million to be shipped in 2012. And very early in Q3, Comm Systems successfully negotiated a small SATCOM award valued at just over $3 million that will ship in 2012.

Given the anticipated revenue pressure due to uncertainty in government defense spending, we continued our rightsizing of the business operating infrastructure and our cost control efforts where we have had to make some very tough calls on some very good people and to reduce salaried headcount by almost 35% year-to-date. These reductions contributed to a 13% lower quarterly operating expense run rate and an annualized savings of approximately $4 million.

Also now that many of our new products are in the customer demo and testing phase and the majority of the (inaudible) new product development design work is behind us, we have throttled back spending levels by approximately 7% but will nevertheless continue the funding of new product development and other multigenerational product plans such that we maintain a healthy pipeline of new product flow.

Lastly though we don't talk about it much, I am pleased to say that our team has been very focused on cash management and to their credit despite a tough Q2, we ended the quarter with zero long-term debt and positive cash on hand of $4.2 million.

So in summary despite the current revenue challenges, our lean driven manufacturing productivity gains, operating expense control, and cash management discipline position us well to press on through the present difficult environment and provide us the opportunity for nice operating leverage as we return the total Company to topline revenue growth.

In a few minutes I will take you through where we stand on each of our top three priorities for 2012 but first I would like to ask Ultralife's CFO, Phil Fain, to take you through some additional details of our second-quarter 2012 financial results.

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

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

Consolidated revenues for the second quarter totaled $18.7 million, a 57% decline from the $43.1 million we recorded for the second quarter of 2011. Revenues from our Battery & Energy Products segment were $15.5 million, a decrease of $15.7 million or 50% from last year. $8.6 million of this variance is due to business that did not recur and consists of $4.6 million related to shipments to the DLA last year under the IDIQ contract awarded in September 2010 and $4 million related to the completion of the non-US portion of a Telematics battery contract in the second quarter of 2011. The remaining $7.1 million decrease is primarily attributable to a slower government and defense order rate for a chargeable and non-rechargeable battery and charger systems.

Communications Systems sales of $3.2 million decreased by $8.7 million or 73% from the prior year. $7.5 million of SATCOM shipments last year accounts for most of the year-over-year comparison. In addition, Communications Systems sales declined because of lower shipments of 20 watt amplifiers reflecting timing differences in orders for large international funded projects.

Our consolidated gross profit was $4.5 million compared to $11.6 million for the second quarter of 2011. As a percentage of total revenues, consolidated gross margin was 23.9% versus 26.8% for last year's second quarter, a decrease of 290 basis points. Gross margin for our Battery & Energy Products segment was 24.2%, a 100 basis point improvement over the 23.2% reported last year and a 460 basis point sequential improvement over the 19.6% recorded in the first quarter.

During the second quarter of 2012, we reduced the manufacturing variances experienced in our Newark operation in the first quarter by over $1.1 million and the actions in refinements we took in our operations to reduce scrap and right size labor and align production levels with demand eliminated those variances altogether in June.

For our Communication System segment, gross margin was 22.1% compared to 36.3% last year. The decline was the result of two factors. The first being sales mix, which included a much higher concentration of radio accessory products and the sale of some legacy products in the current period versus higher volumes of amplifiers and SATCOM units in the second quarter of 2011.

The second factor being the recording of a reserve to rework and upgrade in McDowell products requested by a strategically important customer for products it purchased in 2008. The latter accounted for almost 800 basis points or more than half of the overall decline in gross margin.

Operating expenses totaled $7.4 million, a reduction of $1.1 million or 13% from the $8.5 million for the 2011 period. The overall decreased from 2011 was the result of ongoing reductions in force, general and administrative spending cuts, lower sales commissions, and more focused R&D and new product spending.

Operating expenses for the second quarter included almost $300,000 relating to severance. As a percentage of revenue, operating expenses represented 39.6% compared to 19.8% a year ago.

Second-quarter non-cash operating expenses including depreciation and tangible asset amortization and stock compensation expenses amounted to $1.3 million, the same as the year earlier period. And adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense amounted to negative $1.6 million versus positive $4.4 million for the second quarter of 2011.

We incurred an operating loss of $2.9 million compared to an operating profit of $3.0 million for the same period in 2011. The 2012 loss was driven by the lower sales that I described earlier. Other expenses primarily comprised of foreign currency translation and interest expense amounted to $133,000 compared to $170,000 for the year earlier period. The year-over-year decrease resulted from lower interest expense as the outstanding revolver was substantially reduced in 2012.

Our second quarter tax provision of $0.2 million primarily reflects income taxes for our profitable China operation. Net loss from continuing operations was $3.2 million or $0.18 per share compared to net income of $2.8 million or $0.16 per share for the same period last year.

The Company's liquidity remains solid with cash of $4.2 million, an outstanding revolver draw of $357,000, net cash of $3.8 million, and a current ratio of 3.0. By comparison, the outstanding balance on a revolver at the end of the second quarter of 2011 was $3.7 million, net cash was $0.3 million, and the current ratio was $2.3 million. At present the outstanding draw on our revolver is zero.

While there is no doubt that we are disappointed with our second-quarter results, the actions we have taken to further streamline our manufacturing variances, enhance our flexibility to meet demand across our market portfolio, and increase inventory turns while maintaining tight cost controls should help drive our return to profitability in the second half.

We continue our attention on relentless execution of our top priorities. We believe that the improvements recently made and those to follow will generate strong incremental returns and revenue growth and will allow us to make progress towards achieving our interim goal of a 10% operating margin.

I will now turn it back to Mike.

Thanks, Phil. Restating once again our top three priorities for 2012 are, one, optimizing the Company's profitability; two, executing our growth game plan; and three, leveraging our China operations for global growth and improved cost competitiveness.

To improve our profitability, over the last 1 1/2 years, we have taken an outside-in approach by making adjustments to our portfolio such as the exit of Energy Services, RedBlack, and some legacy product lines as well as an inside-out approach where we immediately launched a Company-wide lean implementation and established our 30-5-5-10-10 business model. The numbers making up that business model essentially say that if we achieve 30% gross margins and spend 5% of revenue on new product development and R&D and 5% on selling expense with 10% on all other G&A expenses, we will achieve a 10% operating margin, our initial OM goal.

As stated earlier, our recent activities have been focused on realizing our standard gross margin targets by adjusting our manufacturing infrastructures to current revenue realities which have shown progress to date at Battery & Energy Products. The gross margin improvement activities with a mindful eye to sales and operations planning for better inventory efficiency are becoming an integral part of our weekly business operating rhythm.

While we are pleased with the quarter to quarter sequential improvement in Q2 gross margin at Battery & Energy Products, we were disappointed with the gross margins at Comm Systems and have put in place mechanisms to drive gross margin improvement in both businesses through the remainder of the year.

It should also be noted that we recently brought on board a seasoned business veteran in the newly created role of Vice President of Finance for Communications Systems. He will not only have financial controllership and FP&A responsibilities but will also add significant multifunctional operational experience that will better focus our margin improvement efforts and enable the executive and sales leadership to spend more time out working with customers to help drive our revenue realization goals.

Regarding our new product development and selling expense allocations, as stated earlier, we are starting to trim back on some of the R&D expenses as new products are completed. We will also show some reduction in selling expenses as we pass through a skill set and performance-driven initial round of salespeople churn. However, any reduction here should be viewed as temporary as we still need to achieve a net increase in the number of feet on the street to fully serve our customers' application needs and achieve our revenue growth applications.

Turning to an update on the priority of executing our growth game plan, I am pleased to announce that after a six-month search we hired in June another proven business executive with an expertise in creating salesforce excellence to service as the Corporate Executive Vice President of Global Sales reporting directly to meet you.

It had become clear to me as we were driving the cultural transformation from essentially being a contract manufacturer to the US government defense industry to an agile new product innovation driven company including new products tech development execution, prototype to production manufacturing transitions, and go to market capabilities focused on both commercial as well as government and defense market segments that we had some key experience and skill set gaps.

In another lesson learned, I view that our present year results have been challenged by the transition of some of our strongest rainmakers from individual contributors to sales leaders, something that I had implemented as we had added feet on the street. I look forward to the time-validated sales force productivity improvement processes and discipline that the new Executive Vice President of Global Sales will bring as well as to getting our key rainmakers and industry experts back to playing offense by being out meeting with our customers.

In another action recently taken, we have engaged an outside firm with expertise in accelerating new product innovation impact to the revenue streams to help us more efficiently target our new product value propositions to the most attractive and receptive end-user customers. The initial deep dive activities are well underway in conjunction with our annual strategic planning cycle which we typically complete by the fall.

Looking at the status of our new products, in the first half of 2012, we completed seven full site demonstrations of the patent pending Ultralife GenSet Eliminator at locations in the United States, Europe, and Asia. For the second half, we have an equal number of demonstrations scheduled with a heavy focus on international and US military applications and including the US Military Network Integration Evaluation 13.1 at Fort Bliss, Texas in October and November of this year.

From our customer downloads, we have learned that they like the GSE silent operation capability and no heat signature, the reduction in fuel and maintenance required of a coupled generators, the renewable source integration possibilities particularly with solar, and that it provides usage monitoring and recording that will facilitate smarter energy consumption and remote location applications.

In terms of the specific status of the GSE in the US military's process, we are currently pursuing the formal safety assessment report or SAR to be completed in conjunction with the CERDEC -- excuse me -- it's completing in conjunction with CERDEC and the safety release from the Army testing and evaluation command at the Aberdeen proving grounds by mid-September. After these tests and reports are approved, units can officially be used by our soldiers, which is a key milestone positively impacting our ability to get orders from the US military as they can then procure and deploy as desired.

In parallel to the GSE activities in the United States, we also have several pending order opportunities for small initial quantity purchases this year at various sites in Europe, South America, and the Far East. In each case, the likely sequence of events would be small quantity purchases and final customer evaluations followed by minor spec adjustments, then larger quality purchases.

Regarding the GSE product variation which we call the manned portable power system or MPPS, which consists of ruggedized single man portable gear and the multi-kilowatt module or MKM, which is a large format rechargeable battery, we are in advanced discussions stages with customers in Europe and the Middle East for initial orders. Some of the projects are for the military applications while others are for commercial applications in conjunction with generator OEMs.

And again in a process similar to what we are seeing with the GSE, demos are expected to be filed by small quantity initial purchases for customer validation. Then if they like what they experience, they tell us that opportunities for dozens or hundreds could follow.

Since this is a lengthy process and now that we have a pretty good handle on what the final specifications are to include, we are increasing the build plan for demo units for the GSE, MPPS, and MKM products. This will enable us to be more responsive to the growing list of interested parties looking for demo units and also allow us to reduce cycle times for orders fulfillment as people firm up their actual purchase needs.

Strategically the GSE, MPPS and MKM new products are an important component of our organic growth plan and our gestation cycle remains on track. While we are very encouraged by the breadth and depth of interest we have received given a long sales and procurement cycles of both our military and commercial customers for both -- for brand-new products such as these and our desire to get it right the first time without any false starts, we do expect that we would be into 2013 before we see any order quantities that would materially impact our revenue stream.

Looking at our recently introduced new half-size 5390 [primary] battery, which delivers similar energy as the currently used products yet with one-half the size and weight, we have successfully completed both UN and SAR testing and are receiving initial small quantity orders from the military. We also expected the half-size rechargeable 2590 battery, UN and SAR testing, will be completed sometime in August.

As a side note, the half-size 5390 battery, the new full-sized 5390 battery and our half-size 2590 battery will all be used in the upcoming NIE, giving them broad exposure to potential end-users.

For the thin-to-body conformal battery, we have a prototype hard version which will be built in UN and SAR tests for CERDEC contract in December 2012, can be ready for volume sales in January 2013. Significant interest in this product has been seen from the United States, United Kingdom, and Australian militaries. A flexible version will be under consideration next.

As an update to our three new Communications System product development efforts, which are focused on vehicle and manned portable systems and equipment supporting multiple radio configurations, we have shipped demo units of our new lightweight portable amplification system, or LPAS, to two different international customers.

As you may recall, the LPAS system utilizes our very successful A320 amplifier in an interchange -- in an integrated rechargeable power supply, which allows for either dismounted or vehicle operations using AC/DC or battery power and will support over 11 different radio configurations. Contracts for higher volume purchases will follow customer testing and are expected in late 2012 with shipments to start in 2013 to take place over several years.

Regarding our new handheld vehicle adapter or HVA, which enables the operator to use the same radio in the vehicle or doing during the dismounted operations for commercial or military vehicles and while supporting over 16 different radio configurations, we have broad and specific project interest in the new product from Asia, the Middle East, and the Americas primarily in the special operations forces. Initial orders and shipments are expected in 2013.

Lastly, our new satellite radio combiner product, which enables simultaneous transmission and reception of any two military UHF satellite radio channels is already in production with initial customer small quantity testing expected in Q3 with firm orders to follow later in 2012 and into 2013.

In summary, regarding our new product development efforts, in each case we are progressing through the necessary yet slow customer technical qualification and procurement processes and at the same time, we have been very pleased with the reception of the new products and the small number of design setbacks along the away. We are confident in our new product development direction and with a new Executive Vice President of Sales assertively upgrading our sales processes and talent, an outside company expert helping us better target our new products and fine-tune our value propositions, and deliberately getting our executives out more talking to customers, we feel we have the right pieces coming together to achieve our mid- and long-term organic growth objectives.

As we look at our last 2012 priority and that is to leverage our China operations for global commercial business growth and improve cost competitiveness, the positive story continues. In the second quarter, our China operations saw revenue increase at 6% with improving gross margins and operating expense control driving operating margin to 8.3%, a solid increase from the prior year.

The largest part of Ultralife China's growth is coming from within China from electric metering customers buying our vinyl chloride lithium batteries, which are known for their high energy and long operational life and manufacture their own facility in China. As I mentioned in our previous call, we are making small investments in our facility at Shenzhen to significantly improve manufacturing productivity for achieving larger volumes and tighten manufacturing [tolerances] that we feel are necessary to take our product successful in the local China market to the global electric metering markets.

I just returned from a visit to China last week to view our progress and I am pleased to report that we are already producing parts and expect the project to be fully completed by the end of August. Accordingly, we are currently developing plans for expanding our reach beyond China for this product line and to more fully leveraged upcoming similar projects for our existing high-capacity 9-volt product now also manufactured by Ultralife China.

Next steps after completing the final vinyl chloride and 9-volt product manufacturing productivity projects will be to further advance to a more meaningful revenue stream in our thin cell-based products for emerging global growth opportunities and RFID (inaudible) tracking devices and safety and security OEM products.

Our China team continues to perform well and we look forward to rapidly growing their contribution to our overall commercial revenue growth game plan.

With regard to the financial outlook for 2012, we are still bullish on the pending business opportunity funnels, particularly in Comm Systems in China and the market opportunities we are pursuing based on our new product pipeline across the Company. However, the continued slowdown in B&E has made achieving revenue growth and profitability difficult and the uncertainty in the overall market and government defense spending has led us to approach the remainder of the year with caution.

In Communication Systems, which has been in the past and is expected to be in the future a lumpy sales revenue business, the maturing opportunity funnel and continued high activity level in both domestic and international funded projects leads us to expect that our total 2012 revenue to increase by a high single to low double-digit rate over 2011.

In Ultralife China, based on the projected upcoming order flow and recent track record, we expect to achieve a double-digit 2012 annual revenue growth rate.

With Battery & Energy Products down 36% year-to-date and a lack of a meaningful revenue catalyst to suggest any change in trajectory in the very near term, we anticipate a total year decline in the Battery & Energy Products revenue in the range of 35%. Given its size relative to the overall Company, this decline when combined with the other business units would lead to an overall Company total year revenue decline of between 20% and 30%.

With respect to operating profit, we expect to return to profitability for the last half of the year though not at the magnitude capable of offsetting the operating losses in the first two quarters of the year. We estimate an operating margin for the second half of the year to be in the low to mid-single digit range.

Our mission for the remainder of 2012 is clear. That is to quickly drive return to total Company profitability despite current marketing conditions. It is also imperative that we continue to drive productivity as much in our sales operations as we do in our manufacturing operations.

Lastly, that we leverage those sales and manufacturing productivity gains to shore up our core businesses so that the new growth opportunities brought on by our exciting new products truly result in a net increase in the total Company's topline growth curve. With smart, focused, and hard work, we expect these goals to be achievable in the coming quarters.

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

(Operator Instructions). Walter Nasdeo, Ardour Capital.

Thank you. Good morning. I need a little help here. We are looking for revenue to drop 20% to 30% year-over-year. The outlook, we are looking for a number of these products, these new products to start bringing in some sort of significant or at least a meaningful revenue early next year.

Mike, listening to your kind of list of new products that are in the pipeline, I'm having a hard time kind of honing in on really what are you going to hang your hat on? What's going to kind of be the standard bearer for the Company so when we talk about the Company, we really like the 5690 or whatever as we did in the past. What are we going to be talking about in six months as far as what your Company is or what you want it to be going forward?

Walter, that's a very good question. With a number of the new products, as we have gone through the development cycle and received a ton of customer feedback, had an iterative design process and now we literally have demos all over the place from the small individual batteries to the large Integrated Systems like the GSE, the multi-kilowatt modules. Even as people have seen some of our large-format batteries, they've come up with new ideas.

But to the extent of their brand-new products everybody's really excited about it but they really want to kick the tires pretty hard. So we are seeing small quantity orders like I mentioned and sometimes it's one, it's two. Sometimes it's eight and every one of those behind it they say because I have the need for maybe 100 or 200. We are not certainly putting all of our eggs into one basket but when you take a look at where we currently sell, a larger portion of that obviously historically has been government defense either directly to the US military or to OEM prime contractors.

In the case of that market, there has been a strong call for lighter weight higher power better capacity type batteries and we know that the existing military coffers are filled with a lot of the old technologies and so it's going to take a little bit of time for that inventory to be burned down, our new products to be tested. But as we go onward, we really believe that the half-size and new configured batteries will become a very strong component of what we sell to the US military directly.

Relative to the commercial space, historically our commercial space has been for all intents and purposes a 9-volt business in safety and security, some medical device stuff that we do for the most part on the radar and then a telematics business. And if you take it apart by its pieces, we just put in a brand-new product line for a 9-volt, a better performing from a technical standpoint, I think a better constructed battery. We have done a major transformation of that product to China. That still represents a pretty big chunk of our revenue stream. It's up to -- it's close to 20% of the total of B&E product line.

So I think you will continue to see in the commercial space in the safety and security a 9-volt business. The medical products, a lot of those medical products and things that we are really working at tend to be in the form of super cells, so it sort of leveraging what we have an existing 5390 installed base type experience records and combined with some of the technologies and battery management systems that we are working with with some of our MKM products. And so I think that you see going forward derivatives of those types of products really supporting a medical devices business.

And then the third piece historically in our commercial base has been telematics. Even the fact that we hate -- the reality of the fact that some of these contracts have gone away and the revenue streams have dropped down as a result of that, they weren't hugely profitable for us, so sort of a bittersweet loss to have some of these contracts go away. What we're looking to replace that revenue stream with would be some of our energy storage type product revenue streams from large format or GSE as the case may be.

We believe there is a pretty long runway in terms of metering. We are showing pretty good success in a very difficult China market and with the things we talked about in terms of some of the tooling we put in place in China, we think that has legs on a global scale. And we really haven't even begun to scratch the surface in terms of thin cells.

So if I looked at how are we trying to approach it, we are not trying to be everything to everyone but we are trying to do better in our core US government defense industry and expand some of that presence on a global scale. We are trying to shore up our safety and security leg and be stronger in our medical area and continue to grow that. And then last but not least and probably in the newest area is really create an energy storage and electric metering sort of leg where we take advantage of some of the needs that we identify in the market there.

So it's hard to follow all this, I know and what we are most excited about the fact is that we are so many brand-new products that we are actually going to go to talk to customers about but we tend to think of our growth opportunities in those buckets -- US government and defense, global and domestically, safety and security and medical, and energy, storage and electric metering.

All right, thanks. You mentioned increasing inventory turns. What are they at now and what is your goal going forward?

Walter, right now we are at between 3.25 and 3.4. Our goal going forward is to get that in the 8 to 10 range for the types of business that we have. And we have -- of course we have our dedicated leader in the lean process that has gotten a lot of the production-related improvements, the lower hanging fruit well underway with the benefits reaped to this point and the focus is now on -- clearly on the S&OP system which will specifically drive inventory reduction. And we have seen a lot of good activity in the last month converting raw materials to finished goods and that full-court press will certainly go on. We're looking -- we're treating -- the goal is to treat inventory as we do our accounts receivables.

Got you. I see that -- you are really driving costs down and that is obviously commendable. What are you anticipating your cash burn to be for the rest of the year?

Our cash burn based on -- if I compare cash in versus cash out, our goal is not to burn cash. We are going to be in periods where there's going to be timing differences, where we are going to be drawn upon our revolver, but not to any great magnitude. And of course this is driven by revenues, the revenue forecast, but we manage our cash very, very -- certainly with great diligence and I can assure the investment community that there has been no deterioration in either DSL or DPO. We are very much on top of that but I would think that at this point that the cash burn would be minimal.

Thanks a lot, guys. I appreciate it.

Mike Cykos, Sidoti & Company.

Just a question for you. First coming off I guess the speaker before me from Ardour Capital. Mike, when you were answering his question about the runway you are seeing in China, you had mentioned it was a difficult Chinese market. Is that because of competition you are seeing or why -- I guess if you could just provide some more color on that?

Is a lot of layers, supply chain, a difficult pay cycle. Sometimes you have very extended payment terms. There is a very strong culture of getting the lowest price. I would say just your normal competitive dynamics, nothing real insightful other than we know a lot of our competition has really long payment terms and we know that sometimes people will be opportunistic in terms of pricing.

So we are trying to really sell that when it comes down to reliability and provability and performance, those are important and to try to maintain more global standards for some of the commercial attributes in our transactions.

Also for operating cash flow in 2012, I guess with the sales you expect to see coming in, would we expect you guys to be seeing a cash outflow based on working capital?

No, we expect to be cash-positive this year.

Okay, and also with the projects that you mentioned in your prepared remarks, I want to make sure that I have this right. So we are saying there are radio power supplies contract for up to $9 million over the next five years with roughly $1 million to ship in 2012 as well as a commercial order. I'm sorry, for a Communications System order for $3 million, a SATCOM award that will ship during 2012. Is that correct?

But two different transactions.

Excuse me?

Yes, that's correct. There's the IDIQ, which they have to release specific purchase orders against and as we are being told right now, there could be up to the amount of money I mentioned in my prepared remarks that would be needed to be shipped for this year, the whole life of the contract to be over five years as they usually are. And then separate to that, Communications Systems has a firm contract award for a small SATCOM amount of business that will ship in 2012.

Okay, in your -- I guess with the sales that we saw in the second quarter versus your outlook for the remainder of 2012, does the remainder of 2012 include I guess the orders that you saw pushed out from the second quarter?

Yes, yes. What we have seen is that generally an overall slowdown and things sliding to the right. So as much as I would like to think that everything that happened in Q2 -- that we expected to happen in Q2 now is in Q3 plus everything we also thought was going to happen in Q3 will still happen in Q3, in my year and a half here, I have found that that is not usually the case. So that's why the things tended to slide right overall.

Okay, then my last question was more just sort of housekeeping item. You had also said that your Chinese operations during this quarter saw an operating margin of 8.3%. What was it a year ago?

It was slightly under breakeven.

Okay, all right. Thanks a lot, guys. I appreciate it.

Will Nasgovitz, Heartland Advisors.

Good morning, can you hear me? Can you remind me what your guidance was for this year coming -- post your Q1 release?

We said based on the number of large projects we saw in the pipeline, I believe we had said that we're still approaching double digits and that operating margins between 7% and 7.5%

So that was in early May?

Whatever that call was, correct. And it was --

I guess I'm just trying to understand the why not preannounce? This is as dramatic ramp down and your guidance is not?

As we look into guidance, we try to deal with the most current information we have and especially in the case of Comm Systems, where there is some lumpy type projects, things can move pretty quickly one way or the other and so we never tried to certainly withhold information that we have at hand. We also try to get the most current information we have.

We've done -- I think we have been as transparent as we can be with trying to communicate in a timely fashion the best information that we have at the time.

Let's stick with Comm Systems. I think it was in last quarterly call if I'm reading my notes here or this correctly, I think your quote was the opportunity funnel has grown dramatically for this business. It doesn't appear to be the case given where revenues are through the first half of the year. Can you just elaborate? I know you talk about a lot of products there. What is really going to be the big driver for that business in the second half and into 2013?

One of the things we've done to that salesforce that is different in the past -- there was in the past a lot of chasing of smaller type projects and individual amplifier opportunities and only the ability to focus on maybe one major prime at a time. And we made the conscious effort over the last year or so to bring on a number of program level guys to help us position ourselves in more of those projects so we weren't so dependent upon that single project we were working on hitting or not hitting.

As a result of that, we have a number of different OEM prime type engagements that we are involved in and certainly those represent large dollar value transactions for us and everything that we're being told is -- our position is very strong. A lot of these projects are funded but as you see from some of the mega-OEMs, they are seeing the same dynamic. A lot of those products are slowing down and they are moving right for them.

So our positions with those OEMs are strong. Our competitiveness is strong. It's not just a single project we are talking about but as the overall landscape of the those megaprojects moves right for the reasons we are all well aware of, that has had a negative impact on our ability to close them and ship them.

Let me try to really try to understand the salesforce dynamic. If I'm not mistaken and perhaps I might be a little inaccurate, but I think you're salesforce has doubled over the last year and you gave some color on some of the changes in the structure. You mentioned two new hires. Can you just elaborate on their pedigree and how long they have been with Ultralife here?

The two new hires I mentioned in my prepared remarks was the first one was a Vice President of Finance for Communications Systems, and his background, he as large multinational experience, a very, very strong pedigree in the financial area, but has also had a lot of multifunctional P&L type experience. And so in that hire we were really aimed at trying to strengthen the overall operational backbone of a small Company, Comm Systems. While we think we had better capability to look around corners from a financial perspective, we also wanted someone could help the team overall in terms of operations, so we could get some of the industry experts that we have in that team more focused on the front end and some of their revenue realization targets that we have in the marketplace. I think we have accomplished that.

He has been there now for a couple of months. He's got thick skin. This is not a game for the meek and the timid. I think having a person like that on board is extremely helpful.

The salesperson that we brought on the board for the overall Company has to directly report to me. We refer to that as Executive Vice President of Global Sales, and we really were looking for someone that had strong I'll call it sales operating chops -- sort of like a Chief Operating Officer of Sales. We had a very good but small company mindset of a couple really, really strong rainmakers but not necessarily a lot of detailed methodical processes.

And as we have higher aspirations for more rapid growth, we needed to move into a more rigorous methodical approach to sales and we brought this person on board after a lengthy search and as we receive the candidates, you normally have a slate of a small number of candidates, we had someone that really, really stuck out and we're just delighted to have him on board. He comes from a background of working with a large company environment, meaning he's got access to the processes and the expectations of very successful companies but he has also worked for small companies within those large companies, which gives him them the understanding and the experience of having to do a whole lot with not a lot of extra resources.

So we think he is a very good fit for that and he has been very active. He's been on board for a little over a month now and I'm just very excited about the impact he will make.

I'll look forward to seeing the results going forward. Just on the updated guidance, then, if I recall correctly, it was second half operating margins, low to mid single digits. We have had two successive quarters of operating losses. If I'm not mistaken you did about 4.4% operating margin in the third quarter. Do you anticipate being above that here in the current quarter or can you provide any more detail on that?

We do not give quarterly guidance. For the second half of the year, we, just as Mike said, we expect operating margin to be still in the single -- low to mid single digits. That is driven, Will, by the improvements that we made in gross margins on the Battery & Energy side by reducing the manufacturing variances and taking the issues that we experienced in the first quarter and into the second quarter, taking those out of the equations with solid solutions.

On the Comm Systems side, it's clearly mix. The projects, the funded projects that did slip to the right were the higher margin 20 watts -- 20 watt projects.

Then it's a matter of getting the gross margins up through the work that has been done and complete focus on operating expenses. You will see the 7.4 in Q2 and I did mention that $300,000 of that approximately $300,000 of that was severance. So easy math to figure out going forward that we are talking in the $7 million, $7.0 million range on a go forward basis for operating expenses.

Okay, thanks. Mike, you and your team have done a nice job recognizing that the energy business wasn't a strategic fit. Can you just elaborate on what's the synergies between Battery & Energy Products and Communication Systems?

From a product standpoint it's actually very little. You know, we intersect a lot of the military branches and particularly as we are pursuing global markets, it doesn't make sense for us to have necessarily two different sales teams calling on the same international customer. But from a product standpoint, there's a very limited amount of overlap. It's more in terms of the fact that we are calling on the same military service branches in many cases.

Okay, thanks for your time.

Gary Siperstein, Eliott Rose Asset Management.

Good morning. Just a few questions. First on Phil's side. You mentioned, Phil, in the OpEx, the $300,000 from severance, so we did $2.9 million operating loss for the quarter with that severance. I'm not sure if I heard accurately but the fix for the legacy product from a big customer that you did, did that expense come in the quarter or is it in the third quarter?

We took the reserve on this in Q2, Gary.

And how much was that?

By the math we mentioned 800 basis points. You can calculate that to be approximately $250,000.

Okay, was there anything else one time in the quarter so that gets the operating loss down to those two factors, down to $2.3 million from $2.9 million. Was there anything else in the quarter one time?

Nothing really to speak of. Maybe $100,000 or something in that range. You like to call those one time but there's -- one-time recurring events.

Okay, so that gets you close to about $2 million loss on $18 million. So with some of the manufacturing improvements, I guess I could do the math but where do you figure the breakeven is now?

The breakeven is at $26 million. That's based on -- it's a forecasted estimated number. It's not -- there's always mix and there's always other factors that may be involved. Gary, I do want to point out that the number 18 months ago was $40 million breakeven.

Okay, super, but we are still lagging behind the sales, right? But we are getting there. Also obviously with the lower sales, I would not expect a bigger -- any big drop in inventory. But can you give us some color on that inventory being sort of flattish year-over-year? First of all, I guess is it clean, is it clean and good stuff?

From where I sit, one of the items that I have to manage very, very closely is all aspects of the balance sheet. The balance sheet as it sits right now, whether it be receivables, whether it be inventory, whether it be other assets, other liabilities is very, very clean. And it is not only my opinion on that because certainly there's always subjectivity when you are looking at inventory but on a quarterly basis, we have our external accountants go through the inventory in detail. We feel that we have dealt with any significant issues in the past. So the balance sheet as far as I am concerned is quite clean.

The issue that we face, Gary, is when your expectations are that you were going to be closing certain funded projects on such and such a date and it slips, you have already made the inventory buy -- you have already produced in large part that inventory. So the reason why the inventory is flat or in some respects in some categories up a bit is simply because it's based on the timing of when the sale is actually going to close and when it's going to ship.

With S&OP, and we are making great progress in that, the focus then becomes on the piece of -- the key piece in S&OP is the raw materials, so the focus now is on converting the raw materials, drawing the raw materials down to a lower level and then being very, very cautious in your buy of the raw materials by tying it directly to the demand process.

Sure. Understood. And in light of things pushing to the right, lesson learned, right? Fool me once, shame on you. Fool me twice, shame on me. So with that start, regardless of your forecast from improving revenues in the back half of the year, we are going to see them moving down closer to the lower level, which would be applicable to the lower level of revenues even after the uptick you hope for in the back half?

That certainly is my goal and my intention because with $30 million plus of inventory, I look at where the biggest opportunity for drawing cash in the business comes from and that is more diligent and more prudent management of the inventory.

Okay, super. What would be an expectation there, Phil? Can you bring it down in the back half by about $5 ml?

I would certainly hope so and I'm certainly striving for that but then again, it's based on what needs to be delivered in the first quarter or maybe in the second quarter and dealing with lead times. There's a lot -- I am not making excuses. I am just going through the realities of the different dynamics that are pulling and tugging away, but it's clearly raw material and management.

Then to any other, again I heard you earlier about that breakeven coming down substantially from $40 million a quarter to $26 million a quarter, so you have probably got all the low hanging fruit. Is there anything else? How about your facility in Newark? Don't you have 250,000 square feet? Can some of that -- I know it's Newark but can some of that be subleased or can anything be sold off there?

It certainly can and we used to say we look under every rock and we're certainly looking under every pebble. If there's an opportunity, I can assure you that we are on it. The cost of being in this facility is relatively low. It's just the cost of the utilities and the cost of the property taxes but nevertheless, it is an opportunity and there is a lot of moving going around, going on now in this facility not only based on lean but recognizing different types of opportunities.

Okay, again just for clarification, so there might be a way to reduce your footprint within the facility and possibly lease out some of the space?

There is that possibility.

And does that exist in China as well? Don't you have over 100,000 square feet there or more?

You know, I don't think there's a huge opportunity for that, Gary. We actually looked at for various reasons even other facilities in China and what we realized that the benefit we were going to get by improving what we have in our existing facility was going to far outweigh the turmoil moving to a smaller facility or a different facility and sort of starting from scratch.

But I would expect -- we are trying to do doubles in China. We are looking at -- they're showing nice double-digit growth but still single-digit millions type of business. We are really trying to make that business double every two to three year business and to that extent, we are not buying any more bricks and mortar for that facility but trying to be more efficient within the facility that we have.

And do we own that or lease that?

That's leased.

That's leased but we own in Newark?

Yes.

And then, Mike, to the few questioners ago, a gentleman asked you about where -- which product area are we going to get the oomph from. And you went over a lot of stuff again subsequent to the lot of stuff you went over in your prepared remarks. So is it right to assume that we get a lot of seeds planted in a lot of different specific industries or product lines if you will and multiple products within each and you actually don't know at this point which one is going to be the one we are going to lay our hat on?

We will see as you do these demos and feed all these different accounts, we will see which one germinates. Is that it? We just don't know for sure yet?

I may not have done a very good job of answering that question, so let me try it in a different way. One of the things that I thought when I first got here was constraining our overall growth is that we weren't doing anything until we had a contract or a spec. And then when we did decide to look at new products that we were going to go after, there was like 50 or 60 items on each business' list so you don't get anywhere, right?

And so we believe that we took in each of the businesses with a pretty well-informed debate, a handful of new products in each business, maybe it's three or four in the Comm Systems, maybe it's five or six in the Battery & Energy Products. And so we are betting on those four or five, five or six type products in each of those businesses for our new product development growth.

Within those, the large-format Battery and B&E seems to have applications all over the place. If I do it as individual component, I can do it as an MKN where I can do it on the super cells of subcomponents of it. Or if a customer just wants me to do it all for him, I can provide it as a GSE.

So I think that -- I look at sort of the large-format battery GSE area as an opportunity for significant growth on the global scale. The half size batteries that we're doing for the military, I just think that's a logical progression of the lifecycle of that product and the need by the military.

The third leg of it are sort of new cells and we look at that in terms of electric metering. There are other ways we can work closely with either a medical customer or a metering customer to design a brand-new cell for their application that makes them more competitive and creates great stickiness for me.

But when I look at those things, I look at the large-format batteries. I look at the military as more replacement plus some upside and then opportunistically some of the individual cells we're working on including think cells.

I don't know if that helps at all but we are not putting all their eggs in one basket but we certainly aren't sitting back and waiting to be given an order before we start nor are we going after 50 things at once just so we don't get criticized for not doing a particular item. We are trying to really focus on things that make sense.

And then lastly, one of the reasons why I have engaged an outside firm is that there's a lot of blue sky out there and we know we have a strong value proposition for pursuing different opportunities with different customers but we are not naive to know that we don't have necessarily the world-class marketing operation that some much larger companies have.

So we are going out and buying that expertise so that the precious financial human resource that we apply to new product development, when those products get over the finish line that we are selling them in the right places to sell them and not just throwing them up against the wall and hope they sell.

Okay, that's helpful. Mike, to the questions about the sales force, so I guess the hope six, 12 months ago was as we double or triple the salesforce, that it results in sales. So is it -- was it we had the wrong people or was it we were all selling to the government that wasn't giving any one orders?

And I know you've tweaked it along the way, some people haven't worked out, you've let go. Some people haven't sold anything, you've let go. You brought in new people so it's a process and I see you bringing on this VP of worldwide sales. Is it really a need to just do more focus on the commercial side where at least even with things moving to the right, there could ultimately be a decision?

I think those are all very valid points, Gary. If it was one thing in particular, it would already be fixed, right? I would never say, gee, you would think -- it would even be n a lot worse if we hadn't done what we did. I would never say something like that. I think that as we have rebuilt our salesforce, we got a really good look at what we had and what we thought we had. We had said all along that as we brought on new salespeople that it would be somewhat of a Darwinian approach and I think that we have been true to form in that.

Some of the people that are in our salesforce today are some of the brand-new people we brought in. Some of the people that are no longer here today are people that were with us for a long time.

So I think that we continue to get better and we are not in an environment where if you look at the sales attributes you look for in our space, hopefully they have industry experience, hopefully they are really good closers, so to speak, and that they have strong technical capability. Trying to find all three of those things in the same person for Battery or Comm Systems as the case would be, is very difficult.

In more robust times you can get by with maybe only having one or two of those attributes but in today's world, I can't afford to have three people going to call on a customer. So we are really looking closely at the people we have trying to make sure we have the right people and then giving them better tools to go do their job.

So its work in progress. I'm very, very excited about the new EVP of Global Sales. We are all in sales and it's just really nice to have a full-time quarterback that's focused on the process as much as individual transactions.

Okay, that's helpful. Thank you, Mike. Just finally just my opinion, I think Will at Heartland sort of asked this as well. Actually maybe it's separate from guidance, but I think it would be helpful being a smaller company. you saved a lot for the conference call but as they are happening I think I noticed the government Registry 30 days ago or 45 days ago about the $9 million order. Maybe you didn't have all the i's and t's dotted or the color on the delivery schedule but I think more timely releases of information to the Street so we sort of get a sense of what's going on intraquarter.

And on the new hires, most public companies make releases about the new hires, talk about the last three places they worked. We even know where they went to school, whether they have advanced degrees, so I think all of that stuff would help instead of lumping it all into the conference call.

And then last for -- again to the back half of the year, you talked about being profitable for the back half. Should we expect a nominal loss for the third quarter and all the earnings to make the back half profitable in Q4 based on where you guys stand right now in August?

As we don't provide quarterly guidance, I can't respond specifically, but it's never the intent to play to a loss in any quarter.

Okay, good enough. Thanks, guys.

(Operator Instructions). Thank you. Mr. Popielec, I will turn the conference back to you.

Okay. Thank you all for joining us for our second-quarter 2012 earnings call. Once again I look forward to meeting up with several of you in person over the next week or so and of course just sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much for participating.

That concludes today's conference. You may now disconnect.