Ultralife Corp (ULBI) 2014 Q4 法說會逐字稿

Good day and welcome to the Ultralife Corporation fourth-quarter 2014 earnings release conference call. At this time for opening remarks and introductions I'd like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Jamie, and good morning everyone. This is Jody Burfening LHA.

Thank you for joining us for the Ultralife Corporation's earnings conference call for the fourth quarter of fiscal 2014. 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 at www.ultralifecorp.com where you will find the release under investor news in the Investor Relations section.

Before turning the call over to management I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include potential reductions in US military spending, uncertain global economic conditions and acceptance of the Company's new products on a global basis.

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 differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures.

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

Good morning Jody and thank you everyone for joining the call this morning. Today I'll start by making some overall comments about our fourth-quarter and total year 2014 operating performance, then I'll turn the call over to Phil who will take you through the detailed financial results. After Phil has finished I'll provide an update on the progress against our 2014 revenue initiatives then talk about focus areas for 2015 before opening up for questions.

For the fourth quarter of 2014, we were pleased to return the total Company to quarterly profitability and generate an operating profit of $1 million on revenues of $19.9 million for an operating margin of 5%. Continuing the trend from the third quarter commercial revenues for our battery & energy products business increased 47% year over year driven in large part by battery pack sales to global manufacturers of medical devices for respiratory applications in medical carts and for 9 volt sales to manufacturers of safety and security devices such as smoke detectors. This more than offset a 24% decline in B&E government defense revenues and led to year-over-year B&E quarterly revenue growth of 6%.

In our communications systems business slower demand for amplifiers for government defense tactical communications drove revenues down 26% year over year which led to a total Company revenue decline of approximately 1% year over year. Also noteworthy in Q4 2014 was a solid increase in gross margins of each business. Driven by a higher mix of promotional products and overall volume leverage for our B&E segment and a favorable mix of new products for our communication systems unit the total Company gross margins improved 400 basis points year over year to 31.7%.

Looking at the total year, we demonstrated the solid operating leverage potential to be realized with even modest top-line growth. Our battery & energy products investments in new products aimed at diversifying the customer base more into commercial and international markets enabled the business unit to be profitable for the year.

Total year commercial revenues were up 32% year over year and represented approximately 62% of total B&E 2014 revenues versus 47% in 2013. Total year B&E international revenues were up 10% year over year and represented approximately 46% of total B&E 2014 revenues versus 41% in 2013. And by adhering to the guidelines set by our established 30, 5, 5, 10 equals 10 business model the revenue generated from the new product and market development led to favorable mix and operational leverage that helped the B&E team increase gross margins for the total year by 220 basis points.

For our communication systems business in 2014 we continued to solidify our opportunity pipeline with a heavy focus on US SOCOM and our OEM customers. The new product development activity was primarily associated with integrated tactical communications systems including but not limited to amplifier and vehicle adapter products.

Once again a substantial amount of upfront engineering and new product development expense has been incurred ahead of future potential revenue streams. That said, over 40% of the communication systems 2014 revenue received came from products less than or equal to three years old and this helped drive a total year gross margin improvement of 130 basis points year over year.

Now I'd like to ask Ultralife's CFO Phil Fain to take you through the additional details of our fourth-quarter and total year 2014 financial performance. Phil?

Thank you Mike and good morning everyone. Earlier this morning we released our fourth-quarter results for the period ended December 31, 2014. Consolidated revenues for the fourth quarter totaled $19.9 million, representing a $0.2 million or 1% decline from the $20.2 million for the fourth quarter of 2013 and a 24% sequential increase over our third quarter.

Revenues from our battery & energy products segment were $16.8 million, an increase of $0.9 million or 6% from last year. The year-over-year growth was fully attributable to an increase in commercial sales which exceeded the decrease in government and defense sales.

Commercial sales increased $3.1 million, or 47% over the fourth quarter of 2013 primarily driven by shipments of new products including those specifically designed for medical devices in carts as well as higher demand for our 9 volt batteries. This marks the fourth consecutive quarter of double-digit commercial sales gains and brings the 2014 annual increase to 32%.

Sales to government and defense customers declined $2.2 million, or 24% from the fourth quarter of 2013. As a result the mix of commercial sales increased from 42% to 58% and government and defense sales fell from 58% to 42% versus last year.

Communications systems sales of $3.2 million decreased by $1.1 million, or 26% from the prior year. Continuing the trend that started in the second quarter of 2013 we experienced slowness in the daily order flow of amplifiers for US Department of Defense tactical radios and delays in the final signoff and purchase order issuance of several large projects. Our consolidated gross profit was $6.3 million compared to $5.6 million for the 2013 period, an increase of 13%. As a percentage of total revenues, consolidated gross margin was 31.7% versus 27.7% for last year's fourth quarter, a 400 basis point increase.

The improvement in overall gross margin highlights the continued penetration of commercial markets for our battery business, the introduction of higher margin new products for our communications systems business and increased factory throughput driving absorption as well as our lean productivity improvements. Gross margin for our battery & energy products segment was 30.0%, a 390 basis points increase from the 26.1% reported last year. The year-over-year increase primarily reflects the higher gross margins associated with the 47% growth in commercial sales and the favorable overhead absorption resulting from higher production volumes and more favorable production mix including the resumption of primary battery shipments to the US Department of Defense.

For our communications systems segment gross margin was 40.6% representing a 710 basis point improvement from the 33.5% reported last year. This increase resulted from the higher mix of new products.

Operating expenses totaled $5.3 million which was slightly below the $5.4 million reported for the 2013 fourth quarter. The 2014 operating expenses reflect our continued efforts to reduce discretionary spending while continuing our investment in new product development.

As a percentage of revenue, operating expenses represented 26.5% compared to 26.6% for the year-earlier period. Operating profit was $1.0 million representing a fivefold increase over the $0.2 million reported for the fourth quarter of 2013 despite the slightly lower sales in 2014. Operating margin improved by 410 basis points from 1.1% in the fourth quarter of 2013 to 5.2% for 2014.

The 2014 results demonstrate the leverage in our business model highlighting the impact of volume increases and the more favorable mix on our gross margin structure. Fourth-quarter noncash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.1 million compared to $1.2 million for the year-earlier period. This brings us to adjusted EBITDA defined as EBITDA including noncash stock-based compensation expense of $2.1 million, or 10.4% of sales versus $1.2 million or 6.9% of sales for the fourth quarter of 2013.

Other expenses primarily comprised of foreign currency translation and interest expense netted to $90,000 versus $22,000 in 2013 primarily reflecting strengthening of the US dollars to pound sterling. And our tax provision was $91,000 primarily reflecting income taxes for our profitable China operation and the timing of deferred taxes.

Our tax provision was $104,000 for the 2013 fourth quarter. Net income was $0.9 million, or $0.05 per share compared to $0.1 million or $0.01 per share for the same period last year.

The Company's liquidity remains solid with cash on hand of $17.9 million, no debt, working capital of $45.6 million and a current ratio of 5.1. By comparison the cash on hand at the end of the fourth quarter of 2013 was $16.5 million.

Our accounts receivable days sales outstanding metrics continue at very favorable levels and inventory decreased by over $2 million or 7% from our third quarter. Our strong balance sheet continues to provide us with flexibility in evaluating and executing our strategic capital allocation plans.

As disclosed during or first-quarter earnings release and investors call our Board of Directors authorized the repurchase of up to 1.8 million shares of our common stock by May 1, 2015. During the fourth quarter we repurchased 56,197 shares bringing the total number of shares repurchased to 216,754 shares at an average price of $3.30. We remain committed to the share repurchase program as a key element of our capital allocation policy in which we are balancing longer-term investments in revenue growth including new product development and acquisitions with enhancing shareholder returns in the near term.

In summary, the actions we have taken to strengthen our business model while preserving our strategic investments in building a strong balance sheet are demonstrated in our fourth-quarter results. While we are pleased with the continued growth in commercial sales for our battery & energy products business and the resulting profitability now generated by that segment, we continue to focus on growth opportunities for communication systems and productivity initiatives to optimize our gross margin while maintaining strict controls over discretionary spending. This will help ensure greater leverage to our business model and profitability when the results of our efforts to grow the consolidated top line both organic and through acquisitions are more fully realized.

I will now turn it back to Mike.

Thank you, Phil. As you may recall we entered 2014 with improving value propositions leading to higher gross margins, a business model to fund new product development and sales reach expansion as a function of revenue level, a strong balance sheet and liquidity and we were diversifying our customer base to grow our opportunity pipeline and return to revenue growth.

For the battery & energy products business we carried the momentum of 2014 forward into 2015 to try to capitalize on several newly developed revenue streams to fully offset the government defense decline and obtain total revenue growth. For the communications systems business after a few years of new product development and testing for several larger projects and for larger we mean individual transaction sizes ranging anywhere from several million dollars to tens of millions of dollars our focus in 2015 is to continue to move towards actually capturing these larger contracts and realizing revenue.

Operationally in 2015 both businesses will continue to aggressively pursue variable and base cost productivity building on gains made in 2014. Therefore our investor earnings call commentary for 2015 will again be focused on revenue growth initiatives and consist of three core elements: expanding our market and sales reach, new product development and pursuing acquisitions.

In our battery & energy products business to expand our market and sales reach we will continue to focus on diversifying our customer base outside of our core US government defense market by growing our commercial and international revenue. The inflection point of when the increase of a commercial business and international business overcame the decrease in the US government defense business to deliver total net revenue growth occurred in the third quarter of 2014, was validated in the fourth quarter and is viewed as a key revenue growth indicator for B&E as we head into 2015.

In our core US government defense business B&E continues to deliver against and receive new releases for our 5390 batteries under a five-year IDIQ DLA contract which is maintaining our backlog in excess of $2 million. We also recently received the national stock number for the commercial version of our 5368 military battery which is used in night vision equipment and chemical detection equipment and with ongoing shipments for both military and commercial solutions expected throughout 2015.

For new product development in battery & energy products investment continues consistent with our targeted 30, 5, 5, 10 equals 10 business model with those ratios following close into line as we grow revenues while reducing run rate costs. Revenues derived from products introduced less than or equal to three years ago represented more than 56% of our sales in Q4 and grew year over year every quarter in 2014. New product development is a fundamental part of our growth strategy as the introduction of new products as well as the continual multigenerational product planning of that product ensures the product line vitality necessary to maintain and grow competitive advantage for us as well as our customers.

In the fourth quarter we completed the shipments from our an order of several hundred units of the Multi-Kilowatt Module MKM new product development to support silent watch on border security and we are working with the same customer on a multigenerational product plan for their next-generation systems. We have also recently completed an MGPP upgrade for a large Tier 1 military radio supplier for their vehicle mounted charging system and received a development contract from a separate radio OEM for an uplift of their small hand-held radio battery and charger system. On other fronts we have received very positive feedback from a G&D prime contractor as part of their evaluation process to use our new high-capacity CFX blend cathode cells for battery-powered surveillance systems.

We continue to add to our new line of lead acid replacement lithium batteries and to see very good traction across several commercial markets and applications. And we have completed a range extension of battery-powered test and measurement equipment for a Dow Jones industrial company.

At communications systems domestically the business has continued to nurture and grow relationships with top customers. Our team has become deeply embedded in major developing and ongoing US DoD programs wherein our products and technical expertise are helping to shape platform capabilities, increase communications consistency, eliminate disparate and legacy equipment and programs by providing radio agnostic cost-effective solutions. These relationships continue to drive our new product development process, push our team to develop new creative ways to solve emerging mission-critical needs and offer our knowledge and insight into integrating both our own and other manufacturers technologies in a cohesive and simple manner.

The scope and breadth of the work has driven our business to develop partner relationships with both smaller companies with new cutting-edge technologies as well as with the larger established OEMs that offer mission specific hardware and software to the warfighter. Our team has been able to architect holistic solutions that positively and dramatically increase the communications capabilities at the farthest edges of a tactical battle space and give our nation's soldiers increased situational awareness and network access that is unprecedented to date. As these technologies converge and program specifics mature our engineering team is fully engaged in the development of tightly integrated solutions.

Internationally the communications systems team continues to identify, vet and mature multiple large global program opportunities. As this activity outside of the US is increasing as part of our expanding our market and sales reach in 2015 we plan to expand our global development business team to increase the customer interaction frequency and to capture more revenue.

While most of our international work to date has been direct to a specific country's military we have grown our global OEM relationships substantially and qualified our popular 20 watt amplifier line with the OEM radios expanding our market reach into areas that we were previously unable to touch. We are also seeing an increasing demand on a global scale to augment previously fielded radios where a complete replacement program is not economically feasible.

These opportunities add value to our customers by allowing them for instance to upgrade their capability by doubling the communications range while eliminating the training time to adapt to and fully field new hardware. This continues to be a trend globally as communications become increasingly vital in both tactical and urban scenarios.

Looking at communications systems new product development as in the last several quarters comm systems revenue mix continues to be made up of new products less than or equal to three years old. In Q4 they represented 41% of sales and were driven largely by products such as our A-301-150 satellite radio combiner and our MRC UVA hand-held radio power supply. In line with our past practice we will continue to collaborate with customers to launch a number of new products to expand our portfolio throughout 2015.

We have tactically chosen a lineup to the new product development efforts for 2015 based in a wide market survey, customer interaction and identify industry capability gaps. This targeted approach has led to a consistent quarterly sales mix of 40% or more from the new products.

As the business development and engineering teams have worked to capture the voice of the customer, collaborate with them to refine requirements and improve our execution for new product development we also continue to expand our capabilities for both design and manufacturing by adding new talent, technology and improved processes. Our posture for 2015 is stronger than ever and we are excited to continue to launch new products in support of our customers and end-users service men and women.

In closing, by ending on a strong note for the second half of 2014 we have validated that our strategy, business model and operational execution are heading in the right direction and combining to deliver profitability in the underpinnings for top-line revenue growth. The battery & energy products business is capitalizing on new revenue streams from new products, customers, markets, geographies and globalization to diversify and fully offset the government defense revenue client to achieve revenue growth. With a growing commercial business and expanding and evolving product lines for medical devices and carts, higher capacity core rechargeable battery and charger products, new primary batteries, various portable and standby power battery solutions and recent uplifts of our government defense product portfolio, we are excited about the opportunity to achieve revenue growth in 2015.

At communications systems, given the high level of customer interest in project activity for our communications systems products we continue to invest in both our people and the new product development of next-generation technologies. As stated earlier, for communications systems 2015 is all about beginning the capture of some of the larger projects that have been under development over the last few years and to start realizing initial revenue from the numerous multiyear opportunities in the pipeline that now aggregate in value to several hundred million dollars.

Activity level is clearly increasing and centered on integrated vehicle solutions, amplifier upgrade programs and initial new radio fielding. Predicting the timing of converting the opportunities into sales revenue remains our biggest challenge. Given our strong presence with the global special operations forces, our OEM customers and current world events we remain optimistic about the revenue growth prospects for our communications systems business.

In terms of acquisitions, we will also continue to pursue an accretive business edition for either of our segments in 2015 to enable us to more quickly gain scale, particular market access or technology, new products and/or skilled resources as the case may be. Operationally as each of the business teams continue to improve gross margins, lower operating costs and improve profitability we very much look forward to the operating leverage and accelerated earnings growth that increased revenue and potential acquisitions will bring. As the Company maintains its solid balance sheet and liquidity we have the flexibility to create more organic revenue growth opportunities through new product development and market reach expansion, seek out and integrate bolt-on acquisitions and enhance shareholders return through stock repurchases.

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

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

Good morning Mike and Phil. Congratulations. A couple of questions, first of all in a couple of defense contracts that got delayed and pushed into the first quarter or pushed into 2015, have any of those been signed off at this point now that we're six weeks into the quarter?

Now any time that we receive a formal contract of any material magnitude we will let you guys know that.

Okay. And can you talk about R&D and what you expect R&D to look like in 2015? It's running roughly $1.4 million a quarter if you go by the fourth quarter. What do you expect it to be in 2015?

Sam, I expect it to be very similar to that. And the reason why I say that is because new product development is such a critical part of our overall strategic plan.

It's not something that we would say that once a product is launched we're going to turn it off. It's going to continue to be I would say at the level that you're seeing in Q4 and the only change hopefully will be the continued recognition of what happens with the successful launch both in terms of the business that we're seeing as well as the major project when associated with those.

Okay. And in terms of newly developed revenue streams, can you talk about those and can you tell us if you've got any estimates on how large these revenues could grow to in 2015?

Sure. The revenue streams that we refer to we talk about new revenue streams, the medical cart revenue stream that has taken a couple of years for us to develop there are some ongoing other medical device revenue streams that are coming on. They are not huge individually but in aggregate they sum to where we're actually seeing overall top-line growth for battery & energy products business.

The other area is I mentioned too a little bit in the prepared remarks about some of the portable power solutions which essentially we're providing a large-format battery to an OEM whose developing a product and we're getting some positive feedback about making it through what has been quite frankly a rather lengthy testing and evaluation process. So we know that that will spiral into other opportunities as the first few major installations are more well-known.

The China product line, we had some products in China where we're providing those products for sale into China pretty much exclusively into China and we're really trying to drive some of those products which held to the same quality and performance standards as any of our products and take some of those products overseas and to globalize that product line by taking into for instance European or South American markets. So it's hard to comment on what the specific magnitude of each of those individual markets would actually be and what the potential could be but on a collective basis those are the revenue streams that I tend to refer to in the prepared remarks.

Which one is the largest opportunity?

I would say the medical space just demographically is extremely attractive to us. It's attractive to us because not only of the aging populations and for people wanting to be continue to be active and maybe sometimes to carry their devices with them but also it's very consistent with our core customer base and that being sort of our history of being in the military area where the product just absolutely has to work and be reliable I think that's a very good fit to branch off in some of these commercial markets where we have that same type of high-level conservatism and needing for the product to perform.

So I think the medical space is a very attractive one for us. And ultimately I believe the portable power solutions could be a very large market but there's a lot of rhetoric about battery solutions and their different applications around the globe and what we've been trying to do is just keep our head down and get some really strong installed base references so we can grow that business. But those two could be quite attractive for the long term.

And the last question is management blacked out on buying stock because of M&A activities or do you expect management to or insiders to buy stock after the earnings report?

Let me answer that on two levels. There is an overall blackout that is customary for the management team, many of the management team members over the last two weeks of the quarter and all the way through until roughly 24 hours after we announce earnings. There's also a small subset of that group that are involved in the stock buyback decisions and the members of that subset are unable to trade at all.

Thank you very much.

Gary Siperstein, Eliot Rose Asset Management.

Good morning, Mike and Phil. How are you? Congratulations on the quarter, very impressive, great progress.

I just wanted to start off with you mentioned these new areas that we're going into on the commercial side and we've had some traction on the medical side with carts and other products. Can you give me a little more color on what some of the uses are for some of the other medical products in that space?

Sure. Some of the more common ones are the infusion type applications for pain management, diabetes and other things. There's also portable battery packs for respiration devices, CPAPs and things like that.

Is this trend towards battery-powered -- what's the rationale behind that? Is it in case they lose power?

I mean most hospitals have backup generators, a lot of redundancy. Can you just give me some color on the rationale?

You know I'm certainly not an expert on the medical side of it but what we've been led to believe by our OEMs and some of our value-added resellers is that it's all about mobility. It's people don't want to be tethered to an outlet and whether that's in a hospital or a nurse or a staff member implementing data for employee record to not be stuck to a certain room to be able to use the medical cart wherever they need to be to type information in or if it's to the vital sign statistics to not be tethered to a single room.

Those are the kinds of things from some of the devices perspective that drive the demand for more mobile products. Then as we've said some of the quality of life issues relative to infusion pumps and other kind of personal medical devices.

Mike, you mentioned other commercial products in the border security area, test and measurement, surveillance. Can you give me some color on what the actual products are and what they are going to do in each segment there?

A number of the border security and other kinds of things are very confidential and secretive. So I really can't give you a lot of commentary on that but essentially in just about all the applications as the name of the product would suggest it's for very remote locations, places which are difficult to get to to maintain battery say for instance versus the lead acid solution, places where you may have a really wide temperature range which lends itself to a lithium-ion solution to having a high number of cycles and not have to replace the batteries.

Those are some of the attributes that are associated with some of those products. But a lot of them as you would think they would be they are for temporary power in many cases or they are in remote locations where they are likely to be hidden and not many people know they are actually there. So that's sort of a representative view of where some of those applications are without revealing more than I am able to reveal.

How about on the test and measurement side?

The applications that we're looking at is there is some inspection equipment for operating machinery where the devices a lot of this test and measurement equipment are involved in using batteries, they are portable-type devices. And we have one customer in particular that has worked over several years with us to develop a lithium-ion solution for one of their inspection devices and that's starting to take off.

And you had mentioned surveillance. What was surveillance using prior to investigating batteries with you guys?

Can you repeat that question, Gary?

On the surveillance side you had mentioned some stuff going on. I'm just curious what the power supply and surveillance you're using prior to looking at batteries or external energy?

You know, sometimes they would use like I said at lead acid solution or they would use earlier generation lithium batteries.

Okay. And you talked about communications system. It's been slow for a couple of years now.

In terms of your pipeline had there been any awards to competitors? Is it just that awards haven't been I guess awarded or is it we've lost some of those opportunities to competitors?

No, Gary, we're not aware of any of those major contracts being lost.

Okay. And what gives you a sense of movement in that area now that another 12 months has gone by with nothing material?

Well as I said in my comments there are a lot of these activities are maturing. They take a couple of years. There are multiple opportunities being pursued simultaneously where I would say two or three years ago it was a small number of opportunities being pursued at any given time.

Some of the military stuff that obviously we're talking about has to go through NEI-type testing and validation so we now have the benefit of knowing that a lot of our equipment has made it through those tests. We know the good, bad, the ugly of those devices and products in those applications and what the feedback is and have had a chance to fix anything we need to.

So it just all sums up to being a maturing of some of these ongoing opportunities. The hardest thing to know is and we're trying to understand it better with both internal and external resources is the timing. With a lot of the budget activity that has caused us to take a cautious approach to the actual timing of activity even though from a demand and a requirement perspective it would seem on the surface that these opportunities are just right around the corner.

So that's why we've been a little more cautious in how we've described what we see for 2015. That being said the spending levels that we have now migrated towards are encouraging inasmuch as we're continuing to be able to invest in new products and the people and these margin re-expansion activities and at the same time show a profit whereas it was more difficult about a year ago or so where we knew we had to make the spending for some of the new product development market reach expansions and we didn't have any revenue against to liquidate it. Our results showed some losses.

So I'm not looking at spending a lot more than we're currently are spending at this time to pursue those new opportunities. But as I said I think a couple of times in my prepared remarks we're looking for at least some of that to start happening in 2015.

Okay, that's fair. And Mike in terms of seasonality or exception of seasonality a lot of on the commercial side of the business a lot of people believe there is a fourth-quarter budget wash or they spend a budget spend to empty out the budgets yet the government's fiscal year is a few months prior on the military side. So I guess what I'm asking is it an automatic that our revenues in Q1 have to decline from Q4 due to that seasonality or is that seasonality a myth?

You know, I really wouldn't provide individual quarter commentary but if you do look at the last several years in the fourth quarter it's been a high-water mark for revenue. That's been the empirical experience but I don't think there's any fundamental market drivers that would suggest that the first quarter has to be lower than the fourth quarter.

The government to the extent that our government, the US government defense business in particular, gets smaller and smaller by design as a percent of our overall revenues the dynamic of seeing a spike I guess in historical years in our third quarter because of that government spending and we haven't seen that in the last couple of years and as military gets smaller I don't see a big seasonality based on the US government fiscal budget. And relative to the commercial for whatever reason the fourth quarter seems to be a high-water mark but I don't see any fundamentals as I've said just a couple of seconds about there's no fundamental reason why the first quarter has to be lower. It is what it is based on individual customer projects and demand and where we are in returning this opportunities.

Okay. And in terms of the government battery orders, I think at one point I don't know if this is two quarters ago or even a year ago due to the sequester and all the budget craziness on the military side I think I recall at some point our factory at least domestically was operating maybe four days a week. Has that been -- has there been a tick-up in that from the government starting to replenish inventories on the battery side so that maybe we're running at five or six days a week now?

You know the comment that we made about having a backlog for everybody to hear is exactly that point. It's not huge, it's not dramatic in terms of volume but it's pretty steady and we have been getting some operational leverage by more consistent volume, a little uptick in revenue helps our liquidations of overhead. So yes, I would say that government contract is extremely helpful to help us baseload our operations.

In terms of I think we had a move in the third quarter in China. Were all the expenses of that move expensed in the third quarter or was there any carryover into the fourth?

Well, there was carryover into the fourth, Gary, and that is now all behind us. And I will say when all is said and done recognizing the expenses and getting a negotiating a reimbursement with the local Shenzhen government it turned out not to have a significant impact on our 2014 results. But as of the end of the year the relocation was complete.

So, Phil, was there any expense in the fourth quarter related to that? Can you just quantify it?

Yes, there was but it was offset by reimbursements that were negotiated with the local governments.

Okay. Super. Thank you. And in terms of inventory I guess we've started the year at 26 million, we finished at 26 million.

Since we saw, Mike you called out maybe the bottoming on the military side in Q3 and then we saw more evidence in Q4. So what's an appropriate inventory figure if we indeed are going to start growing again at least at -- forget about acquisition at least, on an organic basis? Is that inventory going to trend up as revenues trend up or is it going to work are we going to be able to make some progress on that as revenues churn up?

Gary, we're certainly going to make more progress on that. And one of the things that you do see in the $26.1 million that was reported at the end of the year was some safety stock relating to the China relocation. We didn't want any drop-off in our ability to cover the needs of the customers.

So we purposely built up inventory in China to get through the relocation and to go into Q1 as the China new year is coming up very shortly. But there were some I would say a good accomplishments in 2014 that really sets the table for us to make some good quantitative progress that you will see -- that we will all see in 2015.

Can you give me a range, Phil? What I mean 12 months out would you like to see inventory down to $22 million, $18 million, $20 million, can you give us some goal?

Absolutely, Gary. And I look at this is the cheapest form of financing and my personal target is at least in the $3 million to $4 million reduction range. And I think that's very reasonable.

Super. Okay. And then lastly on the buyback there wasn't a lot of stock to buy back in the quarter and I know about the restrictions on volume and percentage of volume and blackout days, etc. and I've mentioned on other calls perhaps expanding the program so that blackout days don't apply.

In light of book value over $4, working capital almost $3 now, over $1 a share in cash, you know EBITDA positive, you generated $2 million in cash in the quarter, on an EBITDA basis sequentially cash went up almost $3 million in the quarter. So I guess what I'm asking is the program is through May for 1.8 million shares we bought 56,000 a quarter, not a lot prior to that.

So we're not even denting the 1.8 million. So I would again with almost $3 in working capital the valuation is just ridiculous -- ridiculously cheap.

So I would just ask you guys to look into other mechanisms to maybe take advantage of the disconnect in the public market price from what you guys of accomplished. And it would be extremely accretive going forward if you could take out a nice chunk of stock down here either through a Dutch tender or I forget what they call him, 5B1, 501 plans, whatever they call them which has no blackout dates, etc.

Gary, thank you and I can assure you and the other listeners on the call that we continuously review the different alternatives of repurchasing the shares both internally and with those who are helping us externally with the share repurchase program as well. But thank you for your thoughts.

And just last question then I will give someone else a chance. Mike, what's your gross margin target going forward? I know there has been a lot of moving parts, commercial, military and the sequester and so forth but once you get to a more normalized steady-state and some of the confusion comes up the military budget what sort of a long-term goal in gross margin?

I think we've said in our business model is built on as a starting point, an interim target was 30% which we're starting to be able to hit. I think the way I look at it is that the gross margins of comm systems are fully capable of in the 40% range, B&E gross margins are fully capable to be in a 30% range.

I don't have any theoretical limit. I think as long as we can continue to develop products that are highly valued and the customer really recognizes that and what we're able to sell them for in the marketplace and gets the economic value add I don't think there's any theoretical upper limit. But I can say I'm very pleased that we're starting to hover around the 30% and we just have all-employee meetings this day as well and we say we still think there's room for improvement.

I mean there's so much that we can do to continue to improve efficiency so I haven't set a target that we just stop at. I'm glad we're at 30% overall and will continue to move up forward.

Sometimes we may want to be more optimistic about what margins could be. But every now and then you get an opportunity where maybe the price levels have to be a little different than what they currently are to help manage our overall business model. So I'm going to maintain some flexibility but I don't think that we've plateaued in our achievement of gross margin improvement.

Okay. And I lied. I've got one more question.

If you look globally like a mile up in the air now with the Republican Congress and an election a couple of years from now and even if a Democrat were to win it seems like either a Republican victory or even a Democrat either way they'd probably be a little more hawkish than Obama is with the defense budget. And Obama just presented a budget which actually broke the deal and the Congressional budget deal with military request in excess of the agreed-upon amounts. So is there any chatter out there that things might finally in lieu of all that and of course what's going on with special forces and Obama's request the other day to go after ISIL is there any chatter that things might be loosening up for us both on battery & energy and comm?

We read and hear and see the same things you do. Our approach has been to hope for the best, prepare for the worst and try to make money and grow our business in any environment.

Okay, sounds good. Thanks for taking all my questions and congratulations again. Great progress.

Thank you.

(Operator Instructions) It appears there are no further questions at this time. So I'd like to turn the conference back to Michael for any additional or closing remarks.

Great. Well thank you once again everyone for joining us for our fourth-quarter 2014 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future.

Thank you very much for your time today. Bye-bye.

Thank you for your participation. This does conclude today's call.