Ultralife Corp (ULBI) 2015 Q3 法說會逐字稿

Good day and welcome to this Ultralife Corporation third-quarter 2015 earnings call. At this time for opening remarks and introductions I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Tim, and good morning, everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for the Ultralife Corporation earnings conference call for the third quarter of fiscal 2015. 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 and, if anyone has not yet received a copy, I invite you to visit the Company's website, www.Uutralifecorp.com where you will find the release under Investor News in the Investor Relations section.

Before turning the call over to management I'd like to remind everyone that some statements made during this conference call may 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 risk factors that could cause Ultralife's financial results to vary from forward-looking statements 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 those housekeeping matters out of the way, 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 will start off by making some overall comments about our third-quarter 2015 operating performance before turning the call over to Phil who will take you through the detailed financial results. After Phil has finished I will provide an update on the progress against our revenue initiatives for 2015 then open it up for questions.

For Q3 of 2015 we were very pleased to deliver another quarter of total Company profitability and positive EPS, generating an operating profit of $1.17 million on revenues of $19 million for an operating margin of 6.2%. This represents a year-over-year improvement in operating profit of $1.23 million on a 19%, or $3.0 million, increase in revenue, again delivering leveraged earnings growth on solid execution of our business model.

Revenues at our Battery & Energy Products business increased by 18% over the prior year driven by a 31% increase in government defense sales, primarily to the OEM primes and the DOA, and a 9% increase in the commercial market led by sales of rechargeable batteries for medical device applications and 9 volt batteries for smoke detectors.

For our Communications Systems business, revenues were up 23% over last year's third quarter driven by sales of our core power amplifiers, universal radio vehicle adapters and power supplies. Whereas overall Communications Systems shipment volumes are still challenged by transaction timing and DOD budget constraints, the revenue improvements are derived from a broad range of new products being sold through our OEM channels and a more steady day-to-day flow business.

With both businesses achieving meaningful revenue increases in Q3 total Company revenue grew by 19% year-over-year, the third consecutive quarter of solid double-digit increases, bringing revenue growth for the first nine months of the year to 23%.

Looking at the quality of earnings in Q3, the total Company gross margin rate increased year-over-year by 310 basis points to 31.0% driven again by favorable mix as well as volume leverage.

While continuing to fully fund revenue growth initiatives, we also kept a close eye on operating expenses. And with the uptick in revenue were able to reduce operating expenses as a percent of revenue by 350 basis points year-over-year to 24.8%.

So, in addition to the revenue growth and increase in operating profit the quality of earnings also continues to improve. And in Q3 of 2015 our operating margin of 6.2% was the highest it has been in almost three years.

We know we have much work to do to realize our ultimate goal of being able to deliver consistent and sustainable top- and bottom-line growth, but we are very encouraged to see that our business model assumptions and the heavy lifting done over the last several years are leading us towards that desired steady-state.

Now I would like to ask Ultralife's CFO, Phil Fain, to take you through the additional details of our third quarter 2015 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning we released our third-quarter results for the period ended September 27, 2015. Consolidated revenues for the third quarter totaled $19 million representing a $3 million or 19% increase from the $16.1 million for the third quarter of 2014.

Revenues from our Battery & Energy Products segment were $16.4 million, an increase of $2.5 million or 18% from last year, reflecting growth in both government and defense and commercial sales.

Government and defense sales grew 31% and was driven by higher sales of batteries and chargers to a large international prime defense supplier and shipments of primary batteries to the US government's Defense Logistics Agency for the fourth consecutive quarter.

Commercial sales for the third quarter of 2015 increased 9% over 2014 with higher shipments of batteries and chargers into medical channels and 9 volt batteries to large global smoke detector OEMs. As a result of the higher growth for government and defense sales, the split between commercial and government and defense sales shifted to 56/44 compared to 61/39 for the 2014 period.

Communication Systems sales up $2.7 million increased by $0.5 million or 23% over the 2014 period. Similar to the first two quarters, we experienced more broad-based sales as well as increases in our order flow, reflecting increased demand from system integrators in support of US Department of Defense programs and international projects.

On a consolidated basis the commercial to government and defense split was 48/52 versus 53/47 for the year earlier period. Our consolidated gross profit was $5.9 million compared to $4.5 million for the 2014 period, an increase of 32%. As a percentage of total revenues consolidated gross margin was 31.0% versus 27.9% for last year's third quarter, a 310 basis point increase.

The improvement in overall gross margin highlights the leverage of our underlying business model and the benefits of our strategy of focusing on higher value proposition new products. In producing a gross margin at or above 30% for the past four quarters we are building a track record of performing to our business model target.

Gross profit for our Battery & Energy Products business improved by 25% reflecting the leverage from the 18% sales increase for the period. Gross margin for the segment was 29.1%, a 170 basis point increase from the 27.4% reported last year.

The improvement reflects the higher production volumes increasing the absorption of our manufacturing overhead; the more favorable margins associated with commercial sales and continued lean productivity gains for the business.

For our Communications Systems segment gross profit improved 67% over 2014 and gross margin of 42.4% improved by 1,100 basis points over the 31.4% reported for last year's third quarter. This improvement reflects both product mix and higher production volume.

Operating expenses represented 24.8% of revenues versus 28.3% for the 2014 period, reflecting 350 basis points of leverage. Operating expenses of $4.7 million were sequentially below the $5.2 million and $5.0 million reported in the first and second quarters respectively, highlighting our continued efforts to contain discretionary spending while continuing our investment in new product development.

The $0.2 million or 4% increase over the $4.5 million reported in the third quarter of 2014 was primarily driven by higher sales commissions and new product development. We expect operating expenses to be slightly higher in the fourth quarter as we transition our recent $8.2 million VIPER award to high production volumes in line with the 2016 shipment schedule.

That operating leverage combined with increased revenue resulted in an operating profit of $1.2 million for the 2015 third quarter compared to an operating loss of $55,000 for the 2014 period.

The year-over-year improvement in operating profit of $1.2 million consisted of a $0.8 million contribution from the 19% increase in sales and a $0.6 million contribution from the 310 basis point improvement in gross margin, partially offset by the $0.2 million increase in operating expenses.

Operating margin improved from negative 0.3% in the third quarter of 2014 to positive 6.2% for 2015. Third-quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to $0.8 million compared to $1.1 million for the year earlier period.

This brings us to adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense of $2.1 million or 10.8% of sales versus $0.9 million or 5.3% for the third quarter of 2014. Our improved operating performance has resulted in the generation of $7.4 million of adjusted EBITDA over the trailing 12-month period representing 9.6% of sales for that period.

Other expenses primarily comprised of foreign currency translation and interest expense netted to $3,000 of income versus $208,000 of expense in 2014. The income generated in 2015 resulted from favorable foreign currency fluctuations and our tax provision was $130,000 primarily reflecting income taxes for our profitable China operation and booked tax timing differences relating to the amortization of intangible assets.

Our tax provision was $60,000 for the 2014 third quarter. Driven by solid operating performance net income was $1.0 million or $0.07 per share compared to a net loss of $0.3 million or negative $0.02 per share for the same period last year. Having sustained positive EPS for the past four quarters, our improved performance has resulted in earnings per share of $0.20 for the trailing 12-month period.

Our weighted average shares outstanding has decreased from 17.49 million shares for the third quarter of 2014 to 15.633 million shares reflecting the repurchase of shares over the past year and weighting the timing of those repurchases. The reduction in average weighted shares outstanding accounted for $0.007 of EPS improvement in Q3.

During the third quarter we repurchased 748,542 shares and the total number of shares repurchased under our 3.4 million share repurchase program through October 28, 2015 is 2,442,191 shares at an average purchase price of $4.04. Our common shares outstanding are now 15,219,620.

The Company's liquidity remains solid with cash on hand of $14.7 million, no debt, working capital of $40 million and a current ratio of 4.5. By comparison, the cash on hand at year end 2014 was $17.9 million. The $3.2 million decrease in cash from year end reflects our 2015 share repurchases of $9.2 million partially offset by positive operating cash flow.

In summary, the actions we have taken to optimize our business model while preserving our strategic investments and further strengthening our strong balance sheet are once again demonstrated in our third-quarter results. We remain intent on driving sales through organic initiatives and acquisitions to unleash the full leverage potential of our business model. I will now turn it back to Mike.

Thanks, Phil. With respect to our revenue growth initiatives, in 2015 we have remained focused on three core elements: expanding our market and sales reach; new product development; and pursuing acquisitions.

Commercial diversification of the Battery & Energy Products business continued in Q3 as sales into commercial markets represented 56% of total B&E revenue. Demand for our products serving the medical market was strong and sales were up 59% versus Q3 2014 and representing 19% of total B&E sales for the quarter.

Within the medical market, after working closely with our strategic business partner the last few years to develop its end-user customers, we are beginning to see a steady demand increase for medical cart battery and power systems. Shipments through Q3 2015 have already exceeded those for all of 2014 by more than 50%.

Regarding our 9 volt battery, third-quarter 2015 volumes remain solid after a very significant increased demand during the first half of 2015 with 9 volt sales in Q3 representing 21% of total B&E revenue and up 5% year over year.

And lastly, within our China operation we continue to gain traction from the locally manufactured lithium vinyl chloride primary batteries largely driven by the use of automobile toll pass applications.

In our core Battery & Energy Products government defense market both our international and domestic business development activities remain stable, several of which involve our upgraded military battery and charger solutions.

During the third quarter we received an additional $1.4 million delivery order from the Defense Logistics Agency, or DLA, for our 5390 batteries which will be shipped throughout 2016. And we are actively participating in several other DLA multiyear IDIQ solicitation processes for our legacy and new high-capacity hybrid lithium batteries for the soldier and their specialized tactical communications networks.

New product development revenue from Battery & Energy Products less than or equal to three years old represented 19% of the Battery & Energy Products total Q3 revenue. This is up from 10% of total revenue in Q2 2015 and demonstrates the ongoing impact new product development has on our revenue vitality.

We continue to develop new products and evolve existing products through multi-generational product planning, or MGPP, to better meet the needs of our customers' medical, asset tracking, OEM device, vehicle and other applications.

For example, we have started an MGPP project with our strategic business partner to enhance the diagnostic and display capabilities of our current medical cart rechargeable battery and power systems. Expected to be completed for sales beginning in 2016, this enhancement will provide customers additional battery operating and system status as well as usage data to assist fleet managers with the overall management of their battery pool.

We also have an ongoing battery development project with a major automated external defibrillator manufacturer utilizing our lithium manganese primary cells which have exceptional life and storage capability. Likewise to be completed in 2016, this project will result in the customer being able to increase battery life an additional two years over their current offering.

In regards to our new product development for energy storage applications, shipments continued in the third quarter of 2015 for our multi-kilowatt module, MKM large-format battery and new MGPP opportunities of this product continue to emerge in both the government defense and commercial market sectors.

As an example, we have started the development of a new manned portable battery with an energy storage strategic business partner in support of several government programs including the mobile electric hybrid power system and the ground-based operational surveillance system. Prototype mockups were recently introduced at the Joint Services Power Expo in Cincinnati and the Defense & Security Equipment International Exhibition in London.

This battery serves as a manned [carryable] power source for either 12 volt or 20 volt applications that can be parallel connected to increase storage capacity and is suitable for high [cycle life] expectations of between 1,500 and 2,000 cycles. The battery unit is stackable, or rackable, for use in various operational configurations and is initially expected to be manufactured in individual scalable units of 1.3 kilowatt hours each.

A subsequent development is also in the works for our higher energy version approaching 3.5 kilowatt hours each, which will be developed for applications where the cycle life is more in the 300 to 500 cycle range.

Finally, we are also in the early stages of several new product development projects for prototype lithium batteries for new commercial applications including those that use a solar -- that use solar as a primary remote power source.

Building off of our expertise in applying and building military grade batteries for performance and reliability, we are targeting industrial and commercial opportunities where the operating characteristics and economics of our lithium battery and charger solutions can be fully realized, thereby making our customers more successful with their customers.

In our Communications Systems business, which of late has been driven primarily by special forces customers, we were delighted to receive in Q3 2015 the award in head-to-head competition of an $8.2 million contract for the soldier radio waveform vehicle installed power enhanced Rifleman applique systems for the US Army.

Following a terrific effort by our entire Communications Systems team and extensive collaboration, development and testing with the OEM prime contractor, our system was selected as a critical component for the US Army's multi-phased modernization program, providing enhanced digital voice and data communications to a dismounted soldier.

Initial small quantity deliveries are expected to begin by year end with the remainder to be completed in 2016. This contract illustrates our strategy of investing in new product development to broaden our product and customer reach and is indicative of the nature of the projects making up the maturing pipeline of opportunities for our Communications Systems business.

As we continue to develop new products across our business our amplifier platform provides a technically advanced building block for the increasingly complex, secure, innovative communication systems required for soldier modernization.

Our reach into the large OEMs continues to grow as our products become further embedded in extended range communications and integrated C-4ISR systems globally. The efforts and successes in the US have begun to create a ground swell internationally, just as we had hoped, and further reinforce our position as a global supplier of mission-critical communications.

Our team recently spent a week in the UK at the Defense & Security Equipment International Exhibition, working hand in hand with one of our UK partners to demonstrate and discuss new capabilities that bridge the communications gap among special forces, conventional forces and NATO forces. The user feedback was resoundingly positive.

While the international efforts tend to have lengthy sales cycles, our resource allocation and investments are targeted on prospects showing realistic short- and long-term growth potential. In the meantime, we continue to support our largest Communications Systems customer, USSOCOM, with a multitude of core products for various vehicle programs and other applications.

For new product development in Communications Systems, in Q3 2015 new products represented over 40% of total Communications Systems revenue. We continue to see consistent new product development sales of our MRC universal radio vehicle adapter and our legacy 20 watt MGPP amplifier products. Unit sales of our core power amplifier products have increased by over 30% year to date year over year.

As mentioned during our last call, we continue to work closely with our global industry partners to develop and jointly display new capabilities. This includes, but is not limited to, the recently introduced open architecture modular communications product, the MRC-MC4 family of radio, waveform and bearer agnostic communication systems that extend the distribution of voice, video and data communications simultaneously throughout the battlefield.

These products address the latest radios, waveforms, amplification, mobile ad hoc networking, ISR networking computing and data storage technologies in streamlined and integrated flexible packages that can be used in vehicles, forward operating bases, tactical operation centers and base stations. Our customers remain very receptive of these systems and demonstrations are continuing in multiple countries.

In closing, our results for Q3 2015 and year to date are validating that our strategy, business model and operational execution are resulting in more consistent profitability and positioning us for total your top-line revenue growth.

As the Company maintains its solid balance sheet and liquidity and improves earnings, we are generating the operational cash flow to pursue more organic revenue growth opportunities through new product development and market reach expansion, seek out and integrate bolt-on acquisitions, and enhance shareholder return through stock repurchases.

Improving operating and financial performance also makes it easier for us to enter into strategic business partnerships for new product development collaboration, market reach and speed, and to attract additional high potential talent to support our growth.

If we take a step back and look at where our B&E business was a few years ago -- dependent upon demand from the US government defense market and facing a reduction in spending from our core customer base -- we can see that today we are well-positioned for leveraged earnings growth as government defense revenues slowly recover.

Added to some budding demand from government defense customers is the continued diversification of our business into commercial markets, which has lessened our dependency on the US government defense business and provided us more control over our own destiny.

Looking ahead, the Battery & Energy Products business continues to diversify and build new revenue streams from new products, customers, markets, geographies and globalization.

In growing the commercial business we look to continue to expand our penetration of OEM devices for safety and security applications while also growing our medical platform. This will come in the form of new product development, geographic expansion as well as capability enhancement and strategic partner relationships.

We also expect to grow our presence in energy storage by targeting sticky customer relationships with new niche applications that make sense for our products, expertise and value proposition.

In Battery & Energy Products core government defense business we remain committed to helping our DOD and global OEM prime customers continue to field our soldiers with the latest and most reliable equipment.

And to that end, view continued new product development as a fundamental part of growing our government defense business. This includes new batteries and systems evolved for OEM device battery packs, vehicle and both chargers, conformal batteries and new battery chemistry plans.

For Communications Systems, in the second half of 2015 we started to see a small uptick in our flow business activity level, such that through three quarters of 2015, Comm Systems revenue was up more than 30% year over year. Some of the larger military programs fielding our products appear to be maturing and moving slowly through the procurement process though protecting the timing and actual contracting remains challenging.

The Comm Systems business model requires that we continue to grow our sales with additional new program revenue streams so that we can continue to fund the new product and technology development projects needed for our customers both domestically and internationally.

A good example of this phenomenon is the $8.2 million contract award for our VIPER system for the US Army which provides us a new program-related revenue stream to layer onto our base level quarterly run rate revenue in 2016.

Given our strong presence with the global special operations forces, our OEM customers, industry business partners and the current world dynamics, we remain optimistic about the revenue growth prospects for our Communications Systems business.

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

(Operator Instructions). Gary Siperstein, Eliot Rose Asset Management.

Congratulations on another great quarter, sequential and year-over-year growth, and I guess that is four profitable quarters in a row. So that is a milestone as well. And I believe it gets you to close to $0.20 for the trailing 12 months, is that correct, Phil?

That is correct, yes.

I also noticed that sequentially inventory was down a bit and yet with that $8.2 million Comm Systems award I suspect you are probably buying some inventory to start shipping that. Mike, you had mentioned some nominal shipments in Q4. Is that correct, Phil, on the inventory? And if it is, how much of that inventory is for that $8.2 million contract?

Well, there is a couple hundred thousand, Gary, that is related to the $8.2 million contract. Inventory, as you know, reduction in inventory is our cheapest form of financing, so that is one of our top priorities. And whether it is dealing with our core business or dealing with major project wins, we are very focused in keeping inventory to the lowest levels possible.

Okay. And in the quarter, Phil, you mentioned I believe [seven change] million EBITDA or cash generation through the three quarters. Was it roughly $2 million in the quarter? Because it looked like cash was just down $1 million sequentially.

And then I am just trying to quickly do the math on the stock you bought in the quarter. You probably spent $2 million plus on stock in the quarter or $3 million. So was it about $2 million in cash generation?

Yes. Yes, you are going to see, Gary, once you have a chance to get into our 10-Q, that it is $2.1 million for the quarter, 10.8% of sales.

Okay, super. And back on the batteries out of Comm Systems, the regular batteries we do for the radios. I believe it was April, or I could be off a month or two, that three primes won a $3.2 billion IDIQ and I think it was General Dynamics and Harris and Thales. And am I correct in understanding that we supply to two out of three of those primes?

We supply battery products to I think all three of those primes in various applications and projects, Gary.

Oh, okay. I didn't realize we did do some business with General Dynamics. That was a question. So, we do sell to General Dynamics?

Yes, I mean, they are not all equal, but we do supply batteries and battery products and chargers to all three of those OEM primes. And as I mentioned (multiple speakers), we try to respect the privacy and the confidentiality of each of those three primes because they compete head to head (multiple speakers).

Yes, I understand.

We are trying to make sure that we help them win and we work professionally and confidentially with each of the respective parties in their transactions and conditions.

Absolutely understandable. I guess I am trying to, Mike, get a sense of even though it is an IDIQ -- so I know we don't know for sure and when or how long these contracts will last, but even if our -- even if we sell to three but let's say it just represents half of that award and let's say it is awarded in total, is there any way to figure out what portion of that is the maximum we could get with batteries?

I understand some of the radios take two batteries, some take four batteries. So if our customers supply let's say $1.6 billion of the $3.2 billion, regardless of how many years that is over, how much is it per radio and then how much is it per X amount of batteries per radio? In other words, what is the maximum opportunity there for us? Is it $25 million? Is it $100 million of the $3.2 billion?

Gary, I think that is very difficult and almost impossible to try to predict. In fact, a lot of the times when we are getting orders from the OM primes we don't really have clear visibility if it is indeed for the US contracts that they maybe recently announced or for some International contract.

What I step back and take a look at -- and I am just really pleased to see that all of our customers are starting to receive more big contracts from the US government and that is going to have a trickle positive down effect to all of us.

Okay, yes, I noticed that as well. So after that $3.2 billion was awarded in April, I think in the subsequent six months there have been several hundred million dollar wins for Harris in the -- I don't know if it'd is Rifleman or Falcon, but different things like that and of course Thales has had a couple of wins as well.

So that was positively surprising to me that after awarding $3.2 billion there was still maybe another $0.5 billion or $1 billion in additional awards.

Mike, on the $8.2 million Communications System order, you mentioned some nominal shipments in Q4. Can you give us a little more color on that? Does nominal mean less than $1 million or less than $0.5 million?

Yes, they are small, definitely less than $1 million. And really just a type of getting the pump wet, if you will, getting some initial units out for some initial testing. But nothing material really in the fourth quarter at all.

Okay. And then you had mentioned I think it was in the news release with that award that most of it would get shipped in the -- you mentioned 2016. I thought there was some specificity on the first half of 2016. Is that correct? Could we ship $8 million in the first half or do you think it will go into Q3?

My understanding is that it would go through the first three quarters of next year.

Okay, so roughly $2.5 million to $3 million a quarter or do you think it will ramp up?

Depending on what the needs of the customers are we will try to ship as quick as we possibly can. But we know that it is a pretty substantial order for us. And we want to make sure that we have all our ducks in a row, that they are the highest quality and that the supply chain is well-balanced. So I think it will be through three quarters.

Okay, super. And, Phil, on the NOL, so a couple quarters ago you had that IRS ruling that I think increased your NOL to $80 million. What is the accounting treatment? When do the auditors allow you to put that tax asset back on the balance sheet now that we have four quarters in a row of profitability?

Sure. To put it in plain English, it's a demonstration of sustainable profit over a period of time. My interpretation of that is sustained profitability of at least -- of two years. So, hopefully at this time next year that is one of the accounting matters that we will be dealing with, putting that on the balance sheet.

Okay. And just check if my math is right. So, let's say this time next year we are in this third quarter and the order has allowed you to recognize it. So it would be, everything else being equal, 35% of the $80 million which would equal $28 million divided by roughly 15, 15.5 million shares, so that would be about $1.80.

And how does the accounting work? The tax asset goes on and then there is a credit to net income, and then net income flows into stockholders equity. So it would be adding $1.80 per share to book, is that correct?

Gary, that is 100% correct, very well done.

I am very infrequently 100% right, Phil, so, thank you. And I think book now stands a little over 4.25. So, forgetting about what earnings you earn in the next 12 months, 4.25 and $1.80, so that gets booked north of 6 this time next year if you are allowed to recognize it. Is that correct as well?

Yes.

Okay. And then speaking about that $80 million, I know you guys have been looking at the M&A side for a couple years. And with an $80 million NOL, Mike, doesn't it make sense --?

Since the same amount of work is typically involved in kicking the tires and doing your diligence on a $30 million or $40 million business as a $10 million or $20 million business, and in light of the size of the NOL, doesn't it make sense to maybe buy something a little bigger and a little more profitable and a little higher quality so you have a significant enough margin of error?

In other words, if you bought something that is only throwing off $1 million in profitability that would get shielded by the NOL and something goes wrong, because M&A is difficult and sometimes there's surprises post closing. Let's say $1 million you think it's going to contribute and then it contributes zero.

Wouldn't it make sense to buy something that maybe has $2 million or $3 million in profitability? And then if you are $1 million off you still have $1 million or $2 million in profitability, so then it can be much more materially accretive. Is that how you guys are thinking of things and looking at things?

I would love to be able to design an acquisition, that would be delightful. And we look at -- because I think your logic is exactly correct. And at the same time you are looking at actual companies and trying to find out the merits versus liabilities of companies you potentially could buy.

Sometimes you have a really large company that has a significant amount of heavy lifting in integration and consolidation to do. So there is a ton of work in realizing the benefits there. Other times you can have a small companies that maybe is just plug and go and continue to drive organic growth.

So I think you get the full spectrum. I think your logic is correct in how you articulate it. We have to look at each individual acquisition candidate on its own merits. And you never get 100% of what you want.

But if we can get at 80%, 90% and it can make a strategic addition to our Company, meaning that post acquisition and integration and consolidation, as the case may be, we continue to grow at a faster rate organically. Obviously there is some pros and cons to different sizes of acquisition.

So I think your logic is correct. I don't disagree with it at all. But we are trying to put that through the filter of the actual candidates that we are looking at.

Okay, that is fair. And medical you mentioned the defibrillator opportunity separate from medical carts. Is that something that the FDA is looking at now and you are waiting -- your partner is waiting for an approval? And is it something that is more of a -- assuming they get approval by June 30, it is more of a back half opportunity. Can you give me any more color on that?

Yes, I would look at them as 2016 opportunities. I mean there is a couple different [AED] manufacturers that we are working with, so it is not just one. But, yes, I would think it is fair to think of it really as sort of a back half of 2016 type of opportunity.

Okay. And in previous conference calls I think there was an opportunity both on metering and tolls -- I think tolls for toll roads or something like that in China. Is there any update in that area?

No, those continue to go well. I mean, as you may recall, our China strategy is really three-pronged. We have the manufacturing of our 9 volt battery, a world-class 9 volt product and having really close proximity to the OEM device makers who want to have their supply chain loop very close to where they build their product for shipping globally. So we exploit that opportunity there in China.

We use that sort of benefit of having capacity and manufacturing capability there and the cost associated with being able to serve that supply chain by going into the in-country activity and in-country demand for electric metering and toll pass. That business has been stable; we are continuing to get some nice volumes there.

But because of the overall China market it's a little bit slower and a lot of battery manufacturers that are in China we are watching that really closely. But we don't see any significant negative material impact on the revenue stream, but those applications are still very much part of our day-to-day activity.

And the third piece but just for completeness is taking both our 9 volt product and our locally manufactured China products and sell those on a global scale, which have the full support of our brand, our quality and technology parameters such that we can use it as a launch point to grow our business on a global scale.

So, of those three really just one-third of that is in in-country business of which it is primarily focused on toll pass and electric metering type applications.

Super, okay. And, Phil, I think with the pick up on the government military side on the batteries, we, for the first time I think, moved into this year and started building up some -- atypically some backlog. Can you tell me if the backlog has remained the same from June 30 to September 30 or has it increased or decreased?

It's approximately the same, Gary.

Okay. And then, Phil, again on -- I think we talked earlier about EBITDA cash flow being roughly $7 million change through the nine months. So, you usually have a little improvement in the fourth quarter versus the third quarter seasonally. I know we have discussed seasonality before and it just seems to repeat itself.

So, if I assume a slight improvement in business in Q4 due to the seasonality, that would get us close to, everything else being equal and apples versus apple, it sounds like cash flow could go from $7.5 million to $10 million if we add in the fourth quarter. And $10 million is I guess $0.67 per share on 15 million shares outstanding. Does that sound about right?

Let me make a correction. The $7.4 million of EBITDA is on a trailing 12-month basis.

Okay, that is trailing 12.

As far as seasonality goes, in today's world with the partnering from the government and defense sector, I really discount any seasonality. If you depend on seasonality you are generally depending on hope and we are more focused on the orders and the opportunities at hand.

Okay. I agree with that. But haven't we always -- not always but I thought the last couple years Q4 was better than Q3. So even though we want to work on orders on hand, hasn't it tended to be a little better than Q3?

Well, last year was. However, I can give you 10 different reasons why that was. And I don't want to say one-offs because there really isn't such a thing as a one-off. But there is multiple opportunities that we are always looking at, some occur some go forward. Rarely do we lose an opportunity.

But timing, a week difference in shipping or booking or receiving based on the shipping terms does make a difference. So, I look at it, the backlog and the orders and opportunities that we are currently dealing with.

Okay. So, I know you guys don't make -- give guidance or make earnings projections. But I just want to walk through a scenario, just tell me if my thinking is right, if my assumption is correct and if they come true.

So with $0.14 through nine months, and let's say conservatively Q4 is the same as Q3, that gets us to $0.21 for the year. And let's say next year organically we grow our earnings just a penny or two a quarter. That gets you to $0.26, that is only maybe -- well $0.02 a quarter is $300,000 with the NOL, that is $0.02.

So, you sort of can say if we could get $0.02 in organic growth that is another $0.08, so $0.22 and $0.08 gets you roughly to $0.30. And then if you ship the majority of the $8.2 million contract, first of all should that contract -- we look at it at the normal corporate margin of 30%?

Well, I prefer not to comment on that. We generally don't disclose the terms of a major project award; we simply disclose the sum of all business that is done.

Okay. Well, from my calculations if I assume 30% -- and again, I know you are not commenting -- and let's say $7.5 million of that ships next calendar year at 30% that is $2.1 million over 15 million shares, so that is another $0.15 a share protected by the NOL.

And I was at roughly $0.30 just with a little slight organic growth, so that gets me to $0.45 without an additional Comm Systems award and without the possibility of an accretive acquisition. So, I'm not asking you to agree or disagree with that as guidance, but if I am correct is there any -- were there any holes in my logic on that?

Well, Gary, as usual your math is very good. And I am not going to comment, I don't want to go out and give any quantitative guidance at this time. But I think as we all know, there is always ups and downs and complexities and all sorts of different things that do occur.

But if you purely look at it based on a linear, quantitative equation, I can't argue with anything that you just said. But again, it is something we are not going to comment on at this time.

Okay, all right. So just again, just so I can hear myself think -- so, if I have nominal organic growth plus the $8.2 million contract that you have in hand, if that gets me in to $0.40 to $0.45.

And if in the next 15 months you win just one more Comm Systems order and/or an accretive acquisition and/or organic growth with all your initiatives on medical and tolls and metering, etc., and/or the military increase continues at pace and/or accelerates.

If I am correct -- and I know you are not commenting on that -- if everything goes well -- and I am not trying to nail you down on a quarter but for the calendar year -- if that gets me to $0.40 to $0.45 or $0.45 to $0.50, and going from $0.22 this year to $0.45 next year let's say we get a PE of half the EPS growth rate, that is a 25 PE.

And because commercial is coming on strong, $0.40 to $0.45 times the $0.25 -- so you could logically make a case for a $12 to $15 stock if all of the above came true. Therefore it seems that we are pretty cheap here in the $6 range, especially in light of the fact that we are also going to get that -- and I didn't include the $1.80 that is the one time on the realization of the tax asset, those are just operating earnings but that gets the book up to $6.

So basically, if I am right, we are a Company that a year from now could be valued today at book value and with a 20, 25 PE selling at double digits.

So again, with all of that in light and all that potential without really reaching for anything above and beyond, tell me why you guys aren't -- now that you have got four quarters under your belt, how come you are not being more aggressive on the IR front?

I am happy to comment on that, Gary. First of all we have seen a pretty significant increase in investor inquiries. And we have certainly, certainly taken those calls, responded to those calls. And I would say that the interest in the Company has certainly -- has certainly gone up.

So, that is certainly one arm of the IR strategy. And that arm is what we call [say do]. That is the most important part of the IR strategy. As I am sure you are very much aware, a number of companies go out there, they make a lot of promises without much to show for it.

Our strategy has been one of focusing virtually all of our time on internal operations to put in place a business model that is highly leveraged and then execute upon that so that we can build very clearly a sound track record that we call our say do ratio. So at this time we have taken the additional calls and we are certainly looking at extending our IR program as we go forward.

And that is not to mean that we are going to go out in front of large groups of people and present and wave the pom-poms and all that. It is really all about meeting with investors more on a one-on-one basis, answering the questions with our focus always being on say do first and using that as the most valuable plank in our IR strategy.

Okay, I hear you, Phil, on two things. First, say do is not a form of karate, right it is not S-E-I-D-O, it is what you say you are going to do then you do it, right?

Absolutely correct.

Okay for those who have never heard say do before. And then secondly, I hear you and certainly I am not asking you to take your eye off the ball from an operational point of view. But we are a public company and IR is part of the responsibility of a public company and we want to get the appropriate valuation for what you have accomplished.

So, I know every Board is different, every management team is different. But now that you have four quarters under your belt presumably with a good fourth quarter we will have a year plus under our belt. And as I just highlighted, things look pretty interesting for next year with just half of the potential bogeys coming due.

So. all I am saying is there are companies out there earning less than you, there are companies not profitable yet that do some form of investor relations just to make a broader audience aware of the story.

So, I don't think it is going to kill anyone if you guys attend one or two or three conferences in a calendar year period looking for sell side coverage. And/or instead of waiting for people to come to Newark, New York where you go to Chicago or LA or Miami and meet some buy side, small value people.

So, I am sort of -- I don't want to get my cake and eat it too, but you certainly have enough evidence of what you are doing and I don't think three overt, proactive outgoing IR efforts is going to take your eye off the ball, you know? And then obviously you deal easily with the reactive ones when people call you and choose to show up at your corporate headquarters. I just want to say that for the record.

I certainly -- we certainly understand your point of view. And Mike and I can assure you that we are discussing this topic internally along with the most effective approach and timing.

Certainly we understand that all the dynamics of being a public company. We have a lot of experience in this arena and we are using the experience that we have had in the past to go forward with the most valuable -- with the most optimal value proposition we can to existing and prospective shareholders. And I do appreciate your thoughts on it. And certainly understand your point of view.

All right, guys. Hey, thanks very much and congratulations again on the great progress.

(Operator Instructions). There appear to be no other questions at this time. I will turn it back over to Mike for any closing remarks.

Great. Well, thank you once again, everyone, for joining us today for our Q3 2015 results earnings call. I look forward to sharing with you our quarterly progress on each quarter's call in the future. Thank you very much and have a great day.

And that does conclude today's conference call. We appreciate your participation.