Ultralife Corp (ULBI) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this Ultralife Corporation second-quarter 2016 earnings release conference call. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Jody Burfening. Please go ahead.

Thank you, Steve. And good morning, everyone. Thank you for joining us this morning for Ultralife Corporation's earnings conference call for the second quarter of fiscal 2016. 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.Ultralifecorp.com, where you will find a lease 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 contains 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 the Company'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 differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures.

With those housekeeping items 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 by making some overall comments about our Q2 2016 operating performance. Then I will turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I will provide an update on the progress against our 2016 revenue initiatives, then open it up for questions.

For Q2 of 2016, we were pleased to deliver our seventh consecutive quarter of total Company profitability and positive EPS, generating an operating profit of $0.5 million on revenues of $20.4 million for an operating margin of 2.4%. Included in these results was the favorable revenue contribution of the battery/energy products UK acquisition completed in mid-January.

Q2 total Company revenue was up $1.4 million or 7.5% year-over-year, resulting primarily from the strong increase in our Communications Systems business. Battery and energy products' Q2 revenues were $15.8 million, down 1% from the prior-year and including the Accutronics acquisition, which delivered $2.5 million in revenue and again performed to profitability expectations. Increases in [B&E] revenue from the core businesses' medical batteries, chargers products and favorable acquisition contribution were more than offset by decreases in the core business revenues due to the nonrecurring 9-volt battery European demand surge in 2015, slowness in our China final colloid battery business, and smaller than prior-year shipments of our [MIDS] batteries for special Communications Systems.

For our Communications Systems business, second-quarter revenues were $4.6 million, up 55% year-over-year, again the highest quarterly revenue level in three years, and driven by the deliveries under the vehicles installed power-enhanced Rifleman applique large contract announced last year.

So for the first half, our revenue was up 8%, we are profitable and our new acquisition is performing to expectations. Yet we have been seeing some sluggishness in some of our core market segments in both business units.

As such, we recently completed some cost restructuring in order to realign our business model parameters to current revenue levels. In a few minutes I will talk more about our revenue initiatives for 2016 but, first, I would like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the second-quarter 2016 financial performance.

Thank you, Mike, and good morning, everyone. Earlier this morning we released our second-quarter results along with our Form 10-Q and Form 8-K for the period ended June 26, 2016. Consolidated revenues for the second quarter totaled $20.4 million, representing $1.4 million or 7.5% increase from the $19.0 million for the second quarter of 2015.

Revenues from our battery and energy products segment were $15.8 million, a decrease of $0.2 million or 1.3% from last year. For the second quarter, a $2.5 million revenue contribution from Accutronics and a 4.7% increase in shipments to medical customers were offset by higher 2015 orders for 9-volt batteries from large global smoke detector OEMs in response to legislation passed in certain European Union countries, large shipments of batteries to service the metering and [toll paths] industries in China and lower military battery shipments.

Commercial revenues for the second quarter of 2016 increased 5.3% over the prior year, reflecting Accutronics sales and the increase in sales to medical customers. Government and defense sales decreased 10.4% from the 2015 period, due to the timing of battery shipments to service multifunctional information distribution systems and slightly lower sales of primary batteries to the US Department of Defense, partially offset by higher charger shipments to several large international defense clients.

As a result, battery and energy product sales were split 62/38 between commercial and government and defense, compared to 58/42 for the 2015 period.

Communications system sales of $4.6 million increased by $1.6 million or 54.6% from the prior year. This increase is attributable to shipments of VIPER systems, which more than offset a decrease in full business orders through the closing and funding timing differences of certain opportunities which are expected to ship in the second half of 2016. Our consolidated gross profit was $5.9 million, the same as that reported for the 2015 period. As a percentage of total revenue, consolidated gross margin was 29.0% versus 30.9% from last year's second quarter.

The 190 basis point reduction in gross margin resulted from the sales mix of products for our Communications Systems business, which offset an increase in gross margin for our battery and energy products business. Gross profit for our battery and energy products business increased by 2.7%, reflecting the addition of Accutronics. Gross margin was 29.6%, a 120 basis point increase from the 28.4% reported last year, due primarily to favorable sales mix, including the contribution of Accutronics and other medical sales, and continued good manufacturing performance.

For our Communications Systems segment, gross profit was $1.2 million, a $0.1 million or a 6.2% decrease from the year-earlier period. Gross margin was 26% compared to 44.2% reported for last year's second quarter, due to sales mix including the weighting of the VIPER program. Operating expenses totaled $5.4 million compared to $5.0 million last year, an increase of $0.4 million or 7.1%. The increase reflects the acquisition of Accutronics, which contributed operating expenses of $0.7 million, including $0.1 million of intangible asset amortization.

Excluding Accutronics, operating expenses decreased $0.4 million or 7.6%, due primarily to strict control over discretionary spending while focusing on the development of new products in revenue growth.

In addition, as Mike mentioned, we have taken actions to reduce our costs going forward which will give us approximately $1 million of savings on an annualized basis. As a percentage of revenue, operating expenses represented 26.5% compared to 26.6% for the year-earlier period.

Operating income for the second quarter of 2016 was $0.5 million compared to $0.8 million for the 2015 period. The year-over-year decrease in operating income resulted from the 190 basis point decline in gross margin in the 2016 period. Operating margin was 2.4% for the 2016 period compared to 4.3% for the second quarter of 2015.

Second-quarter non-cash operating expenses including depreciation, intangible asset amortization and stock position expenses amounted to $0.9 million, equivalent to that for the year-earlier period. This brings us to adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense of $1.5 million or 7.2% of sales versus $1.7 million or 9.1% for the second quarter of 2015.

For the rolling 12-month period we have generated $6.7 million of adjusted EBITDA for 8.4% of sales versus $6.2 million or 8.4% for the year-earlier period.

Other expenses, primarily comprised of interest expense and foreign currency transactions totaled $24,000 versus $28,000 of income in 2015. During the second quarter of 2016, we converted US dollars generated from our Accutronics business in the UK into pounds sterling upon the announcement of the Brexit results, thereby providing favorable foreign currency income, which offset a large portion of our interest expense.

For the year-earlier period, we converted pounds sterling and euros to US dollars to lock in foreign currency gains at an opportune time. And our tax provision was $33,000, primarily reflecting income taxes for our China and UK operations as well as the timing of deferred taxes. Our tax provision was $71,000 for the 2015 second quarter.

Net income was $446,000 or $0.03 per share compared to $788,000 or $0.05 per share for the same period last year. The Company's liquidity remains solid with cash on hand of $3.3 million, working capital of $34.1 million and the current ratio of 3.9. By comparison, the cash on hand at year-end 2015 was $14.4 million. The use of cash since year end primarily reflects the acquisition of Accutronics, the repurchase of shares and strategic capital spending to automate certain of our production lines.

Consistent with our capital allocation plan of balancing longer-term investments and revenue growth, including new product development and acquisitions with enhancing shareholder returns in the near-term. During the second quarter of 2016 we generated $2.1 million of operating cash flow through our operating results and reductions in inventory.

The Company's share repurchase program expired on June 2, 2016. From the inception of the program on May 1, 2014 through its expiration, we repurchased 2,592,095 shares, representing a 15% reduction in shares outstanding. The aggregate cost was $10.5 million or $4.04 per share. During the second quarter of 2016, we repurchased 149,904 shares for a total cost of $0.6 million.

In summary, actions we have taken today to optimize our business model while executing our capital allocation plan through our strategic investments are demonstrated with our seventh consecutive profitable quarter. Our intent remains to drive in volume and sales through organic and synergistic initiatives to unleash the full leverage potential of our business model.

I will now turn it back to Mike.

Thank you, Phil. 2016, our focus on revenue growth remains on three core elements: expanding our market sales reach, new product development and pursuing acquisitions. In the battery and energy products business we continue to diversify into commercial and international markets to supplement revenue from and lessen our historical concentration in the US government and defense markets. In Q2 2016, 62% of total B&E sales were to commercial customers versus 58% in Q2 2015 and 56% just last quarter.

Going down a little further, in Q2 2016, shipments of medical products in the core B&E business were up 5% year-over-year. Since launching our focused diversification strategy towards the end of 2011, our medical product revenues have produced a compounded annual growth rate of over 25%, such that our core quarterly medical product revenues have approximately doubled since 2011.

The acquisition we announced earlier this year essentially doubled to that core run rate again, resulting in total medical market revenues that are now approximately 30% of total B&E quarterly revenues. As we strive for more consistent topline revenue growth through diversification in our B&E business, we view the fundamentals of our sales growth from medical devices with lithium batteries to be attractive.

First of all, medical devices for the growing aging population who desire more portability and convenience are great applications for our battery and charger solutions, due to lithium batteries' size, energy density and cycle capability. Secondly, the safety, performance and reliability requirements are good fits our product and Company culture heritage as a military defense supplier.

Lastly, the necessary collaborative new product development activity helps us create value proposition-based, sticky relationships with our customers.

From initially just providing our long-life nine-volt lithium battery in very simple applications, then broadening participation to include AEDs, infusion pumps and respiratory devices and today serving medical cards, digital X-rays and numerous other patient diagnostic and care machines, the available potential market just keeps getting bigger. While the medical product qualification processes are lengthy and complex, we view the opportunity for consistent and growing revenues to be well worth the effort.

Regarding the recent Accutronics acquisition, the initial 100-day functional integration plans have been substantially completed with no negative surprises, and we remain on track with acquisitions and earnings contribution to the EPS accretive within the first 12 months. During the second quarter we began utilizing the Accutronics facility as a European distribution point for several of our products produced in the US and China and are now recognizing cost synergies from removing a third-party logistics service from the supply chain.

Going forward, we have developed growth initiatives aimed at establishing a broader commercial and [G&E] platform in Europe and set an initial target of leveraging our Accutronics footprint to double the new European entity's revenues over the next three years. Components of that plan include growing organically by achieving the inherited Accutronics three-year core growth plan, maximizing sales in Europe of our Ultralife products, leveraging Accutronics' headquarters location to grow European G&E business and leveraging Ultralife's existing presence to cross-sell Accutronics products into the United States and the rest of the world, particularly with global medical OEMs.

In the core battery and energy products business, the nine-volt revenue did rebound over 25% from Q1 to Q2 but is still below the prior year's surge. That said, the other revenue streams remain fairly stable from a broad range of international and domestic crime and OEM business partners. These include various shipments to the Defense logistics agencies, deliveries to our major global medical OEMs, continued shipments of our medical cart battery system with new smart display and sales of primary cells for AED applications. We also secured a new 12-month blanket PO from an international prime for military communications batteries shipping in Q3 and beyond.

We will continue to diversify our overall revenue by more penetration of commercial markets, international government defense markets and from a broader range of US government defense customers.

In terms of new product development, in Q2 B&E revenues derived from products introduced less than or equal to three years ago are 24% of sales, once again illustrating the vitality of new products on our ongoing revenue streams. We continue to develop new products and evolving existing products through multigenerational product plans for a number of applications throughout many of our served markets.

For example, in the second quarter, we completed development, qualification and shipment of our new advanced tactical two-bay smart charger to a Middle East customer, received our first significant order for an ultra-high-capacity lithium manganese dioxide CFX blend primary D-cell product as part of an international government battery solicitation. And we received a purchase order for our [seal rhodasery] replacement products to begin qualification in a medical patient ventilation application.

Regarding the evolution of existing products, we are following our successful 9-volt blueprint to develop our next-generation 3-volt lithium medical product lines, encompassing multigenerational product planning and community support. Our redesigned next-generation nine-volt product is now in its fifth year of full production out of our China facility. Our field experience of this product has been very positive and recent testing of actual product retained and be temperatures for five years demonstrated excellent shelf life.

It should also be noted that in June 2016 the local Shenzhen Inchon district certify that our China facility met its green energy initiatives. This distinction plus the national high technology entity status it already has enables our China facility to receive local government support in expanding its expertise via green energy product developments. Leveraging this community support and the multigenerational product planning approach, we look towards further advancing our 3-volt lithium medical products. We are presently undergoing qualification testing for industrial 3-volt cells with several top-tier customers, serving multiple applications such as for the next generation smoke alarms, tracking devices, metering and, more and more, the numerous wireless devices supporting the Internet of Things.

We truly look forward to the potential new revenue streams these opportunities should ring.

In regards to the communication systems business, refined focus on emerging markets and leveraging new products into those markets is a key focus of the 2016 strategic and operational plans. The acceptance of new product developments released over the last three years has been strong domestically and the growth in international markets is continuing. We have ongoing testing both domestically and internationally for our new products and continue to embed our products into multiple program opportunities around the world to support soldier modernization and vehicle programs.

In Q2 2016, new products less than or equal to three years old represented over 85% of total communication systems revenue, driven largely by the MRC VIPER and MC-4 shipments. This represents an increase in new product sales versus the prior year of 58%.

Regarding the VIPER program, deliveries throughout Q2 in support of the soldier radio waveform Rifleman radio applique requirements for the U.S. Army are being fielded to units for operational per sets and also used in support of many I-16.2 testing of other Network Systems with no shortfalls presently identified. Future SOW applique program requirements are anticipated to support the Rifleman radium program.

As an update to our new McDowell Research-branded MRC MC-4 integrated communications system, which underwent 18 months of codevelopment effort with an international partner, multiple US OEMs and US SOCOM, initial purchase order deliveries were made in Q2 with systems now undergoing further operation and integration testing by SOCOM for applicability and broader use in command and control platforms.

Regarding the US family of special operations vehicles or FOSOV, program execution during the first half of 2016 was steady with additional program purchases anticipated in the back half of 2016. This critical program for US SOCOM has provided us an incubator for focused new product development based on the knowledge of the platforms and the requirements of the special operations forces' operators which is reflected in the product acceptance and continued integration. These products and systems are now transitioning to global soft programs, providing sustained and future growth opportunities.

Looking ahead, new product development remains focused on emerging radio technical requirements and broad capability sets that not only complied with sophisticated waveforms but also supported existing legacy platforms globally and the known tactical requirements of our core space.

In closing, despite some economic uncertainties weighing in on our customers' buying decisions, in Q2 we sustained availability. And we still have our sights on delivering profitable revenue growth for 2016. Our new acquisition continues to perform well and we know that our commercial and international revenue diversification strategy, new product development focus and operating business model position us to achieve better leveraged earnings growth.

In battery and energy products, we continue to gain revenue traction in our commercial business, particularly in the medical market, where our growth is driven not only by expansion of our core customer products' demand but to a larger extent by new applications from new customers with new product development requirements. We also have the benefit of our Accutronics acquisition, which itself presents us with a new platform in Europe from which to capture new revenue growth opportunities.

We will continue to truly globalize new product development, multigenerational product planning and manufacturing capability for maximum leverage in new opportunity creation.

At communication systems, during the second half of 2016 we are wrapping up shipments against the initial VIPER contract while pursuing other new product development-driven integrated communications systems program opportunities. Our communication systems' global OEM, business owner and end-user activity remains high and we remain very selective in allocating the engineering investments required to support the product integration, evaluation and testing necessary to secure the next large program win.

Regarding future M&A, we viewed the B&E Accutronics acquisition we did earlier this year, though small, as very much a key strategic investment that checks several global organic growth axis for us including diversifying more into commercial markets, particularly in medical, expanding our global sales reach for all of our other core products, and establishing the European platform for both pursuing EU government defense customers and OEMs more locally as well as for overall logistical and product positioning support. The best part, however, is that we instantly have the benefit of the additional benefit of the many talented people that strategic investment brought along with it. As a result of going through this initial integration process together we're well prepared for another acquisition and look forward to pursuing an even larger target.

We're looking for strategic, accretive business additions that enable us to more quickly gain scale, particular market access or technology, new products and/or skilled resources. And whether they be in existing core or adjacent products or markets, indoor vertical integrations.

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

(Operator Instructions) Sam Bergman, Bayberry Asset Management.

So I have a couple questions regarding the military, and perhaps you can tell us the blanket purchase order that you received. Can you give a dollar amount on that?

We haven't disclosed the dollar amount of that blanket contract we did receive.

Can you give us the range?

Phil, do you want to comment on that?

The range is that it's certainly going to help our P&L. It's something that we don't consider on an overall basis to be overly material because if it was, we would certainly have disclosed it.

So I would like to keep it at that, but these things in some cases do come with tails and do provide other opportunities, and that's really the beauty of the things that we don't necessarily consider material at one point could certainly drive other opportunities. So that's how we look at it, Sam.

And if you look at the Harris wins on radios over the last six months and you being the supplier to them, when is the expectation from Ultralife to start shipping -- receiving orders and shipping product on those POs?

That's a very good question, Sam. And we are excited to see any of the radio manufacturers get new business opportunities. Obviously, most of our product support radio programs. So we don't get business if they don't get business. We have ongoing business relationships with all the radio manufacturing OEMs. In the case of some of the specific opportunities that you reference, we are involved with customers with a multigenerational approach to batteries. We continue to work with our customers to advance our battery capability for their additional needs. We don't get as much visibility as we have in prior years to any particular timing of the exact revenue recognition, but we look forward to serving those throughout the next couple years.

It's likely to be 2017, 2018 and beyond that type of timeframe.

So your understanding would be that initial shipments would start in 2017. Are we looking at the first half or the second half?

I wish I had that granularity. And we don't assume anything. We know that there's a qualification cycle. We know that we have to win business each and every day. We feel very strongly about our existing relationships but we don't take anything for granted. So, we have a whole development process and quoting process and evaluation and discussion process to go forward. And to try to pinpoint particular revenue or even first half to second half at this time would be, I think, extremely premature.

Okay. Going to Accutronics, is there a breakout of sales for Accutronics this quarter? I know you didn't last quarter. Do you have any numbers for us on this quarter?

I think in my prepared remarks I actually said $2.5 million.

Yes, we did. It's $2.5 million, Sam, very consistent with what we showed in Q1. And you will also see it referenced in the 10-Q that we filed with the SEC this morning as well.

Do they carry any type of backlog going into the next couple quarters or not?

They certainly do because their whole business is dealing -- or a large portion of their business, I should say, is dealing with large global medical device OEMs. So a large part of that is a combination of backorders and expected pulls.

So piggybacking that company onto your Company -- is there any one particular product line or award that you can talk about that has been received recently because of the Accutronics acquisition?

Most of those revenue streams for Accutronics are ongoing contracts. That's one of the things we liked about the acquisition when we pursued it, that they have a little bit more visibility to revenue over a number of quarters than we did. We have numerous -- and we review them every week -- numerous different contract opportunities underway with them.

Their process, because it tends to be a customer, as they refer to it in the UK, a bespoke type of application is that there's an extensive amount of upfront codevelopment with the end-user. Sometimes [NRE] is involved. So we have our iron in many of those fires. And we talk about those each and every week.

The development cycle from going to that stage into a revenue stream could be very similar to most medical products. It could be two to three years.

If at any time there should be a large award we would certainly reveal that. And further stepping back a little bit to the comment that you asked earlier, I certainly wasn't meaning to evade answering your question. When we look at any revenue or organic growth opportunity for our battery business or [contextual] systems, for that matter, we think about it in terms of points of organic growth. And if we are looking at roughly $70 million or so, every $700,000 represents a point. And we are trying to get multiple points of organic growth each and every year.

So when I give you a list of things, for instance, that we talked about in the energy products business, that list of opportunities could be anywhere from several hundred thousand dollars up and over to $1 million-$1.5 million. Anything, Sam, that I believe would be over $2 million or so, especially if it was strategic, we would put forth a press release.

Okay. If we go back to the medical device area and the expenditures on R&D, can you give a cite there of how much R&D is -- how much is it your expectations for R&D to be up this year just in that area of commercial medical devices? And are you planning to add any salespeople in that area, knowing that you could probably pull salespeople from Accutronics overseas? But still, with that much growth, with that much development going on, one would think there would be some increase in sales in the sales area.

The expenditures in R&D, new product development technologies, we sort of said and may have [referred], remember, from previous calls of 35, 5, 10 equals 10 type of business model. And that's just really sort of a navigational vehicle to make sure that we are spending in the places we need to spend, regardless of whatever the revenue level is.

So typically the spending has been anywhere between, say, 5% and 7% in the new product development and technology area. We wouldn't expect to continue to do that going forward.

Of course, if there's a unique opportunity that comes up, that's not a firm and fast rule. That's more of a guiding principle to make sure that we stay consistent with our revenue levels. So, I don't anticipate that that overall level of spending would necessarily increase. However, the allocation of that spending would logically be more weighted towards some of the medical opportunities than perhaps in the historical realm, some of the other military opportunities.

Relative to salespeople, we don't comment about individual sales force levels. But we have in place and we have very specific plans for organic growth targeting not only, like I said in the comments, not only in Europe, but also back in the United States. And so we have mobilized several quite powerful and capable sales resources in the United States to advocate for the Accutronics products to be able to help expand their presence in the United States.

And the last thing I will say is that whereas, in many ways, the Accutronics acquisition was a regional player working with some large global OEMs, we hear over and over again from those global OEMs that they are delighted to now Accutronics is part of Ultralife because those global OEMs have presence in Asia, they have -- because many times corporate headquarters in the United States. And they look at us overall as a much better supplier than perhaps, in the legacy form, Accutronics would have been.

Okay. And the last question, in regard to the medical device area being a high-growth area going forward, who is your two biggest competitors in the lithium batteries for medical devices?

I think there's a broad spectrum of competitors. I'm not going to name any specific names. I think there's some very good reports out there -- Frost & Sullivan, other types of next words that could go through different aspects of who our competitors are. We look at many different competitors. There are some competitors we see in the primary space and some competitors we see in the rechargeables space. Sometimes we see, for high-volume, more commoditized or less custom development products we see certain competitors. Other times we know that it may be a lower volume, a more complex custom design.

So there's a lot of existing players that are well-known in the marketplace, whether they are batteries or battery pack suppliers. And I think there are other people that would be able to give you a little bit more detail by a specific competitor. But we keep a close eye on those and don't underestimate their capabilities on each and every transaction we take a look at.

So can you give us any color in terms of what type of pilots you are putting out right now versus, let's say, the prior quarter or even the prior year? Are you doing 10 different pilots with OEMs? Are you doing five? Is there any way to gauge what growth is going on in terms of the pilots that are going on?

It's interesting, Sam. I think organically, at any given time, probably in the dozen range or so. We've picked up at least a dozen or so with the acquisition of Accutronics.

I would say it's in that order of magnitude. And we recognize that we are always going to be constrained if we have any ambition at all with financial and human resources. So, we are trying not to get too distracted by the shiny new one in the corner but look at things where we think we can be the most competitive, provide the most value and spend some of our precious upfront engineering and human resources on the ones that think that have the highest probability for near-term revenue. But I would say that the dozen or two range is probably as qualitatively or quantitatively as I can answer that question.

Is there any capacity you can give us for prior quarters? I would assume that if it's growing there must recent increases in that, in those pilots.

My understanding is from other indicators, and this may be very unscientific, but we do know that there's an increase in the number of nondisclosure agreements that are coming through our legal operation. So if that's any indicator of opportunities I'd say it's positive.

Okay. Thank you very much.

Gary Siperstein, Eliot Rose Wealth Management.

In the quarter we talked about how the original organic business, X-ing out Accutronics and X-ing out the VIPER contract has been down year-over-year, you called out the nine-volt win from last year and the [Meduring] win, what else do you attribute the trailing organic business to? You mentioned economic uncertainties. But can you give us a little more granularity, clarity on that?

We look at the overall population of different awards that we received. Obviously there were some things that we received this year that we did not receive last year we just call out everything we just didn't recur. We were pleased with, obviously, the acquisitions. And we were pleased with some of the international government defense opportunities that we talked about.

We offset most of the things that you would expect just by a normal course of business to not be recurring. The ones that we highlighted were some of the largest ones.

I don't know, Phil, if you have any other (multiple speakers).

Yes, I'll just add a few points to that, Gary. First of all, regarding the business and regarding metering and toll passes and all that, just recently some new specs were introduced, national -- what's called national grid specs. And there was some of the delay due to the testing that was involved. And we are very pleased, very excited about the fact that we have now passed all of the new standards. And that puts us in a very solid, very enviable position.

And also with regard to those businesses, there's always a number of different competitors that come up that certainly don't need the specs, they don't have the quality records that we have but do have lower prices and do entertain payment terms that we would think are way beyond what is reasonable. And those are more or less fly-by-night type operations. And over time we see that the bigger players do come back to us in a number of different businesses that we are involved in. But probably the most important point is the first, is that we have now passed all the national standards. And again, that puts us in an enviable position going forward.

So some of that metering business, future metering business can come back to your-- some point in the future of our

We certainly think so, yes.

Okay, super. And so on the other B&E decline, so you called out those two pieces. And then otherwise I guess it's timing and when different things hit. Mike, you went through a slew of opportunities and put some POs and some potential POs.

Can you give us some color on the cadence? In other words you are looking presumably for a better second half, you have adjusted expenses to a lower level. You are hopeful to -- you still aspire to some profitable growth in the Company. It just seems that the leverage is amazing in the operation. In other words, another $3 million in sales per quarter with a 30% margin gets you another $0.06.

So you could almost be at $0.10 quarters if we can tag on $3 million per quarter or $12 million a year. So with any potential acquisitions or anything happens of more substance on B&E with medical and/or government, and certainly the $300 million potential pipeline in Communications Systems, it seems that there are a lot of levers that could happen that could meet the differential. An extra $12 million a year isn't necessarily too much when you have those many things that could drop in any one time.

Is my analysis right on that?

Yes. Having a small company, $500,000 one way or the other has had a huge impact on our numbers. I think if you look at the map it's like $1 million year-over-year decline in organic revenue. And we know that there are multiple hundreds of thousands of dollars type opportunities orbiting our pending business list and could fall this quarter or the next quarter.

So it could be sort of frustrating. But I think what we've always tried to do is be very aggressive in opportunities we pursue but every pragmatic in trying to make sure our costs align with the current revenue stream because one of the things we aspired for early on was to have consistent profitability. And we really set that as a minimum requirement to have profitability. And $500,000 here or $500,000 there can make a big difference in our growth rates, given our size.

And I think you are exactly right about the leverage. We've seen that over and over again. We're optimistic about the second half of the year but felt that it was prudent, given some of the sluggishness that we saw, as we already talked about, to try to set the deck in the most favorable addition possible for a profitable and a growing revenue year.

So again, just to hone down on -- optimistic for the back half of the year versus the first half, so separate from what you have done in the expense line, is it all the things you mentioned, the blanket PO, maybe it's a little seasonality, maybe something drops somewhere on the communication side? Or is it basically that will be as it is and it's mostly on the B side where there's opportunities coming?

It's hard to say. I'm not a big fan of blaming anything on seasonality. I think it's all about our ability to execute. And we are just doubling down on our efforts, making sure all our executives are seeing customers, making sure that we are not getting tied up in a lot of admin work, and trying to be really smart about the pending opportunities we have and then bring them in for purchase orders for revenue recognition.

But I look at 9-volt activity, 3-volt activity, medical activity, rechargeable activity, we always have in the back -- there's government contracts that we bid even last year that there's ongoing rumors about things happening any day now. My definition of any data is a little different sometimes from what the government thinks is any day now.

But we have several of those opportunities in place. And sometimes they can be frustrating waiting for those. But we know we have many different opportunities in play. And as we look to the risks and opportunities for the back half of the year, we still feel optimistic about showing total year revenue growth.

Okay. And on the investor presentation on the website you talked about that $300 million opportunity on the comm system side. Have any of those gone away or been won by competitors? Or is it still all out there, it's just a question of waiting on the government.

Yes. None of them have really gone away. There's pluses and minuses. I think like a lot of us, we don't have any better crystal ball than anybody else does about which way -- let's just say some of the national elections will go and what influence that have on the ability to get budgets done in a timely fashion, if there will be a change in direction and philosophy. I think it's impossible for anybody to predict at this time.

So we already know that the government defense business, particularly in the United States, is in a constrained type of position. So rather than sit back and be using hope as a strategy, that something is going to fall immminently, we have been taking more conservative, maybe more cautious approach, in saying that some of those things may not happen until next year.

We are still investing in new product development activity to make sure we are positioned with world-class products. But we are not getting ahead of our skis and thinking something is going to fall in the third and fourth quarter right in the middle of a national election season.

Okay. That $300 million, give or take, is still out there? We haven't lost in the competition?

Yes, yes.

Okay. And then on the -- you mentioned the steps you took to moderate expenses for the back half of the year. So you mentioned $1 million annual savings. Were there any charges in Q2 or will there be a charge in Q3 because of that?

No. What goes along with -- if it was material, we would have called it out in our scripts or we would certainly called it out in our Q. It would just be expenses related to the severance that, in total, were not material or cost avoidance going forward, or specific earmarked expenses that we looked upon as being more discretionary and not necessarily related to our more immediate revenue growth.

Okay. So if it's $500,000 in savings in the back half of this year, is it like maybe $200,000 in third quarter and $300,000 in the fourth? Or is it $250,000, $250,000? What do you think the cadence will be on the savings?

I think the cadence is going to be probably very, very close to being split, maybe a little more weighting fourth quarter of the year but pretty close, maybe 45/55, 40/60, something in that range.

Okay. And then you called out on the trailing 12 months EBITDA or cash flow of $6.5 million, but I think in your script you had mentioned Q2 was over $2 million. So that annualilizes at $8 million.

Hasn't that been the highest quarter of cash flow for the last two quarters? And is that a new higher level that we can look towards? Or do you think it was just an aberration in the quarter and we will be back to the $6.5 million?

I'll tell you exactly what it is. It's simply the EBITDA generated plus reductions in inventory. So EBITDA generated, $1.5 million, inventory reduced of $500,000 to $600,000. And we've shared with the investment community on an ongoing basis that we continue to see opportunity in reducing our inventory. Of course, it's cheapest form of financing.

So we have certainly sharpened our pencils and our focus, and that's an area that we are really digging into even more intensely, as we have done in the past. I think the bump up in inventory that you've seen since year end is the result of being prepared for the items on backorder including VIPER, as well as anticipated when certain sales force orders are going to be received in sales are going to be shipped.

So it's a delicate balancing act. Nevertheless, there's opportunities in reducing the inventory. So those are the components.

Okay. So there could be some continued inventory reduction Q3-Q4 or certainly over the next 12 with that?

Gary, we would expect. We would expect that.

Okay. You've got seven quarters in a row now profitability. Can you give us any color on when the orders you expect that NOL asset on the balance sheet?

Yes. But first of all, let me tell you. It's not the auditors, it's doing our best to be in compliance with the US generally accepted accounting principles and SEC regulations. And let me just give you a flavor for that.

You can go back to our 10-K last year, and you can see in the income tax footnote that we specifically have a valuation reserve that includes the net operating loss carryforwards. The overall reserve is the $5 million. Specifically for the NOLs, it's approximately $28 million.

The question is, when can we recognize at least a large portion of that.

So when you look at the guidance, what the guidance says is that this is as follows. It says that forming a conclusion that the valuation is not needed is difficult when there's negative evidence such as cumulative losses in recent years. And I'm just paraphrasing what the guidance is, so it may not be exact. But the one thing that is not laid out by the SEC or by the accounting guidance, it doesn't define punitive losses or recent years.

However, we look at trends. We look at where the SEC is commenting, we look at where there are certain GAAP issues. And the trend is generally a two- to three-year period including the current order intake with the tendency, I guess, more focused on three years. And this trend, Gary, is looking at cumulative losses and then further variables that we are assessing. Of course, I mentioned the Company's history of profitability, how good we are at forecasting. And it also does call out the potential of recurring or nonrecurring government contracts and the timing and impact of that business to us.

Me just give you an example. We put this all together before my time with the Company. And in 2004 the Company reversed its valuation reserve. In 2006, it rebooked it.

I certainly believe that the growth for the Company and the profitability of the Company is very, very strong, or else I wouldn't be here. And with that, we are deeply involved in reviewing our own internal position that we will get the concurrence from our auditors of looking at each year of net operating loss when you lay out the schedule and looking at what is the most reasonable position for us to take that will be acceptable by the SEC and under GAAP.

So I can reassure you that we are neck deep in this and we certainly understand the different variables. And we just want to get this right.

So it's a long-winded answer with the intent being that it's not just a black and white response. Being yes, two years of profitability, we booked this $27 million asset. There's various, various idiosyncrasies and trends involved in this. And we just want to capture all of it, as we do with all aspects of our business.

Okay, yes. Thanks for all that. I understand it's just -- since it's such a major, I think the total -- was it $85 million or something like that?

$86 million.

I'm sorry, $86 million?

Yes.

It represents one of the top two or three assets of the Company. It would be nice to get selected on the books sooner rather than later. But obviously, it's got to be kosher. You've got to dot the I's and cross the T's. But if you look at other companies and so forth, and you just gave an example of what you've done in the past, at some point as you continue being profitable, it would be nice to get that on the balance sheet.

So in terms of additional questions, Sam mentioned the PO. The news release on that, the blanket PO, in terms of materiality. But Phil, then you filled in that sometimes these have tails. So is that something -- if it does indeed ship in the back half of the year, when do they typically let you know if there's a tail to it? Does that coume -- if you get the production line set up and you are delivering against it, as opposed to stopping in and starting again? So does it give you some color midstream or is it only after full deliveries? I guess that would be the same on the VIPER contract with [Talus], if there is some follow-up on that. When do they typically let you guys know?

Well, generally what happens is it turns out to be the waiting game. In trying to specifically point out that the delivery schedule that may be diluted in the PO or may not be included in the PO if it's an ID/IQ is just purely, purely guesstimating. And a perfect example certainly goes back to VIPER. We were all set to go with VIPER. Then we waited for a year or 18 months. And that's the difficult part of this, Gary, and that's the anticipation of nailing down the closing for any government -- generally, any significant government-related contract.

Okay. And then just the last two -- so it was good to hear that Accutronics was on track, 100-plus days in, and keeping to your budget and that you did what you had to do on the currency despite Brexit. So that's encouraging, and it's very exciting what's going on in the medical space and with the increased RPs and potential opportunities. And you called out that now you are starting to look at cross-selling. Can you give us any more color on that? Have we had any more action sales on the cross-selling yet, or is it still too early?

It's too early. But let me give you an example. There may be a multinational global OEM that had a plant that Accutronics may have served in the UK before. Now we are going and working our way up that company hierarchy to say, hey, we are a big supplier of yours in the UK where we've proven ourselves, we are high quality and very competitive, collaborative in terms of new product development. We are trying to go up the food chain a little bit to the other facilities for some of those global OEMs.

And those take a long time. The medical stuff particularly takes a long time to do. But that's a very active activity. But it will take several quarters before there's any meaningful revenue.

Okay, and then last question. Sam, your earlier questioner, had mentioned I think it was north of $2 billion win on the radios for special forces that included Harris and I don't know if it was General Dynamics or Raytheon or Lockheed -- maybe Talus. But I think it was three that it was split. Have we done business with two out of three, historically? Or have we done business with all of them historically and so we have a shot at, even if it's late 2017 revenue, when the POs start coming in on that, we have a shot at supplying two out of three of the winners?

Gary, without getting specific to what products we sell to OEMs, we definitely serve all of them. And we hold very dear to our hearts that when we work with a particular customer that we will protect their intellectual property and proprietary information, and so on and so forth, and try to work with them specifically and collaborate as they see they need to be successful uniquely with them.

So I don't want to really talk about any specific competitors. But we do do business with all three of them in various forms. I just wanted to make the point that in each and every one of those cases we do that in complete isolation to the others, lest we viewed as not being protective about their intellectual property.

Got you. Okay. Hey, thanks very much and good luck in the back half.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time I'd like to turn the conference over to Mike Popielec for any additional or closing remarks.

Thank you very much, everybody, for joining us again for our second-quarter 2016 earnings call. We look forward to continuing to share with us our quarterly progress in each quarter's conference call in the future. Have a great day, everybody.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation.