Ultralife Corp (ULBI) 2017 Q4 法說會逐字稿

Good day, and welcome to the Ultralife Corporation Fourth Quarter 2017 Earnings Release Conference Call. At this time, for opening remarks and introductions, I'd like to turn the call over to Jody Burfening. Please go ahead.

Thank you, Dale, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the fourth quarter of fiscal 2017. 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'll find the release under investor news in the Investor Relation section.

Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include potential reductions in 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 reflects the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results is included in Ultralife's filings with the securities and exchange commission, including the latest annual report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics and differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures.

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

Good morning, Jody, and thank you, everyone, for joining the call this morning. Today I'll start by making some overall comments about our Q4 and total year 2017 operating performance. Then I'll turn the call over to Phil, who would take you through the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2017 revenue initiatives, talk about some focus areas for 2018, then open it up for questions.

For Q4 of 2017, we were delighted to reach our highest quarterly revenue and operating profit level in 5 years, delivering a solid quarter of year-over-year revenue and operating profit growth. By generating an operating profit of $2.1 million, on revenue of $22.5 million, our operating margin was 9%, the highest quarterly earnings quality recorded in 7 years. Regarding earnings per share, EPS for the fourth quarter of 2017 was $0.24 and included $0.12 from our operating performance as compared to $0.11 per share recorded for the fourth quarter of 2016, plus an additional $0.12 related to the Tax Cuts and Jobs Act.

For the total year of 2017, we were pleased to deliver total year top line revenue growth and bottom line profitability improvement for the third consecutive year. Total year 2017 revenue was up 4% year-over-year while operating profit was up 72% year-over-year. EPS came in at $0.49, including $0.12 in Tax Cuts and Jobs Act benefit. On an apples-to-apples basis, excluding the new tax law, EPS was $0.37, up 61% year-over-year. Throughout 2017, we aggressively pursued exciting new revenue contributions for market and sales reach expansion, new product development and customer partnerships, while preparing to launch new products to serve the emerging IoT demands. In a few minutes, I'll give you further information about our revenue initiatives, but first I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the fourth quarter and total year 2017 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter and total year results for the year ended December 31, 2017. It gives me great pleasure to share with you that we also filed our Forms 10-K and 8-K with the SEC this morning, and have updated our investor presentation in the Ultralife's website. For the fourth quarter, consolidated revenues totaled $22.5 million, representing a $0.9 million or 4.1% increase from the $21.6 million reported for the fourth quarter of 2016. Revenues from our Battery & Energy Products segment were $16.8 million a decrease of $0.9 million, or 5.3% from last year with gains in government and defense offset by lower commercial sales. Timing differences in medical sales caused commercial revenues to come in below last year by 18.4%. Sales to our medical customers represented 47% of our commercial sales or 27% of total revenues for this segment. Government and defense sales increased 25.3% over the 2016 period due to higher demand from our U.S. and international defense customers, which grew 8.3% and 88% respectively over 2016. After 4 quarters of year-over-year sales declines from this sector in 2016, this year we have posted 4 consecutive quarters of growth in government and defense sales. As a result, the Battery & Energy Products sales split between commercial and government and defense was 58-42 compared to 68-32 for the 2016 period. The geographic distribution of our Battery & Energy Products sales was an international to domestic split of 55-45 compared to 59-41 for the 2016 fourth quarter.

Revenues from our Communication System segment were $5.7 million, an increase of $1.7 million or 41.9% over last year. The year-over-year increase reflects higher shipments of our core products, such as our 20-watt amplifiers and universal vehicle adapters, which increased 64% over the prior-year period as well as a 25% increase in VIPER shipments under the $4.7 million follow-on award we received in August. Sales on a consolidated basis split 42-58 between commercial and government and defense sectors, compared to 56-44 for the year-earlier period, reflecting the 32.3% revenue growth in the government and defense sector. Our consolidated gross profit was $6.9 million compared to $6.8 million for the 2016 period. As a percentage of total revenues, consolidated gross margin was 30.5% versus 31.5% for last year's fourth quarter. The 100 basis point decline in gross margin reflects the increased mix of government and defense sales. Gross profit for our Battery & Energy Products business decreased 9.8% from $5.3 million in 2016 to $4.8 million, reflecting lower sales in the sales mix. As a result, gross margin was 28.6%, 80 basis points lower than the 29.4% reported last year. For our Communications Systems segments, gross profit was $2.1 million, an increase of $0.4 million or 26.7% from the year-earlier period. Gross margin was 36.2%, compared to 40.6% reported for last year's fourth quarter. The 2017 gross margin decline is a result of sales mix, primarily increased VIPER shipments. Operating expenses totaled $4.8 million compared to $5.2 million last year, a decrease of 6.7%. As a percentage of revenues, operating expenses represented 21.4%, an improvement of 250 basis points from the 23.9% reported for the fourth quarter of 2016. The improvement reflects our continued control over discretionary spending. Operating income for the fourth quarter of 2017 was $2.1 million compared to $1.6 million for the 2016 period, a 24.8% gain. The operating profit generated in the fourth quarter, the highest reported in 5 years is a solid demonstration of the leverage of our business model. Operating margin was 9.1% for the 2017 period, an increase of 150 basis points over the 7.6% for the fourth quarter of 2016, and the highest reported since Q3 2010.

Fourth quarter noncash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses, amounted to $0.7 million compared to $0.8 million for the year-earlier period. This brings us to adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense of $2.8 million or 12.6% of sales versus $2.5 million or 11.5% for the fourth quarter of 2016. Accordingly, adjusted EBITDA for the 2017 12-month period is now $9.6 million, representing 11.2% of revenues, a 28% increase over the $7.5 million or 9.2% of revenues reported last year.

Our tax provision for the fourth quarter prior to accounting for the favorable impact of the Tax Cuts and Jobs Act was $200,000 compared to a tax credit of $115,000 for the 2016 fourth quarter, which included a favorable adjustment to tie the 2015 tax payable amount to the returns subsequently filed in 2016. As a result of the Tax Cut and Jobs Act, we recognized a one-time noncash tax benefit of $1.9 million in the fourth quarter of 2017. This resulted from the revaluation at the newly enacted 21% federal tax rate of our deferred tax liabilities, relating to book-to-tax differences and goodwill and other intangible assets. This adjustment when combined with our tax provision from operations, resulted in a net tax benefit of $1.7 million reported in the fourth quarter. There was no earnings impact for the revaluation of our domestic deferred tax assets representing our net operating losses as they continue to be fully reserved. These NOLs remain fully eligible for offset against our future profits for tax purposes going forward. Lastly, there were no resulting toll taxes due on the future repatriation of our non-U. S.-based cash, which amounted to $6.1 million at year-end 2017. Driven by our solid operating performance in the noncash tax benefit, net income for the fourth quarter was $3.8 million, or $0.24 per share. Prior to the tax benefit, our net income was $1.9 million or $0.12 per share compared to $1.7 million or $0.11 per share for the same period last year. Earnings per share for the full year of $0.49, includes $0.37 from our 2017 operating performance, which is an increase of 61.3% over the $0.23 reported for 2016. Also driven by the solid operating performance, the company's liquidity remains strong. With cash on hand of $18.3 million, no debt, working capital of $47.7 million and a current ratio of 4.3. The increase in our cash on hand from $10.7 million at year-end 2016, demonstrates our highly efficient cash conversion, as our operating cash flow remains at a level over 1x our operating profit.

In summary, the actions we are taking to drive profitable growth are demonstrated by our 2017 results, another year of profitable growth. Our intent remains on driving volume and sales through further organic and synergistic initiatives to unleash the full leverage potential of our business model. I will now turn it back to Mike.

Thanks, Phil. As we look back at 2017 and think about the year ahead, what stands out are the many new revenue contributions we created that position Ultralife for future revenue growth. The mechanics of our business model are working, producing profitable growth and improving quality of earnings. To more fully realize the operating leverage potential of our business model, in 2018 we are keenly focused on advancing new revenue initiatives carried over from 2017, and on increasing our revenue opportunity set to market and sales reach expansion and new product development. The strategy for market and sales reach expansion in the Battery & Energy Products business has been to diversify more into the global commercial markets and international Government/Defense markets. This serves to mitigate our historical dependence on the U.S. Government/Defense market, particularly as up until recently, the U.S. Government/Defense market had been on a downward trend. Looking more deeply into our global commercial revenue, the largest segment is medical, which represented 27% of the total B&E revenue in the fourth quarter. Key fourth quarter shipments for medical products included battery and charger solutions for breathing devices, infusion pumps, medical carts, automated external defibrillators and digital x-ray.

For the total year and isolating the impact of 1 customer associated with some lumpiness in the fourth quarter, in 2017 our overall medical revenue increased 6%.

Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown organically at a compounded annual growth rate of 25%. And including the acquisition of Accutronics in January of 2016, the total compounding annual growth rate is closer to 45%. The fundamentals for sales growth for medical devices with lithium batteries continue 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 a lithium battery size, energy density and cycle capability. Secondly, the safety, performance and reliability requirements are good fits with our products and company culture heritage as a military defense supplier. Third, the necessary collaborative new product development activity, includes a multiyear and complex qualification and certification cycle, helping us create a value proposition-based sticky relationship with our customers. By providing our technical expertise, we help the customer give a detailed engineering of the battery and/or charger solution for the specific requirements of their medical devices application. And the intellectual property contribution continues throughout the manufacturing process. Lastly, our global footprint of facilities in the U.S., U.K. and China enables us to efficiently serve, both the customer supply chain continuity and cost considerations. We also remain very active in pursuing revenue growth opportunities in a wide range of other commercial markets besides medical.

Fourth quarter 2017 transaction and development activities, included receiving multiple 9-volt blanket purchase orders for safety and security applications for 2018 deliveries, customer approval for our China produced 3-volt cell for use in another critical safety and security application, initial battery orders for an asset tracking device for livestock, final customer approval for another primary battery producer at a China facility for use in asset tracking application with shipments beginning in the first half of 2018. Continued shipments against the Q3 order of our ultra ThinCell product for an IoT application. A development agreement for our custom battery used in remote industrial valve applications, and various other ongoing opportunities in drones, UAVs and robotics applications. In 2018, we will aggressively continue to utilize our global platforms to pursue broad expansion of our commercial business to drive revenue growth in our targeted end markets. Over the last 2 years, we have greatly stepped up our digital marketing efforts to increase product and brand awareness with our global commercial customers, setting the stage for providing detailed performance information and product samples and kicking out the usual prerequisite development, qualification and testing processes. For Battery & Energy Products international Government/Defense business, the year ended strong. With Q4 2017, revenue is up 88% year-over-year and key Government/Defense shipments, including communications, used batteries into Western Europe, multiple products to a Japanese [channel] partner, battery and chargers for a Middle East partner, and battery and chargers for an America's International Defense Force. We also received a steady flow of new orders from international Government/Defense customers for various batteries, chargers and ancillary equipment. Lastly, in B&E US Government/Defense business, we are pleased that early signs of recovery continue to emerge and revenues again increased in Q4 2017, up 8% year-over-year with strong contributions from the DOA, Global business channel partners, and our OEM primes. At DOA in particular, we are seeing positive indicators of future growth potential demonstrated by 2 major IDIQ awards received throughout 2017, one for $21.4 million and the other for $49.8 million. As these new contracts include revised products specifications and thus extensive test protocols over the next several months, the expected timing of potential initial deliveries is early 2019. However, during the interim period, we have continued to receive purchase orders for our legacy batteries. In fact, in January of this year, just last week, we're happy to report that we received an additional purchase order from DOA for our legacy 5390 non-rechargeable batteries valued at $3.3 million and for deliveries in 2018. This contract is significant, as it represents a tripling of the volume of the 5390 DOA battery shipments that occurred throughout 2017. As a result of the U.S. and the international Government/Defense markets, both continuing to approve, we saw double-digit Battery & Energy Products Worldwide Government/Defense revenue increases. In Q4 2017, up 25% year-over-year and for the total year up 22%. For 2018, the increasing activity levels from the various defense departments contracting channels, and global prime OEMs are encouraging indicators of potential Government/Defense revenue growth again this year. In addition to the market and sales reach expansion through diversification for the Battery & Energy Products business, the other fundamental revenue growth drivers are new product development and multigenerational product planning. B&E continues to drive about 1/3 of its revenue from products introduced less than or equal to 3 years ago. New product development revenue was 37% of total B&E revenue for Q4 2017 and 32% for the entire year of 2017. Some recent activity from the fourth quarter of 2017 includes completing a multigenerational product planning upgrade of our 2590 family of rechargeable battery products, reporting higher capacities, and next-generation technology that improves data charge accuracy, completing a battery configuration to be used in an external wireless charger that will support implantable medical devices, and delivering initial shipments of a next-generation battery, supporting a new radio program for a large OEM defense customer. In 2018, we will continue to collaborate with our key customers to develop new products and evolve existing products through multigenerational product plans, to help them achieve their products performance goals and expand their competitive advantage. We're also preparing to launch new products that will serve Internet of Things applications in the rapidly growing wireless devices market as well as next-generation smoke alarms, asset tracking devices and metering. At our Newark, New York facility, we're continuing on development of the next generation 3-volt lithium metal product lines and a strategic CapEx investment to modernize manufacturing capability. We are targeting initial low volume equipment production to support product qualification builds in partnership with customers during the first half of 2018 with higher volume U.S. production expected beginning around year-end and into 2019.

At our China facility, we have completed a multigenerational product plan improvement to an existing China produced lithium manganese dioxide 3-volt cell and are beginning full production shipments. We're also moving forward with a multigenerational product plan improvement of our thionyl chloride cells, preserving newly identified commercial and industrial applications. As said before, our new product development goal is to produce the highest value proposition, best quality and safest products in which every one of our global locations that best serves the supply chain of our end market and OEM customers.

Regarding communication systems, in Q4 2017 new product development revenue from products less than or equal to 3 years old, represented approximately 73% of sales, this includes initial shipments from the $4.7 million Q3 2017 award of the VIPER, vehicle amplifier adapter system from the Rifleman Radio, Universal Vehicle Adapters and power supplies in support of various FOSOV programs and individual 20-watt amplifiers. Also in December of the fourth quarter, we were very pleased to announce our communication systems business was awarded through a global radio OEM, a new $3.9 million contract for a vehicle amplifier adapter system designed around their radio for the U.S. Army's security forces system brigades, or SFABs and other opportunities. Shipments under this contract are to be in 2018.

After some challenging years, while the Government/Defense tackle communication spending was dramatically reduced, it's now our pleasure to see that the efforts that communication systems business put forward during that time period to develop newly integrated products through strategic partnership collaborations are starting to pay dividends. The vehicle adapter solutions for handheld radios, which included our latest RF amplifiers, power supplies and advanced mechanical integration are hitting the mark for enabling an enhanced range of communications and operational flexibility for a soldier, as demonstrated by the recent program contracts and growing installed base within the U.S. Army. It is also encouraging that there are several new named radio programs now in play, such as domestically the leader, HMS Manpack and STC programs, lending credence to the belief that the new radios with improved waveforms, multiple channels and increased overall radio performance will drive more demand for our products and solutions. Internationally, we also see activity increasing in our gauge through channel partners with militaries of several NATO countries, as they look to increase spending in 2018, as part of their multilateral commitments. For 2018, while continuing deliveries on the VIPER and SFAB DLA contracts, communications Systems has multiple ongoing collaborations and development activities underway, with global OEMs and military program offices leveraging our products and integrated systems for both dismounted and vehicle platforms.

In closing, for the fourth quarter of 2017, driven by a strong double-digit increase in Government/Defense revenue, we were very pleased to achieve our highest quarterly revenue, operating profit, operating margin and EPS in several years. We delivered on our stated goal of generating total year profitable growth with the operating profit of 72% year-over-year and organic revenue increase of 4%. Furthermore, we entered 2018 with the shippable backlog value of 49% over where we started the year 2017, such that when combined with continued disciplined execution of our business model, we are in an excellent position to extend our track record of profitable growth in 2018. Continued investment in market and sales reach expansion, new product development and strategic CapEx, position us well for growing our revenue prospects and to realize additional operating leverage as the global commercial and Government/Defense markets for our products improve. Looking to 2018 and beyond, we remain optimistic of at least 4 key areas that are emerging catalysts to accelerating revenue growth. Continuing to achieve high single digit plus medical market growth, an aggressive push or big splash in the Internet of Things market, more major G&D deals, and lastly, a meaningful acquisition. Our clean balance sheet, efficient cash generation and access to capital, give us the flexibility to aggressively pursue, both organic and inorganic growth opportunities.

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

(Operator Instructions) Our first question is from Sam Bergman from Bayberry Asset Management.

I have. (technical difficulty) Can you discuss the first couple of products that you have developed in the IoT area? And what markets they serve?

I'm sorry, Sam, I don't know if the beginning of your question had cut off or not, but I think you asked about what products that we deal...

Okay. So for the IoT market that you're adding -- or expanding one of your facilities, you have several products that are coming out, I guess, in the first half of 2018. Can you talk to us about those products and what markets they serve?

Sure. Primarily, we're looking at the cell level at this immediate time. They consist both of our ThinCell products, which we've been talking about for some time, but also some individual 3-volt cylindrical cells that tend to be the dominant cell used for the emerging space and wireless devices and IoT. And sort of the logic behind that was is that we know that there is a certain volume of units that are going to be produced or being consumed over the year, as households security systems and other types of devices become more prevalent, and just looking at, sort of the mathematics of the number of units that are available, we estimate that's going to be anywhere between 50 million to 100 million units per year. Just thinking about 125 million households in the U.S., that sort of makes sense. And we're looking to see if we can try to capture about 5% to 10% over the next couple of years or so. And the cells that we will use to support that are individual 3-volt cells, which we benchmarked the existing competition for and are coming out with a cell that we think is going to offer a very competitive, but better-performing cells available in the marketplace. We will continue to produce other devices that serve the IoT market, but the major thrust at this point is in pushing this new 3-volt cell. And that's being done, both in the United States to serve the U.S. in North American market, being really close to where the demand is. And then we also have a parallel activity for a 3-volt product being produced in China, which would be really close connected to a number of the OEMs that are assembling devices inside China.

So the U.S. ongoing collaborations with other companies right now in that space?

Yes. As a matter of fact, just a rough order of magnitude, there're probably over 20 companies that we currently are working within various stages of qualifying our products.

Okay. Communications systems, let's talk about that for a minute. It seems there's been a little pick up there. You just got awarded a contract in December. I noticed the backlog is, I guess, $8.9 million on the 10-K. Can you give us a backlog on the whole company at this point or not?

Yes. We certainly can, Sam, and it's also just a simple of some mathematics from the 10-K, but what you'll see is that the backlog that we have entering 2018 is $39.1 million. That compares to the backlog that we entered 2017 with, it was $26.2 million. So we're talking about a $13 million increase, 49% as Mike had mentioned a little bit earlier.

Okay. Also in regards to the batteries that you're dealing with medical companies. Have we been able to discuss any names in public or do you have the ability to bring out those names to us?

Yes, Sam, we've not really done that really across all of our product lines. We try to respect the privacy and the confidential nature of those relationships.

Okay. I mean, is it going to remain that way?

Yes, I mean, really because we play across multiple competitors and one thing that we value dearly is a close, intimate collaborative relationship with our customers and as much as that -- we're trying to be friends with a lot of people that may be competing themselves, we're very careful not to disclose those names and jeopardize that relationship.

Our next question is from Gary Siperstein from Eliot Rose Wealth Management.

Congratulations on a strong Q4 and an extraordinary year. Mike, I just want to start with, you called out the success of medical over the last several years, both pre-Accutronics and post, and yet last year or their fourth quarter, I didn't hear clearly, was only up 6%, and I know you aspire to upper single digits going forward. So I think you had called out one particular customer, which had some delays, lumpiness in Q4. Can you give us a little more color about that?

Yes. In Q4 of 2016, we had -- there is a normal replacement cycle for some of our products in the field and working in collaboration with one of our key customers, they decided to accelerate our replacement cycle and incorporate some improvements in the product. And we sort of view that as sort of an extraordinary event which really provided a surge of volume in Q4 of 2016, which did not recur again in 2017. Sort of a one-time event as we replaced that installed base.

Okay. So if you X that out, what would -- instead of being 6%, what would it be, the growth?

It was 6% without their growth, and Accutronics is up around 5% or so, the overall rest of the business is up around 6%, excluding that one-time surge.

Okay. And so if you do achieve in 2018, upper single digits, so it goes from 6% to, let's say, 8% or 9% for the year, am I correct in assuming the medical margins are a little better than our Government/Defense margins?

Generally they're a little bit better. They involve, because of the continued development and multigenerational product planning, you end up having a little more value contribution for a lower number of total units. And so yes, I'd say generally the margins are a little bit better than some of the legacy Government/Defense products.

Okay. So I guess, what I'm trying to get at, is so for 2018, we won't be anniversarying that particular one-time surge from that customer. So if we get to the upper single digits in growth with slightly better margins that will be, sort of, added into 2018 earnings going forward?

Yes, and we view that as a very positive opportunity. And also there's long cycle times for the development of products, and so we're excited about some of the new maturation of products that we've been working over the last couple of years driving some revenue in 2018 and 2019.

Great, okay. And then Mike, you had also called out for the IoT. You had called out drones, UAV and robotics, for I guess, IOT/3-volt. Can you give us a little bit more color on those kinds of opportunities?

The reference to the robotics is really sort of fascinating, because that crosses over a couple of different areas, I mean, there is -- we're working on with some of our, sort of, Sealed Lead Acid replacement products, some of our smart U1 batteries, we're looking at applications for robotics and things like material handling and warehousing. It's also being utilized in medical carts. And then we're just starting to get involved in some of the surgical instrumentation and some battery supplies for those applications. So you have robotics that is probably the most exciting is for some of the things in medical but it also is involved in energy storage and material handling applications. Not some -- Internet of Things, I don't know if I specifically said it was associated with Internet of Things, it tends to be more medical and material handling.

Okay. And robotics is more significant opportunity and more timely than drones and UAV?

Yes. I mean, we sort of have them on our screen. We keep watching UAVs very, very closely. We're -- we know that the pain point for some of the drones is the life of the battery. We're just trying to determine if the overall size of the market and our value contribution is there to make a strong thrust in it. But there are some military applications, and we're just sort of trying to keep everything on our screen to make sure there is an opportunity for us to continue to grow revenue but not be so scattered that we don't get anything in particular done. But right now, the robotics seems to be a pretty exciting area for us.

Okay, super. And moving on to IoT. So. Is that mostly all 3-volt? A, and then b, is it mostly asset tracking or is it mostly meters?

It's largely 3-volt, but there's other battery voltages and things involved. There are some 9-volts still, but I think it's mostly wireless devices, Gary. It's not so much acid tracking, and some of the other kinds of things, a lot of, a lot of wireless devices.

Okay. And then you mentioned with the 3-volt this IoT opportunity. You mentioned -- I didn't do the math quick enough, but you mentioned the number of households and then you said you hoped to get 5% to 10% of that market. Can you tell us what the size would be if we got 5% in dollars?

Yes, the way I try to think of it, Gary, is like, when we do new product development for the battery business, let's say, we always have to make decisions as to the risk/benefit of spending the money in new product development and how does that impact overall revenue growth. And so we tend to think of things in the battery business in terms of points. So if we can -- if we're trying to grow the business at 2x to 3x GDP, and it's a $70 million business, anytime we can get a revenue stream that's an incremental $700,000 a year, that's an extra point of growth -- organic growth for the battery business. When we look at the IoT space, and just doing some sort of back of the envelope calculations, if we think that we can get between 5% and 10% of the available market as we see it, we think we could grow the battery business, if we -- say between somewhere between 6% and 10% individual growth, if we were to pick up 5% to 10% of the overall market. So when we looked at it collectively, and we talked about this a little bit when we did the capital investment. Anytime we can make an investment that we could get 6% to 10% or 11% growth in the battery business, that seemed to make a lot of sense for the overall investment for the efforts to develop a new product.

Okay, and then on the dedicated space in your manufacturing facility for the IoT opportunity. You mentioned some progress there in the first half of 2018. What have you budgeted to spend, and when will that space be built out and ready?

I think we made a comment overall about what the authorization was for the project, but I really don't want to comment about individual budgets by year, here versus China versus anywhere else.

Okay, but do you expect it to be completed by the summer of 2018?

In my prepared remarks, I said, we expect it to be throughout the end of 2018 and into 2019.

Okay. And then when you talked about the heretofore difficult government spending environment for the last few years, how that's starting to change. So as the government goes from a continuing resolution to an actual budget, and some of the preliminary stuff I saw over the last couple of days, talked about an $80 billion increase in defense spending. Just for my education, clarify for me how once, there is a budget in place with the $80 billion raise, how that should flow down to the companies, the defense contractors like you guys versus a continuing resolution?

That's an outstanding question, I'm not sure I can give you the real secret answer to that. But, I guess, the way I'm looking at this, Gary, is that for such a long time, we knew we were in constrained budgets, there was sequestration, we were operating on a continuing resolution and it just felt like that people were sort of withholding funds that they had because there was no clear visibility to whether or not they would be getting new funds in the future. And what's really interesting to me at least is that, as much as we're still under -- technically operating under continuing resolution, yet we're seeing a pretty decent growth rate last year that there seems to be a feeling from the Government/Defense customers that more money is on its way. We still haven't seen that yet. So the best I can really describe at this point without being very precise about where the money actually is going to hit us is that, it's really encouraging that the people that are placing contracts with us and the ones who make those decisions for the spending in the Department of Defense, feel so strongly that they're going to be getting more money that they're willing to release money that they may have already had and -- to serve some pent-up demand. And if we can grow at a strong double-digit rate, just from pent-up demand, we're really excited about the prospects of what can happen longer term as more money is available, just not new money.

That makes sense. And Mike you also called out some of the VIPER shipments from those 2 contracts. Can you tell us how much shipped in Q4 and was it both contracts, the 3.9 and the 4.7 or was it just from one of the contracts?

Other VIPER contract, I believe we shipped -- it was a $4.7 million contract, I believe we shipped $2.9 in 2017 which means we've got about another $1.8 million to go in 2018. And the additional -- the other contract for the S5 just really started shipping the very tail end of the last year and it's going to be shipping throughout 2018. So the full amount of that $3.9 million contract is expected to ship, for all intents and purposes, in 2018.

Okay, great. And then, Phil, just a quick question on the $6 million in cash outside the USA. That sounds high, is that all Accutronics or it's Accutronics plus your international government business, defense business?

No. It's, I would say, Gary, it's split 50-50 between China and the U.K. We obviously watch that very closely, but the bottom line to my comment was that there're no toll taxes because of our situation with the international entities. So we have the ability now to pull that cash back in with no tax penalty going forward.

Super. Okay. So have there been Phil -- had there been the possibility of, if you had pulled that in, any part of that $6 million back in 2017, there could have been some tax penalty but there is not going forward?

That is correct, yes. And that's the whole purpose of the toll tax that you hear of as part of the Tax Act.

Okay. And so what's a comfortable level of cash to keep in China and Accutronics? How much is available to take back?

Well that absolutely depends on the level of activity, which certainly is growing for both. So just to be very clear, as you'll see in the 10-K, we make a statement that our current intention is to use that cash where it currently exists for organic growth in both of those operations.

Okay. And on the NOL carryforwards based on the new tax law, what's the figure on NOL is going forward?

Okay. Let me share with you, and for your reference, if you refer after the call to note 9 in the 10-K, it goes in there in quite some detail, but a quick summary is as follows; we have $70 million of domestic net operating losses with certainly the hope being to fully utilize those. So we still have 100% of the $70 million NOLs available to offset against our future domestic earnings. The tax rate, which was 35% as you know, has been reduced to 21%, so what you'll see in our disclosures is that the tax impact on those is a reduction -- the pure taxes that would be owed of $10 million, down to actually $23 million. So about a $10 million revaluation, both at the gross side of it as well as the valuation allowance that we have in place. So the way I look at it is this. We still have the $70 million of NOLs in their entirety to offset against our future earnings, and that's my view of this, regardless of what the tax rate is or what it's going to be going forward.

Okay, super. So we still have $70 million to offset?

Yes, we do.

And just the last couple of questions and I'll give someone else a chance. So year-over-year, cash went from $10 million to $18 million, so you increased cash 80% year-over-year. I'm not going to ask you to think if you could do that again, but obviously, cash is robust. And I know you're being judicious on the M&A front, and you haven't quite been able to close a deal since Accutronics. So with the cash growing so robustly, and the company doing so well, growing earnings 61% on 4% to 6% revenue increase, doesn't it make sense maybe to get back in there on a buyback program since the money is not earning much. And even if you just add $5 million or $6 million in cash in the next year instead of $8 million, it seems to me you could use some of that cash and maybe buy back a million shares and still have a huge amount of cash left, just in case it takes another 2 years to be able to close an M&A acquisition.

Well the way I look at it is this, Gary. When you talk about M&A, it's not like we're just looking at one item and it's black and white. We have been working at this for quite some time, and I want to have the cash available and the resources available that's going to give the company the absolute highest return. Right now, I see that being as M&A and strategic CapEx. So my ordering would be exactly that, MA/strategic CapEx to increase revenues which would certainly show an impact from our leveraged business model and then further down, I would look at a share repurchase.

That's fair Phil. Mike, can you give us any color on what's been happening on M&A in terms of if you've found any prospects but maybe you weren't able to close due to price discrepancy or some other reason, or have you just not found anything that you could get to a closing? I mean can you give us some color on maybe you got close once or twice but you were apart on price as opposed to there's absolutely nothing out there?

We really don't want to comment on individual transactions that almost occurred. But I do know that we've had over a dozen NDA's. So just in terms of order of magnitude, there has been a number of companies we continue to look at. A lot of that is relationship you develop and you know that longer-term it could be a great fit for your company in terms of acquisition, but the company you're targeting may not be ready for it. There may be something going on with them, which doesn't make it a great time for them. So we continue to make those relationships, we continue to evaluate the fit. I'm not real worried about not being able to do some acquisitions, but we're going to continue to be disciplined so it's a good fit with the overall enterprise.

Okay, that's great I was just hopeful -- you mentioned 12 NDAs, so I was just hopeful that you've been seeing things and for whatever reason weren't able to close, but -- as opposed to nothing being really of any quality that you've seen. So that's encouraging. And just lastly on the almost 50% increase in backlog. Are the entire VIPER or those 2 contracts included in that $39.1 million figure?

On the Communications Systems side, that is correct.

(Operator Instructions) It appears there are no more questions at this time. I'd like to hand it over back to you, Mr. Michael Popielec. Please go ahead.

Well, thank you once again for joining us for the fourth quarter 2017 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. And as Phil mentioned, I'd also like to mention that we updated the interval financial information as well as some other slides in our investor presentation, which is now on the website. So please check it out. And have a great day. Thank you very much for participating today.

Thank you. This marks the end of the conference. We appreciate your participation. And have a great day.