Ultralife Corporation (ULBI) Q4 2011 Earnings Report, Transcript and Summary

Good day, and welcome to the Ultralife Corporation Fourth Quarter and Year-End 2011 Earnings Release Conference Call. At this time for opening remarks and introductions, I’d like to turn the conference over to Ms. Jody Burfening. Please go ahead.

Thank you, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the fourth quarter of fiscal 2011. With us on today’s call are Mike Popielec, Ultralife’s President and CEO; and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the company’s website www.ultralifecorp.com, where you will find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include uncertain global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring actions and delays. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company’s analysis only as of today’s date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could 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 that differ from GAAP. These non-GAAP measures should be considered as supplemental to the corresponding GAAP figures. With that, I would like now to turn the call over to Mike. Good morning, Mike.

Good morning, Jody. And thank you everybody for joining the call this morning. Today, I planned to start by making some high level observations about our fourth quarter and total year operating performance. Then I’ll turn the call over to Phil who will take you through the detailed financial results for the quarter and the year. After Phil has finished, I’ll take the call back to provide a recap of the achievements towards the top 2011 priorities that we have laid out at the beginning of last year and then talk about what expectations we have along those lines for 2012. Lastly, I’ll share with you our thoughts on the full year financial outlook for 2012 before opening it up for questions. In the fourth quarter, we continue to grow gross margins across all of our business units. Total company gross margins in the fourth quarter were 30%, up 240 basis points year-over-year and reflecting the productivity gains from our Lean initiatives and a favorable product mix. Revenue in the fourth quarter decreased year-over-year, driven partially by a difficult year-over-year comparison in our Battery & Energy Products business. However, both B&E products and our Communication Systems businesses saw additional softness in the U.S. government defense demand in the fourth quarter and in fact several shipments were delayed in 2012. On a total year basis, Battery & Energy Products delivered a 6% increase in revenue excluding the first quarter DCAA settlement, aided by strong double-digit revenue growth through the first 3 quarters of 2011. At Communication Systems, the non-recurrence of a large SATCOM award in 2011 impacted revenue comparables all year. However, additional softness was experienced through the year in its non-SATCOM account business where revenue was down 23%. Given the headwinds faced by both businesses in the fourth quarter, we were pleased that in addition to the strong gross margin improvement realization that actions taken by the teams throughout the year led to a reduction of our run rate operating expenses in the quarter of $2.3 million, which was 25% lower than the prior year and helped us achieved a fourth quarter operating profit of $2.1 million or 6.8% to sales. This represents a 20 basis point operating margin improvement year-over-year despite much lower volume. In a few minutes I will talk further about our specific 2011 progress and 2012 plans for sustainable revenue growth. But first I’d like to ask Ultralife CFO, Phil Fain to take you through additional details of our fourth quarter 2011 financial results. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter and full year results for our year ended December 31, 2011. Consolidated revenues from continuing operations for the fourth quarter totaled $31.4 million representing a 32% decline from the $45.9 million reported in the fourth quarter of 2010. Revenues from our Battery & Energy Products segment were $23.9 million, a decrease of $8.9 million or 27% from last year. This decrease was attributable to the completion of a telematic battery contract in the fourth quarter of 2010, which resulted in higher shipments for that period and the timing of shipments of rechargeable batteries to a large customer, which was delayed into the first week of January 2012. Otherwise, the segment continued to experience growth for rechargeable batteries and further penetration of our primary batteries into the utility metering business in China. Communication System sales of $7.5 million declined by $5.6 million or 43% from the prior year. When adjusting for 2010 SATCOM shipments, sales decreased by $1.1 million or 13% due to delays in the government funding approval for amplifier orders. Our consolidated gross profit from continuing operations was $9.4 million in the fourth quarter of 2011, compared to $12.7 million for the fourth quarter of 2010. As a percentage of total revenues, consolidated gross margin was 30.0% in 2011 versus 27.6% for last year’s fourth quarter, an increase of 240 basis points. Gross margin for our Battery & Energy Products segment was 29.1%, a 340-basis point improvement over last year reflecting the tangible and permanent benefits of the company’s ongoing Lean initiative and the continued trend towards higher margin rechargeable batteries. The 29.1% is the highest gross margin ever reported for this segment and represents a 160-basis point improvement over the third quarter. For our Communication System segment, gross margin was 33.0%, an increase of 40 basis points over the prior year, reflecting a higher mix of the AMTI amplifier sales. Operating expenses from continuing operations totaled $7.3 million for the fourth quarter of 2011, a reduction of $2.3 million or 25% from the $9.6 million for the year earlier period. The overall decrease from 2010 was primarily a result of our continued actions to reduce discretionary expenses, while investing some of the savings in new product development and the expansion of our sales force to increase our geographic coverage and penetrate new markets. Fourth quarter 2011 operating expenses also reflects the favorable impact of the G&A actions including reductions in-force completed earlier in the year. As a percentage of revenue, operating expenses were 23.2% for the fourth quarter of 2011, compared to 21.0% a year ago. The percentage for the 2010 period would have been 23.3% when excluding the SATCOM shipments. Fourth quarter noncash operating expenses from continuing operations including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.4 million, virtually unchanged to the amount reported for the year earlier period. And adjusted EBITDA defined as EBITDA including noncash stock-based compensation expense amounted to $3.4 million in the fourth quarter versus $4.2 million for the fourth quarter of 2010. Despite a 32% reduction in sales, our 30% gross margin and 25% reduction in operating expenses helped drive operating profit from continuing operations to $2.1 million, representing an operating margin of 6.8%, compared to $3.0 million from an operating margin of 6.6% for the same quarter last year. The improvement in gross margin and the reduction in operating expenses versus the fourth quarter of last year contributed over $3 million to operating profit for the 2011 period. The improvement in gross margin and the reduction in operating expenses versus the third quarter resulted in a 240 basis points sequential improvement in our operating margin. Other expenses primarily comprised of foreign currency translation and interest expense amounted to $0.3 million for the fourth quarter of 2011, compared to $0.4 million for the year earlier period. The 30% reduction is a result of no draws on our bank revolver throughout the entire fourth quarter of 2011. Our fourth quarter tax provision was $0.2 million primarily reflecting book tax timing differences related to the amortization of intangible assets. The 2010 fourth quarter tax provision was a credit of $0.7 million resulting primarily from a refund pertaining to our 2008 tax return enabled by subsequent retroactive legislation. Net income from continuing operations for the fourth quarter of 2011 was $1.7 million or $0.10 per share, compared to $3.4 million or $0.20 per share for the same period last year. The company’s liquidity remained solid with cash of $5.5 million and no debt. As a result of careful working capital management and cash generated from operations in our Lean initiatives. We had no draws on our bank revolver during the fourth quarter. The outstanding balance on our revolver at the end of 2010 was $8.5 million. Our inventory levels at the end of 2011 increased by $1.8 million over year end 2010, due to delays in the shipments of rechargeable batteries into January and building amplifier inventory to help fulfill our recently announced International Communications Systems contract. Although, our operating expense base has been significantly reduced in 2011 to align with our business model, we will continue to drive operating efficiencies and prevent non-discretionary spending creep with revenue growth. We remain mindful of the importance of exercising strict expense control on the one hand and providing the necessary funds for product development and revenue recognition on the other. We have spent 2011 focusing our attention on relentless execution of our top priorities. We have made significant progress and the company ends 2011 with a more profitable business model than we had a year ago. The improvements made and those to follow will generate strong incremental returns on revenue growth and will allow us to achieve our interim goal of a 10% operating margin. I will now turn it back to Mike.

Thanks, Phil. As we have said many times, Ultralife possesses the elements to achieve sustainable top and bottom line growth by applying a disciplined focused execution and a more deliberate approach to new product development and sales. In early 2011, we established several specific priorities to drive efficient execution and reposition the company for growth. I’d like to now recap with you the progress that has been made against each of those during the past year and talk about our plans for 2012. The first priority has been optimizing the company’s profitability. As Phil has mentioned, we have set achieving a 10% operating margin level as an initial goal. The framework to deliver on this goal consists of growing our total company gross margins to 30% and building an operating cost structure of approximately 20% to sales that allocates 10% to 11% to sales on new product development and selling expense, and 9% to 10% to sales on G&A. During the fourth quarter, we achieved the 30% gross margin level based on successful implementation of the Lean principles and favorable mix. In the fourth quarter, our reported operating margin rate was 6.8% and for the total year 1.8%. If one were to make adjustments for several of the one-time charges taken throughout 2011, that total year operating margin level would be approximately 4.4%, whereas we know that there will still be some variation quarter-to-quarter in our operating margin rate, we are well-positioned for the significant total year 2012 operating margin improvement that is reflected in the guidance provided today. In 2011, not only have we focused on the variable cost components of our margin improvement but we have also taken a hard look at the infrastructure cost associated with our business model. As we have look closely at the allocation of financial and human resources, we have made the tough calls like the decision to exit our Energy Services business in the first quarter of last year and the recent decision to divest our RedBlack division of communication systems. Despite the growth potential of each, when evaluated against our new product development driven manufacturing business model, we felt exiting these businesses was necessary to reach and pass through our 10% initial operating margin quality of earnings goal. The next priority has been to develop and execute a growth game plan. As we pursue our revenue growth initiatives, we are looking for both magnitude and consistency. Looking back at the Battery & Energy Products business revenue performance in 2011, which by the way represented over 75% of our total revenue, we saw year-over-year growth rates of 11% in Q1, 23% in Q2 and 27% in Q3 before the dip in revenue of 27% in Q4. Their total year revenue was up 6% excluding the impact of the DCAA charge. Our China operation also represented a key component of the Battery & Energy Products 2011 growth each quarter and was itself up 34% for the total year. And in the case of the Communication Systems business it’s vulnerability to the timing of large projects is well-documented. So to more fully control our own destiny and drive consistent growth, the internal strategic growth plans that we developed last fall for the Battery & Energy Products and Communication Systems businesses place a heavy emphasis on accelerating new product development and increasing the effectiveness and reach of our sales force. Our intent is to not only further expand penetration of our global government defense customer base but also to diversify and more aggressively grow our commercial presence. In terms of new product development we are now being more proactive in developing pilot products ahead of clearly defined customer specifications by building functional prototypes and gathering real-time voice of the customer feedback in order to fine tune the designs before broader introduction. The patent pending Ultralife GenSet Eliminator announced in September is now on a prototype Rev II which incorporates all of the terrific feedback we received from the October STAR-TIDES demonstration site at Fort McNair and then one week later on the floor of Annual Association of United States Army Meeting in Washington DC. A next round of customer field demonstration is occurring this week and we have several other field demo units now available and earmarked for specifically interested domestic and international customers. The next steps would usually include internal customer testing and once completed we could enter into full production within 6 to 8 weeks from initial order. Another new product that we have developed into conjunction with the GenSet Eliminator systems is something we call internally the Multi-Kilowatt Module which is essentially a large format rechargeable battery. This product is well beyond the PowerPoint phase as we have built several prototypes incorporating different lithium ion battery chemistries depending on the application. In addition to it forming an integral part of the Ultralife’s GenSet Eliminator system, we are generating a wide variety of interests for other types of off-grid, standby and backup power needs. The product has been designed to be manufactured in predefined form factors allowing customers to easily increase or decrease the number of batteries used to meet different demand needs. In the area of new cells and battery product designs, we have completed prototype products now available for initial voice to customers feedback that serve the military’s stated need for lighter, higher-density mobile energy solutions for our soldiers. Specifically these products deliver similar power as the currently used products yet with one-half the size and weight, and will be available for both rechargeable and primary applications. The initial customer testing process will begin within the next several weeks. Each of the above new products has been under development for years. What’s different is that now we have working prototypes of each. In addition to setting clear priorities, we also needed to redesign our engineering processes to free up additional bandwidth for more new product development and our technology team has clearly stepped up the challenge. We all look forward to progressing the previously mentioned products to the requisite testing procedures, fine tuning the designs and entering into full production. We intend to continue to add to our new product pipeline and introduce meaningful new products several times each year. As such, we are optimistic that in the face of decreasing military budgets and troop withdrawals that the expansion of our product offerings through close collaboration with our customers will indeed enable us to more proactively control our own destiny by providing meaningful organic growth opportunities both in the government defense and commercial markets. To take full advantage of these emerging new product opportunities, in 2011 we made structural changes in sales leadership, invested in sales tools and training, and expanded sales coverage both with our major OEMs and internationally. Year-over-year, we start 2012 with a 66% increase in the number of sales people versus the beginning of 2011 each specifically aligned and trained for the market they serve. Whereas we know it will take some time to the new sales people to reach 100% effectiveness. Our opportunity funnels for both large government defense and mid-sized commercial projects are expanding quickly as a result of the focused attention and new product developments. We are delighted that the Communication Systems is off to a strong start for 2012 having received a major international contract for 2,319 A-320 amplifiers as announced in January. Although, we are unable to disclose the actual contract terms or customer for this transaction, the list price for a single unit of this type of amplifier is generally around $6,500 per unit. The third priority for 2011 was to closely look at all the products and business segments in our portfolio and make an assessment of each of their potential mid and long-term contributions to the sustainable growth and profitability of the company. We’ve covered the actions taken in 2011 several times already during this call. In 2012, we will continue to evaluate the present allocation of financial and human resources against other potential uses. Although, we won’t carry this product and portfolio assessment activity any longer as a top priority item subject to comment each earning cycle, you can be assured that is ongoing and that we will communicate any material impact of decisions taken as a result of this process. And finally, the fourth top level priority for 2011 was to more fully leverage our China operations to access commercial markets in China and throughout the rest of the world, and to improve our cost competitiveness. Our Ultralife China team performed strongly through the entire year 2011 and ended with sales up 34% year-over-year. For reference, roughly 33% of our B&E Products business growth is coming from our China operations and approximately 60% of our current China operation sales are into China, where we are seeing nice penetration in electric, gas and water metering applications, as well as in RFID toll-road passes. In conjunction with our Lean efforts, in 2012 we expect to continue to invest in our China operations to increase productivity in throughput without expanding our manufacturing footprint. In addition to the gross margin improvement these activities will bring, we look forward to China continuing to play an integral role in helping the Battery & Energy Products business grow its revenue on a global basis. With regards to the financial outlook for 2012, we expect to see year-over-year percentage revenue growth approaching double digits. Operating income growth is expected to outpace revenue growth and generate an operating margin rate of between 7% and 7.5%. As we look forward, our opportunity funnels for both large government defense and mid-sized commercial projects are expanding as a result of additional sales people in focus and the new product developments. However, as experienced with fourth quarter revenue, our goal of minimizing the effects of variability in shipments and orders still has a ways to go. The operating cost model we developed in 2011 supports profitable single-digit revenue growth rates, while positioning us for favorable operating leverage as we scale up the business. In the Battery & Energy Products business, we’re expecting modest growth rates early in the year driven by growth in our rechargeable and charger products, China and other international business, tempered somewhat by the slowdown in the U.S. government and defense business. Acceleration of the growth rate is expected in the latter part of the year, subject to the timing of testing completion orders for the newly introduced products and traction for the new members of our sales team. In Communication Systems, despite a tough financial year in 2011, the team continued to aggressively position its high technology amplifiers and equipment in a wide range of attractive opportunities. As such, we are anticipating a solid rebound to positive growth rates in 2012 based on this high activity level and broad participation in both domestic and international projects for fully integrated vehicle systems, vehicle and manpack radio amplifiers, and power systems to support and extend the communications range in tactical environments. Our RF amplifier product line continues to evolve and maintain pace with the latest technological developments to include the newest communication wave forms improving speed and data throughput. We have said that Ultralife could double or triple its current size over the next few years. That target remains. However, as a result of the restructuring of our business model and cost structure completed in 2011, we’re also in much better position to deliver more consistent earnings results despite revenue fluctuations. So our mission for 2012 is straightforward and that is to drive more consistent earnings performance and build sustainable growth momentum. As we execute in the business model adopted in 2011 for increased profitability and follow through on plans and place for new product development and sales coverage expansion, we are confident these goals are achievable in the coming year. Operator, this concludes my prepared remarks and we’d be happy to open the call up for questions.

[Operator Instructions] We’ll take our first question from Zach Larkin with Stephens Inc.

Hey. First question, I wanted to just maybe follow up on the outlook for 2012. So it sounds like, Mike, we’re going to be looking for a back half weighted in the Battery & Energy Products. On the Communications segment, do you expect that to be more of a linear growth trend or could you give us maybe a little bit of color on both the segments maybe how much we should look for the weighting on second half for battery and then just the overall trajectory in communications?

Yes. I’d be happy to. I think the difficulty we have in the Communication Systems business really is predicting when any particularly large project can actually close. I mean, they tend to go fairly slow and all of a sudden they speed up and then we’re in a hurry up offense to deliver. And in the past, we’ve had a smaller number of those projects at any given time on our screen and so I think we were highly susceptible to the timing of those order placements and the subsequent shipments. What we’ve done in terms of rebuilding our sales force and expanding it is allowed us to play in a lot more opportunities in any given time. And so, as we announced early in January, we’re able to hit one early in the year, it’s always nice to startup the year with a nice win like that. We have a high level of large projects currently being developed our team. So whereas in the past, maybe there have been 1 or 2 projects and then we try to manage the revenue cycle through the whole year that tended to be backend loaded. With some of the bigger projects we’re looking at and a number of different projects we’re looking at, we hope that there’s not as much front to back difference in the revenue volume. Relative to Battery & Energy Products, they have a little bit shorter cycle in terms of when you see an order to a sale so they can see their volumes pick up and drop pretty quickly without a ton of visibility. As I’ve said in my prepared comments, I expect them to be a little bit slower based on what we saw in the fourth quarter at least initially in the year. But any time we introduce 66% more feet on the street and these are all highly capable, energized, trained, experienced sales people, even if we get part traction on that, we think we’ll still see some nice growth throughout the year. But the combination of getting those people up to speed, employ, contributing and some of the timing of our new product development, working through a testing cycle and actually be going into full production, I think will tend to weight some of the opportunities in Battery & Energy Products into the second half of the year.

Okay. And then also just looking at the softness in the battery, you mentioned that you had the one large order that got pushed out into the first Q of 2012. If I assume that the $1.8 million increase Phil mentioned on inventory is a reasonable representation for that, it definitely takes the year-over-year decrease in Battery & Energy Products down a bit to kind of the high single-digit rates? Is that a reasonable way to think about what the impact of that large order might have been? And also, I wondered if you could give some color if that was a government contract or a little color on it if it just goes with your commentary that delays in government issuance led to a lot of the softness?

Zach, you’re spot on with your assessment. That ultimately lines up being a G&D, Government and Defense product. With regard to the remaining variants, in large part it was due as I mentioned to the difference being a large telematic shipment that occurred in Q4 consistent with the conclusion of a contract.

Okay. Perfect. And then if we look at the OpEx, SG&A kind of I think the trends are fairly straightforward on that, R&D we saw a decent decrease in 4Q. Are you expecting that level to be kind of more of a run rate base or should we get back up into the couple of $100,000 higher than we saw earlier in 2011?

With the latter, I would expect depending on the level of activity with the new product work which certainly is increasing, as well as the scope of the projects that you’ll likely see it up a couple $100,000 in one particular quarter maybe down a couple of $100,000 in the other. It’s really based on the timing. But I think the base has been established and that’s a much more focused look at our new product development process, which has also gone through the Lean process as well.

Okay. All right. So basically, just to make sure I got that right, we’re going to see kind of the standard quarterly fluctuations but the base if it used to be above $2 or it going to be closer to $2 as maybe more of a median level going forward?

I would say so, Zach,$2, $2.2 in that range is a likely way to look -- best way to look at it.

We’ll go next to Walter Nasdeo with Ardour Capital.

I’d like to just, if I can just kind of explore a little bit more the -- I’ve been covering you guys for many years and it’s hard for me to count how many times a contract has been pushed from quarter one of your government contracts, and it’s been a challenge, because the quarter’s line-up is good, your margins are good, there are things that you’re doing that are really advancing the business but then we have a little blip like that? Can you give us some kind of some comfort that as you move forward because this is not the first time we’ve heard that you guys are making efforts to diversify the business out a little bit to kind of not be at such a whim of the government budgeting/contracting process?

Right. Walter, I think it’s an excellent point in. I’d like to make 2 comments in that regard. First of all, as a result of the dynamic that you’re talking about, we felt it was absolutely critical to push our business model in a position to make money despite these big revenue fluctuations. I mean, if the only time you make meaningful money, I’m talking from a quality earnings perspective, is when you get a big contract. That’s really not achieving that much. I mean anybody can really do that. So when we look at our business model, we say, listen, want to be able to have a very solid level of operating margin despite the revenue fluctuations, right-sized for business that we have high visibility to and then as we get those large contracts, we’re able to get some nice leverage on that and improve quality earnings even higher. So I think a lot of what we did in 2011 was sort of sizing the business to current realities and I think that, to some interim success was achieved to the extent that we were able to get 6.8% operating margin in the fourth quarter. Relative to being so vulnerable to these large -- these transactions, whereas overall we’re 60%, 65% government and defense and we talked about the risk of buying commercial business. When you look at the Battery & Energy Products business, which is, as I mentioned, at least in the last quarter was 75% of our total revenues. They’re not that much weighted towards government defense. It’s more balanced between commercial business and government defense business. It’s more or like a 50-50 or any given quarter maybe one side bigger than the other. And so where we expect to see, if you want to call it a smoothing of some of that lumpiness, we really think that the Battery & Energy is positioned well to do that. As we added sales people in the various parts of the Battery & Energy business, we increased the area of metering, we increased the area of standby power, we increased the area of medical, we’re looking very hard on safety and security. So we think that we’re going to be able over time to be a little bit less susceptible to those large government contracts, at the same time make money if we have them, of course, we’ll make a lot of money, if we don’t have them, we still make a respectable level of profit. Now Com Systems, the thing as I mentioned earlier in the call, we have to have the installed base, I mean and we have to have the focus on multiple large products at a time. So I don’t expect for us to get out of sort of the large project business in Com Systems, but our efforts and our number of headcount we’ve added is focused on trying to increase the number of opportunities we’re participating in, so they’re not so few and far between.

Okay. All right. That’s helpful. Let me ask you, you’re getting rid of RedBlack, you got rid of the Engine Services. Do you see yourselves doing any acquisitions going forward or is this purely, you’re really focusing on just growing organically?

No. I think that at the right time we’ll do acquisitions. I mean, at this point, we want to make sure we have stability in our financial results from a profitability standpoint. I think Phil and his financial team has done a spectacular job of managing our cash. We’re starting to bank some cash and as we generate more EBITDA and we look and get more, shall we say, sophisticated in some of our strategic initiatives. I think acquisitions are certainly going to be part of our future. I mean, clearly, we believe there’s a lot of runway for organic growth over the next couple of years and we want to be able to prove that. But for certain there’s some M&A activity that’s on the horizon. It’s nothing, it’s imminent, but certainly over the next 6, 12 to 18 months, if some unique opportunities would come across our screen, we would be very tempted to pursue those.

[Operator Instructions] We’ll go next to Orin Hirschman with AIGH Investment.

The contract that you mentioned finally did come in Q1, which you gave us the average selling price, et cetera, where we can kind of give an estimate what the size is. What -- how many quarters is that shippable or estimated to be shippable?

This contract is a multiple year contract, nominally between 2012, 2014. At the same, it’s only, one of the early stages of a multi-phase contract. So of course, we’re going to do everything we can to meet the customers’ needs for their shipments, if those happen sooner rather than later, that’s always a good thing on a manufacturing business model. But we’re also encouraged by the fact that that’s just one of the early phases of a multiple-phase project.

In terms of meaning the number of deliveries, it’s small relative to what the whole project could be in terms of units?

Yes. I mean, there’s other follow-on business associated with this product line that could be very attractive.

Meaning, larger than the initial contract?

I don’t want to comment on that but it would be material.

Okay. But what you’re saying is the way the project expands right now with the initial order, if you maybe, if we work through the math and we assume whatever amount we assume that there may be a discount. It doesn’t single handedly move the needle for you guys in terms of a rebound in military business per se?

Not single handedly but it’s certainly a great start of the year.

Okay. Just if you look through on a quarterly basis, if it adds $1 million to $2 million a quarter for the next 2 to 3 years, that’s not a massive needle mover?

If it was to take that long to ship, that would be correct.

Okay. I guess what are you trying to say is you hope it’s going to ship sooner?

I always do.

And that’s of leads into my last question just for this morning. I’m wondering if you could talk about hoping to have double-digit growth rates. I presume that means 10% or 12% whatever it might be? And the other thing you talked about the opportunities to double or triple the size of the company over the next couple of years? How do you -- are we supposed to assume that doubling or tripling the size of the company over the next few years, if everything just goes right and then if everything doesn’t go right, you’re the 10% type of grower?

No. I think that there’s, when you justify the opportunity to do acquisitions by improving your ability to grow organically at a high rate and then you follow that up with meaningful acquisitions. I think you’re very, very much can get to a doubling or tripling of the size of the company. As we take operating efficiencies to a new level, as you double and triple the top line of the company, you even more quickly accelerate the bottom line growth of the company.

Understood. I’m saying just in terms of organic growth potential organic growth potential, we should feel we’re doing great if you grow 10% or there’s lots more opportunity than that?

That’s a good question. I mean, when you have our end-user customers contracting their budgets and you’re getting a multiple of GDP growth. I mean, I guess, I would always view that as good, if I can be high single-digit as we talked about in the guidance or beyond, I would say that’s a pretty good accomplishment in this environment.

I’d say back is that it is a lot of the markets that you’re in are growing at massive growth rates. Although, whether it’s backup power or smooth out of power or medical and these things are big growers. You’re not big in there yet. But that would be the opposite let say I don’t know if you almost care GDP is growing or not. But you have certain market the targets that are massive size markets that are just taking off right now that’s true you have competition in some of those markets as well, we have SAT and medical, et cetera, et cetera. But if you really do have superior chemistries and you got the ability to produce, I think you’d be able to call back in those areas as well.

You’re right. I mean, there’s a lot of growth opportunities and we’re trying to make sure it’s profitable growth. I mean there’s a lot of people that would show rapid growth rates that aren’t making any money and we’re trying to make sure they we’re pragmatic in our top line growth and we do it in a very profitable fashion. And the decisions we’ve taken to divest some of the business that we did, both show growth but it wasn’t in a profitability level that we thought was consistent with our business model. So we look at markets, we look at what their overall sizes, we look at their growth rate, but we also look at the ability to make money in those markets and does it make sense relative to our core competencies, and so far that’s been a pretty good compass to decide where we pursue business.

[Operator Instructions] And we’ll go next to Sam Bergman [ph] with Bayberry Asset Management [ph].

A couple of questions. One regarding SATCOM business, if you look at what’s funded and unfunded at this time, can you make any comparison to the level of activity in that area for quoting in the fourth quarter versus even the third quarter, or versus the fourth quarter last year?

Sam [ph], I don’t know if I can make an educated statement about relative to this, specifically relative to SATCOM. But what I do know is that we have several more people working very closely with a larger number of OEMs and so the overall product opportunities have increased, whether that’s SATCOM or other product types. I don’t think I could comment on it. But I think it’s more a function not so much of the end budgets, but the fact that we’re playing in more opportunities.

Okay. I know in prior conference calls, there was mentioning that there was some good opportunities overseas. I have not seen over a 9 month or a 12-month period any announcements on any of those opportunities if they still exist. Can you tell me if they still exist?

You mean in addition to the one we mentioned in January?

Yes.

Yes. They still exist.

And are they on the unfunded stage and that’s why they’re not announced or which stage would you say they’re out at this point?

I mean, we’re trying to follow the money. Sam [ph], I mean, we know that there’s long gestation cycles for these mega projects but we have a finite number of financial and human resources. So when we meet with the sales teams, that’s one of the first questions that we ask is, not only do we feel we have a competitive position here that’s meaningful, but what the status of the funding and we’ve been trying to put the majority of our focus on unfunded projects.

And my last question, it seems like you now you focus quite a bit on R&D which is a healthy thing. Going forward though 2012 how should we model the R&D for the next 12 months?

The way you should look at it, Sam [ph], is we break it down into 3 buckets. We break it down into 30% of the R&D is absolutely targeted at the initiatives of the growth councils that Mike spoke of, building the new platforms that are going to carry us into the future. 50% to 60% of R&D is based on the requests that we constantly get from the military, from special forces, from a whole host of different customers that want something special with the base products that we have. The remaining 10% to 20% is new to the world, pure R&D expenditures. And this is a far different model than what we had deployed in the past, a healthier approach as we go forward.

Can you talk about, last question regarding the growth council and what R&D should be developing and putting out as new products. When should we see initial shipments or beginning ramp ups of announced new products?

Well, I tried to indicate in my prepared remarks that we believe within 1 or 2 months after initial orders for the GenSet Eliminator, we’d start to be able to see some shipments. So depending on how long internal customer testing programs take, like the 1 or 2 month clock would start immediately thereafter. We hope to -- the cycle for these things is that everybody has great ideas but as we’ve learned, unless we have some kick the tire prototypes for people to really fine tune their thought process and let us know exactly what they’re looking for you just never get to that ordering stage without a very, very long approval and specification of our own [ph] cycle. So we’re optimistic that between the GenSet Eliminator product line and some of the other product lines we mentioned that we will be starting to see some traction in the latter part of this year.

It appears there are no further questions at this time. Mr. Popielec, I will turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you very much everybody for joining us on the fourth quarter 2011 earnings call. Once again, I look forward to meeting up with several of you over the next week or so, and to sharing with you our quarterly progress on each quarter’s conference call in the future. Thank you very much for participating today. Bye-bye.

That concludes today’s conference. Thank you for your participation.