Ultralife Corporation (ULBI) Q1 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Ultralife Corporation First Quarter 2012 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Jennifer, 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 first quarter of fiscal 2012. With us on today’s call are Michael 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 were 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, and 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 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. As we have done previously, today I’ll start by making some high level observations about our first quarter 2012 operating performance. Then I’ll turn the call over to Phil who will take you through the detailed financial results for the quarter. After Pill has finished, I’ll take the call back to provide a progress report on our top 2012 priorities with a particular focus on new product development, as well as our thoughts on the full-year financial outlook for 2012 before opening it up for questions. The first quarter of 2012 was characterized by lower battery and energy products demand, negatively impacting both revenue and gross margins, offset to some degree by a very favorable improvement in our communications systems business performance. In the first quarter, we saw the softness in our battery and energy products business that was experienced in the fourth quarter of late last year extend to this year. As we mentioned during our last call, revenue softness included a large recurring Telematics contract that reached its life end late last year, and the slowed U.S government defense business, due to overseas troop withdrawals and well-publicized budget constraints. In anticipation of a slower first half for B&E products, we reduced manufacturing output to bleed down inventory roughly 10%. In the first quarter, we also completed our 9-volt lithium battery product line transition to our China operations. The combination of these 2 events, along with lower demand, led to approximately $1.9 million of negative manufacturing variances in Q1, which was higher than expected and hence impacted net gross margin rates. We have implemented additional head count rightsizing in Q1 to correct a large portion of these variances and have implemented a detailed sales and operations planning process to more quickly respond to demand fluctuations. On a positive note, our communication systems business showed a nice rebound in its sales in Q1 by doubling year-over-year revenue driven in-part by the international project we announced in January. Comm Systems gross margin rates declined modestly as a result of a large project tender pricing. However, we expect to fully recover this slight erosion from lean productivity gains throughout the year. Looking at operating expenses, we continue to knowingly spend ahead of revenue realization on new product development to increase feet on the street, but nevertheless we were able to reduce operating expenses 6% year-over-year. In a few moments, we will talk about several exciting new product introductions we will make this month, which will expand our opportunities for organic growth, despite the present challenging government defense budget environment. But first I like to ask Ultralife’s CFO, Philip Fain, to take you through some additional details of our first quarter 2012 financial results. Phil?

Thank you, Mike, and good morning everyone. Earlier this morning, we released our first quarter results for the period ended April 1, 2012. As a reminder, I will provide you revenue, gross profit, operating expenses, and operating results from continuing operations for the 2012 first quarter compared to the 2011 first quarter. Discontinued operations contain the results of RedBlack Communications. 2011 discontinued operations also contain the results for the Energy Services business, which we exited in the second quarter last year. Consolidated revenues for the first quarter totaled $27.5 million, representing a 1% decline from the $27.9 million for the first quarter of 2011. Revenues from our Battery & Energy Products segment were $20.1 million, a decrease of $4.2 million or 17% from last year. This decrease was primarily attributable to the completion of the non-U.S portion of a Telematics battery contract in the first quarter of 2011 that accounted for in excess of $4 million of revenue for that period. The first quarter performance was also impacted by a slower government and defense order rate for rechargeable and non-rechargeable battery. Communications Systems' sales of $7.4 million increased by $3.8 million or 102% from the prior year. This increase reflects our broader focus on large, global defense modernization opportunities, which resulted in higher amplifier shipments. Our consolidated gross profit was $6.6 million in the first quarter of 2012, compared to $4.4 million for the first quarter of 2011. As a percentage of total revenue, consolidated gross margin was 24.0% in 2012 versus 15.8% for last year’s first quarter, an increase of 820 basis points. During the first quarter of 2011, the company recorded a $2.7 million charge for the settlement of a matter with the U.S. government pertaining to Exigen contracts completed between 2003 and 2004. Excluding this charge, gross margin for the 2011 period would have been 23.2%. Gross margin for our Battery & Energy Products segment was 19.6%, a 710 basis point improvement over the 12.5% reported last year. Excluding the 2011 settlement charge, the gross margin for this segment would have been 21.3%. The lower gross margin for the Battery & Energy Products segment resulted from our decision to reduce production levels in 2012 to more closely correspond to the rate of orders as part of our lean initiatives. Although we incurred almost $2 million in unfavorable manufacturing variances, the decision advances our goals of increasing inventory turns and optimizing cash. In addition, the necessary adjustments we made to our manufacturing operations over the past few months and continued refinements going forward give us more flexibility to achieve the business model goals that we have previously shared with you. For our Communications Systems segment, gross margin was 35.7%, a decrease of 170 basis points from the year earlier period, reflecting some large project volume pricing. Operating expenses totaled $7.9 million for the first quarter of 2012, a reduction of $0.5 million or 6% from the $8.4 million for the 2011 period. The overall decrease from 2011 was a result of ongoing reductions in general and administrative expenses, partially offset by increased selling expenses associated with the expansion of the sales force to increase geographic coverage and penetrate new markets. As a percentage of revenue, operating expenses were 28.7% for the first quarter of 2012, compared to 29.9% a year-ago. First quarter non-cash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses amounted to $1.3 million, compared to $1.4 million for the year earlier period; and adjusted EBITDA defined as EBITDA, including non-cash stock-based compensation expense amounted to $0.1 million in the first quarter of 2012 versus negative $2.3 million for the first quarter of 2011. We incurred an operating loss of $1.3 million in the first quarter of 2012, narrower than the operating loss of $3.9 million for the same period in 2011. The 2012 loss was driven by the unfavorable manufacturing variances that I described earlier. Other expenses, primarily comprised of foreign currency translation and interest expense amounted to $51,000 for the first quarter of 2012, compared to income of $144,000 for the year earlier period. The year-over-year variance resulted from fluctuations between the U.S. dollar and the British pound. Our first quarter cash provision of $0.1 million primarily reflects booked tax timing differences related to the amortization of intangible assets consistent with last year. Net loss from continuing operations was $1.4 million or $0.08 per share, compared to $3.9 million or $0.22 per share for the same period last year. The company’s liquidity remains solid with cash of $4.3 million, no debt and a current ratio of 3.3. Our inventory decreased by almost 10% from year-end and 25% from the first quarter of 2011. By comparison, the outstanding balance in our revolver at the end of the first quarter of 2011 was $10.2 million and the current ratio was 1.9 at that time. Knowing that the timing and mix of our revenues varies from quarter-to-quarter, we have significantly reduced our discretionary operating expense base over the last year, while continuing to provide the necessary funds for product development and expansion of our sales force. The actions we have taken further streamline our manufacturing operations, while increasing our inventory turns and enhancing flexibility to meet demand. The introduction of higher margin new products, suitable for broader markets with a larger, more strategically placed and focused sales force will help us even out revenues in our resulting operating performance. Based on the pipeline of opportunities, we are maintaining our guidance for 2012. That is, year-over-year revenue growth approaching double digits with operating margin of approximately 7% to 7.5%. We continue our attention on relentless execution of our top priorities. We believe that the improvements made and those to follow will generate strong incremental returns and 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. For 2012, we have said that our 3 top priorities are essentially; one, to optimize the company’s profitability; two, execute our growth game plan; and three, more fully leverage our China operations to access global commercial markets and to improve our cost competitiveness. To optimize company’s profitability, we have established a framework to delivering interim operating margin goal of 10%, which is based on working towards a total company gross margin rate of 30%, allocating 10% to 11% to sales on new product development and selling expense, and 9% to 10% to sales on G&A. When we look at the mix and the pricing trends at both Battery & Energy Products and Communications Systems, we see a rebound path to high 20’s gross margins this year once the B&E manufacturing rightsizing adjustments are completed, with any upside to our revenue growth providing additional leverage on the way to 30%. In terms of our new product development and selling expense, we have kept spending several points higher than the 9% to 10% of sales-dated target in an effort to drive our top line growth achievement for the year. However, we will start to modulate this spending back to targeted levels as the initial round of new products move into full production and the new sales force hire-on boarding and training processes stabilize. One of the challenges we face in terms of our current business cycle is that we are in the awkward period in between the time in which we have made some significant changes to the portfolio and operating practices to better position the company for higher quality earnings growth, and the time needed for the gestation cycle of new product development to result in meaningful organic revenue growth. We continue to scrutinize all existing spending and aggressively seek new operating cost reduction opportunities, yet also continue to fund our new product development and focused sales force expansion efforts, which are the core parts of our organic growth game plan. To be clear, we realize the importance of showing top line growth, but we also know that consistently growing our earnings at even a faster rate is the only way to improve our earnings quality. That’s why developing high value proposition new products is such an important part of what we are doing and I’m very pleased with the progress that has been made to-date. Regarding the patent pending Ultralife’s GenSet Eliminator announced in September designed to increase operational efficiency of fossil fuel generators and/or facilitate renewable solar or wind power integrations, we now have multiple demonstration units built and are using those to perform numerous demonstration of the product's capabilities over a wide cross section of potential customers. In late February, we completed a demonstration at the global battery Japan trade show in Tokyo where it received strong reception and wide print media coverage. With the help of an existing channel partner in Japan, we are incubating several standby power application projects. One of the GenSet Eliminators will be on demonstration at the upcoming Special Operation Forces Industry Conference in Tampa, May 22 through 24, while another is scheduled to be demonstrated at the Disaster Response and Recovery Expo in Nashville, Tennessee on May 23 and 24. This will be followed by being shown powering water pumps at the Aid and International Development Forum in Washington D.C. on June 6 and 7. The GenSet Eliminator is also presently progressing through the U.S. Army’s network integration evaluation process for laboratory evaluation to be followed by live field trials at Fort Bliss, Texas in October this year. The NIE, soldier-led evaluation, designed to further integrate, mature and rapidly progress the Army’s tactical assets. Once successfully through the NIE process, new technologies are able to be immediately fielded that allowing for the military to realize benefits in record time. We are also seeing very strong interest internationally for the product as well, specifically we have European MOD’s requesting live demonstrations for late May and we have active discussions underway in South America where the GenSet Eliminator is being evaluated to provide efficient power in remote locations. And lastly, we have system integrators for the middle and far eastern militaries evaluating our large format Lithium Ion batteries and our planning to utilize them paired with a diesel generator, attaining 30% increase in efficiency, and thereby extending the mission time of its border patrols. And finally, in addition to the GSE skid and trailer mounted versions capable of coupling with either generator sets, solar panels or wind turbines, we most recently have introduced a GSE product variation, which we call the Man Portable Power System or MPS, which consist of ruggedized single man portable gear, including portable power conversion, batteries, and solar panel components to add to the user's flexibility for mobility and rapid deployment. We have MPS systems that will be demonstrated in both the U.K. and in France in May and June respectively. As previously-mentioned, we have developed in conjunction with the GenSet Eliminator systems something we call the Multi-Kilowatt Module or MKM, which essentially is a large format rechargeable battery. We are very pleased to announce that we have received and shipped our first order for initial small quantity of new MKM large format batteries to a major defense contract for a standby power application. These initial installations will allow us to field-verify the final product design and position us well for larger follow-on orders. As this product can incorporate different lithium ion battery chemistries depending on the application, in addition to it forming an integral part of Ultralife GenSet Eliminator System, we are also positioning the MKM and several other types of off grid standby, back-up, and motive power projects. Since the MKM is designed to be manufactured in pre-defined form factors, customers can easily increase or decrease the number of batteries used to meet different demand needs. In the area of new sales and battery product designs, we have completed and are presently undergoing customer testing of a new half size product for our well-known 5390 primary battery pack. This new half size 5390 product directly addresses the military's stated need for lighter, higher-density mobile energy solutions for our soldiers. Specifically, it delivers similar power as the currently-used products, yet with 1/2 the size and weight, which will provide the soldier the flexibility of a lighter, smaller battery for shorter missions, or twice the energy in the same size and weight as the existing battery for longer missions. Concurrently, we are also launching a half size 2590 rechargeable battery pack in a new thin-to-body conformal battery as additional lightweight option for today’s soldier. Our Communications Systems new product development efforts over last year have resulted in 3 new offerings, with a focus on vehicle and man portable systems and implements supporting multiple radio configurations and use globally, and reducing SWAP-C that is size, weight, power and cost. The Lightweight Portable Amplification System or LPAS, which is an upgrade of one of our existing products, now will support over 11 different radio configurations, while the older unit supported only one. The system utilized our very successful A320 Amplifier and an integrated rechargeable power supply, which allows for either dismounted or vehicle operations using AC/DC or battery power. This configuration provides the customer with maximum flexibility and operational usage with mixed fielding of radios and also enhances transition when upgrading to newer radio platforms. This product is currently under evaluation for use by key international customers in support of funded major program initiatives. Our Handheld Vehicle Adapter or HVA provides the ultimate solution for vehicle communications supporting chicken-run [ph] communications enabling the operator to use the same radio in the vehicle or during dismounted operations. Since capable of using several different voltages this product can be used in commercial or military vehicles while supporting over 16 different radio configurations. The handheld vehicle adaptor is currently quoted to several domestic and international vehicle programs with fielding planned in 2012. Another known challenge and operational usage shortfall is a limitation of the number of antennas that can go on aircraft, vehicles and maritime craft. In response, Ultralife has developed a satellite radio combiner, which enables simultaneous transmission and reception of any 2 military UHF satellite radio channels. Designed for continuous operations and weighing less than 17 pounds, it provides significant operational capability at very low weight and power consumption, which support the military focus on improvements again in SWAP-C -- size, weight, power and cost. Two U.S. aircraft program opportunities are currently reviewing this product for use. All of the above-mentioned products are cost effective and relevant to current customer requirements based on our direct engagement with key customers and our own extensive knowledge of power and communication system requirements and result in improvement to existing operational capabilities. We are delighted to announce that each will be fully on display at the upcoming 2012 Special Operation Forces Industry Conference May 22 through 24 in Tampa, Florida, home of a special apps command and many of the early adopters to new and cutting-edge soldier technologies. We know that we face some tough headwinds in the current U.S. government defense budget and political processes. We are expanding our aperture for opportunities by leveraging our core competencies in the space to pursue international markets. That appears to be gaining traction in both of our business units. We also 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 U.S. military budgets and troop withdrawals, that the expansion of our product offerings to close customer collaboration will lead to meaningful organic growth opportunities with both U.S. and international government defense customers, as well as those in our commercial markets. Lastly, to more fully leverage our China operation to access commercial markets in China and throughout the rest of the world and to improve our cost competitiveness, we are continuing to make investments in our Shenzhen facility. As an update, we are now producing 100% of our newly-designed 1,200 MilliAmp Hour 9-volt lithium batteries in our China facility, leveraging our thin cell capability to produce superior technical performance and longevity in other competing products. As many of our products are assembled in OEM products before shipment to the end user, it only makes sense to consolidate that product line in China where most of that assembly occurs. Regarding our successful thionyl chloride batteries, which are known for their high energy and long operational life, we are building on a strong technical performance and economic position, by taking a next step in automation to increase throughput and tighten manufacturing tolerances. We look forward to leveraging our increasing competitive advantage in our China-produced thin-cells, 9-volt, and thionyl chloride products to grow our global opportunities in RFID toll road and tracking devices, safety and security OEM products and in utility metering applications. With regard to the financial outlook for 2012, as we stated in our last call the magnitude and quality of our business opportunity funnels for both of our businesses continue to expand as a result of additional sales people in focus and in new product developments. In the case of our Battery & Energy Products business, the increase in the opportunity funnel is largely the result of a new product the team has developed, increased global participation and initial penetration into new commercial markets. We are expecting flat to modest decline in revenues through the first half driven by softness in the U.S. government defense business. However, we are forecasting acceleration of the growth rate in the later part of the year subject to the timing of actual orders and the ramp rate for the newly-introduced products. In Communications Systems, the opportunity funnel has grown dramatically over the last 12 months, primarily as a result of strong technical position in a much broader range of projects driven by the addition of several very focused and experienced sales team members, which has increased our reach of military and defense customers to a global scale. Despite a tough upcoming comparable to a non-recurring SATCOM shipment in Q2 2011, the continued high activity level and broad participation in both domestic and international projects, gives us good visibility to a strong rebound from 2011 and positive total year growth rates in 2012. Therefore with regards to the total company financial outlook for 2012, although we are starting the year flat, we still see the path for year-over-year percentage revenue growth approaching double digits, while operating income growth is expected to outpace revenue growth in generating an operating margin rate of between 7% and 7.5%. Our mission for 2012 continues to be straight-forward and that is to drive more consistent earnings performance and build sustainable growth momentum. As we execute on the business model adopted in 2011 for increased profitability, realign our manufacturing capacity for the current demand profile, and follow through on plans in place for new product development and sales coverage expansion, we expect these goals to be achievable in the coming year. Operator, this concludes my prepared remarks and we would be happy to open the call up for questions.

Thank you. [Operator Instructions] We’ll take our first question from Walter Nasdeo with Ardour Capital.

You’ve talked a lot about the military and the developments that you see in there and also some of the slowdown. Can you kind of give me a little bit of a breakdown right now on how the military to commercial sales are breaking out and then what you expect to see kind of going forward?

Yeah, I mean generally speaking, when you look at Q1 for the total company, we’re about close to 70% on G&D and 30% commercial. In that, obviously Communication Systems is 100% G&D. Battery products is probably more or like 60/40 at this time. The commercial pieces is growing certainly. When I look at it, the other figures [ph] are most likely at 4's [ph]. How does that look on a global scale. And what we’re really seeing in Communications Systems is that, they’re getting roughly half of their business from the United States, but half of it from international markets. So whereas it’s a -- G&D-pretty-much-centric-business, we’re seeing significant growth opportunities outside the United States.

Okay. And then you were talking about increasing inventory turns, what are you at now?

We are at approximately 3 turns right now. And under our lean initiatives, we look at that as totally unacceptable.

Okay, okay. What’s your goal then?

Our goal is to add at least 2 more turns a year to that to get into the 5 to 6 range.

We’ll take our next question from Mike Cikos with Sidoti & Company.

I just had a couple of quick questions for you. Regarding the DCAA charge of $2.7 million relating to the 3 exigent contracts, what was that for?

We had a contract in 2003, 2004 timeframe, which is done as you’re working in parallel to execution of the contract, you’re still defining some of the commercial parameters. There were some costs that went down, some costs that went up. We had the opportunity to ask for increased costs, we sort of looked at it as a net some 0 type of situation and just kept moving forward, trying to support our soldiers in harm's way. In a post audit, when people looked at the charges, the things that went -- costs actually went down. There was an opportunity for us to recoup that for things that went up. We didn't necessarily do that and as by the rules that results in a shortfall and we owed the government some additional monies with that. There's -- they have a lot of tools at their disposal to try to enforce these types of contracts. We felt that we negotiated in very good faith to try to resolve it, and for something that has been around from 2003, 2004, and recognizing that U.S. government is one of our biggest customers, that we felt it was prudent to settle it and we did it quickly at the beginning of last year.

Okay. So all those charges were then in the first quarter of last year?

Right, about $2.7 million.

Okay. Another question for you regarding the MKM product, I don’t know if you’ve done it before or if you could, but just as far as thinking about this product, what’s the typical price range that you are looking for or is it a higher margin product compared to the products already offered by you guys?

Yes, we certainly, when we look at products, we look for the overall need, we look at the niche and of course, we are looking for the opportunity to make a reasonable return. In this project, in the design of the project, we tried to understand, what was the strength of the market and where did it make sense from an applications standpoint. And so when you look at various forms of power many times, you look at it from a dollars per kilowatt hour type of perspective. And we tried to target-price it based on that fit. Now we look at it for as replacement for, say, lotaspet [ph] in some cases in environments where you have a lot of geography, unconstrained space and a high ability to go and maintain on a regular basis those products and perhaps not very high temperatures, sometimes the economics wouldn’t necessarily look so favorable. Whereas if you have very remote locations or places you don’t want to do a lot of maintenance, either from access or from availability of the equipment that it’s part of, and/or very higher temperatures where lithium ion products tend to perform very, very well, then those economics sort of swing in the favor of lithium ion. So at this point, they're over a $1000 of kilowatt hour type of price range and for its selected applications those are very competitive levels.

All right. And also touching on the B&E business segment that you guys had seeing some softness in the first quarter carry over from the fourth quarter, just a recap, that’s mainly attributable than to the budget uncertainty we’re seeing out there, as well as the troop withdrawals?

Yes, and then as we mentioned, we had a longstanding recurrent contract that ended in the last year. And there was a significant portion of that, that shifted in the first quarter of 2011, and did not repeat again this year.

Okay. And how much revenue did that contract generate in the first quarter last year?

$4.0 million.

Okay. And then just 2 other things I wanted to ask you about, with the accounts receivables you guys did a great job bringing that down this quarter. Should we expect it to kind of echo the movements that you anticipate in sales where it'll probably decline in the second quarter again because you are expecting sales in the second quarter of either flat to modestly down. And then accounts receivable will kind of increase in the third and fourth quarters as sales approach that double-digit growth that you’re highlighting?

Well, that’s just one way of looking at it. The way we look at it internally is based on DSO and what you are seeing is both sales-driven, causing the reduction in DSO in absolute receivable balance, as well as a market improvement in day sales outstanding to very, very good levels. Going forward as we increase the international portion of the business, there will be a tendency for the DSO to climb. I’m not saying significantly because we’re very, very cognizant of managing our cash, but nevertheless I would expect an increase in DSO based on normal sales terms.

All right. And one other thing was the sales force that you guys have and I know that you’ve added to it over the last year. Are you still adding to that force at this point or I know the training is an ongoing thing, but is the force itself expanding any more?

Yes, at this point, we’re not increasing the overall number of people, but what we’re doing I mean sales is as a very Darwinian type of a profession. It’s variably compensated and there’s an opportunity for people here to be very, very successful, both for the company and for themselves personally, with strong performance. And there is also times though that when you have bad fits you need to move people on. So at this point, most activity is associated with understanding the people that make it and understanding the people that don’t make it and being very human and respectful about it, but moving those people on who don’t make it and we replacing those with people that we think have a better shot at it. But the overall quantity of people that we’re looking at is where we like it to be relative to the current revenue size, but as we continue to grow our business and create more bandwidth for penetrating new places, we will continue to add more people on stream at that time.

Okay. And then just one thing to cycle back with the B&E business segment, so the growth that we’re projecting then through the rest of 2012 will be based on the fact that this Telematics contract will drop out because the first quarter is now behind, as well as the fact that you’ve expanded on your product offering as well as the traction you are building up in the international markets and these new commercial applications that you do have.

Exactly.

[Operator Instructions] We will take our next question from Sam Bergman with Bayberry Asset Management.

Couple of questions. Are you pretty much saying Ultralife’s earnings get more into the second half of 2012 from the pipeline that you see.

That’s correct.

And what can you tell me about R&D going forward into the next several quarters. Is it going to tick up or is it going to remain somewhat flat from the first quarter.

I would expect it to step flat to down. And we are really trying to looking at that in the context of the overall revenue. We have a number of -- like as I mentioned very exciting introductions that are happening in the month of May and so some of those efforts will result in new opportunities which will of course drive additional engineering requirements, but of the good kind, of the time that you are looking in terms of real transactions and shipping product to customers. But we will be looking very, very closely at the overall expenditures for R&D, selling expenses as well as G&A, to make sure that the hard work we did last year isn’t really reversed this year by overspending in some of those areas.

And can you tell us on the MKM system that you recently shipped to a defense integrator, what was that particular order in terms of dollar value and what could follow-up orders be in what range of parameter.

We don’t provide and we can’t provide any individual details of this particular transaction. But generally speaking the products, this pricing order of magnitude are in a sort of $3,000 to $5,000 range per large format battery depending on its size and capabilities. When a customer buys these in large quantities, we'll be well-suited to rapidly deploy a number of these units, which could create a very substantial part of our ongoing revenue stream. But at this point, the initial customers are making sure that the product does what it says going to do, there is an abundance of brochure-wear [ph] large format batteries, but when you really blow it away and you take it in-house and you do all the detail testing that our customers require, there is actually very few people that have a commercially-viable product out there. So we are very excited about this big first step in this product.

And the other question I wanted to ask you is in terms of your Chinese operation, many companies are bringing manufacturing somewhat or back to the U.S., do you find your costs in China pretty much remain the same or lower than what they were 6 months ago?

Costs have a way of moving up no matter where you are and part of being a world class man who set those costs. So the costs that we see in China increasing make strong headlines because of the percentages, but then when you look at the actual dollars, they're not that big. And nevertheless, just because maybe you have a different starting point doesn’t mean that we want to waste money in China either. So we are working as hard on lean improvement in China as we are in the United States. Now that being said, when we decide a product wants to be in China versus the U.S., what we're really making the decision is not the U.S.A versus China thing, but rather where is my end user, where is my market. And we are trying to be closest to the customer. So that’s really driving our decision to be in China or the U.S. or in another place, more than some of the things that may hit the headlines.

[Operator Instructions] And it looks like we have no further questions in queue. I would like to turn it back over to Mike with any closing and additional remarks.

Sure. Thanks very much. And thank you everyone for joining us today for our first quarter 2012 earnings call. Once again, we look forward to meeting up with several of you in person over the next week or so and also to sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much and have a great day.

And that does conclude today’s conference. Thank you for your participation.