Time will Tell

Time will Tell

STRATEGIES by Mark Gordon | Managing Editor

At the end of a 10-minute video describing what electronics manufacturer Teltronics Inc. does, company President Ewen Cameron doesn't mince words when talking about what his company needs to be doing.

Overhead for production is high in the specialized field of building phone switches, panels and other communications-related gadgets, Cameron says, so the company must have sales of $3.5 million to $4 million a month to be profitable.

It's not there - yet.

"We are still lumping along," he says. "We cannot get every quarter profitable, but we are working toward that. We are trying to get consistent."

Striving for consistency in meeting sales goals is a benchmark of any company. But over the past three years, the Sarasota-based public company has been like a sputtering car battery that works some of the time: It tries hard, but the results aren't always there.

Consider the numbers: In 2005, Teltronics lost money in the first and last quarter ($240,000 and $620,000, respectively) while making money in the middle two quarters ($3.48 million in the third quarter; $1.19 million in the first quarter). Cameron calls the pattern a strangely seasonal phenomenon, a cyclical pattern in an industry that isn't really all that cyclical. The pattern goes back to 2003; Teltronics reported losses in eight of the last 12 quarters.

Revenues have been flat, too. In 2005, its annual revenues were $46.2 million, a tiny increase on 2004 revenues of $46.04 million. It did report a profit in 2005, but that was off a one-time gain of $4.6 million.

So now, Cameron and his management team are implementing a series of changes so the company not only tries hard but succeeds. Besides producing improvement in sales and profits, Cameron, also the CEO, is hoping the company soon returns to being listed on the NASDAQ exchange; it was removed in 2002 after not meeting the board's financial requirements. It currently trades on the over-the-counter board, under the symbol TELT.

Teltronics has also been seeking ways to improve its balance sheet by paying down some loans and obtaining new financing.

Cutting costs

Anchoring Teltronics' strategy is a reorganization of its global sales team so it targets new prospects in bigger markets. Teltronics hired a new senior sales manager for its New York City office, an area that has been lucrative for the company in the past. Among its top customers there are the city's public schools and prisons bureau. Teltronics also increased its sales force in England and New York and hired a telemarketing team for Sarasota. Cameron says he wants the company to do more selling in the Gulf Coast area.

Finally, Cameron says, Teltronics dismissed all of its sales force in its Silicon Valley-area sales office "and started from scratch" with a new senior manager and new sales people.

The company is giving its refurbished sales team some new products to sell, too. It's heavily promoting features for its Cypreon line, a phone system for small and mid-size business that uses the Internet to communicate. One feature is the ability to have auto discovery, so a company can plug in new phones using the system, and employees will be able to make and receive calls in a few minutes. It eliminates the time - sometimes days - spent waiting for the phone company to activate new lines. Also, Cameron says, the company is looking into a "low-end volume product," that would give sales a boost.

Cameron, a Great Britain native who expressed some of that country's infamous dry wit and frank thoughts during a recent interview, says he thinks the changes, especially the ones to the sales team, will be a boost for the company.

He also admits, though, that motivating the sales team to succeed is both his biggest challenge and greatest worry Cameron, 52, has been with Teltronics for 14 years; he earned $376,170 in 2005.

"Our revenues might have been flat," Cameron says, "but we've cut costs, so we are operationally profitable."

Cameron, in spite of the company's erratic results, shows what you would expect from a CEO - optimism. Take 2001, when Teltronics was reeling from spending about $12 million for what it ultimately called a failed product initiative for a wearable computer. Cameron pointed to the bright side, saying, "There are certainly challenges, but we have the wherewithal to face them."

And in the 2002 annual letter to shareholders, coming off several years of rising debt, falling income and shrinking stock price, Cameron told shareholders, "We assure you of our continued commitment to grow the business through revenue, market share and the profitability that will eventually come."

No more pay phones

The latest move to grow through sales as opposed to acquisitions has come as a result of timing. Cameron is forecasting that the industry is at the end of a six- to eight-year business-buying drought brought on by both the post 9/11 economic slowdown and post-Y2K.

"Nobody was in the mind of buying anything," Cameron says, so Teltronics poured money into research and development over the past six years. The majority of its revenues over that time came from existing customers; the New York City Department of Education, IBM and Nielsen Media Research represented 36% of Teltronics' net sales in 2005 and 2004, coming down from 44% in 2003.

Teltronics was founded in 1969. Its original niche in the telephone marketplace was manufacturing coin hoppers for pay phones. It moved from Lakeland to Sarasota in the 1970s and has grown since then by selling its own products and buying other companies in the industry.

Its current product lines include phones and phone systems for 911/emergency systems, alarm companies and call centers. Clients, in addition to its big three, include crystal maker Waterford, Pensacola Junior College, 27 FAA communications centers and governments in Mexico, the Middle East and Asia; several government officials from Russia were in the company's Sarasota headquarters recently to hear new product pitches.

Teltronics is also trying to make sure it stays with the market by using VoIP (Voice over Internet Protocol) technology, which is showcased in the Cypreon product. Teltronics regional sales manager David Curtis says the communications method of sending voice over Internet data lines is where all phone service will be in the future because it's easy to use and brings down the overall cost of maintaining multiple phone lines. Curtis says it's one of the company's most important product lines.

Still, Cameron says, the company needs to keep its options open and continue looking for new products and niches, as the future of VoIP products are fuzzy, mainly "because this is the only new thing to have occurred in the industry since the move from analogue to digital."

Made in the U.S.A.

Teltronics might make and sell high-tech phone software and hardware, but in one sense the company is a relic from 100 years ago: It makes everything it sells in a Sarasota factory.

It claims to be one of the only, if not the only, companies in its field to resist the call of cheaper overseas labor and manufacture everything domestically.

Vice president of manufacturing operations Robert Ramey says keeping things in-house allows the company to control the environment and the quality without having to fly out of the country, he says. Also, Teltronics executives can show visitors and clients the factory in action, which helps sell products.

The factory is a 72,000-square-foot facility on the ground floor of Teltronics' Sarasota headquarters. About 10,000 circuits go through the building each month, Ramey says, going into a range of phone-related products that make up the core of Teltronics' business. The products are welded, packaged and shipped from the building.

There are several companies nationwide making similar products as Teltronics.

Many of those companies outsource the work to factories outside the United States, such as phone giants Nokia and Motorola. Smaller competitors also have international manufacturing contracts, such as Tellabs, a suburban Chicago company that makes and sells phone components.

INCOME STATEMENT

(in thousands) () represents a loss

Years ended Dec. 31 2005 2004 2003

Total revenue $46,229 $46,045 $46,884

Cost of sales 27,224 27,773 28,597

Gross profit 19,005 18,272 18,287

R & D expenses 3,673 3,114 4,191

Selling, general and administrative 12,782 13,125 14,434

Non-recurring 1,583 (1,233) -

Other expenses 535 1,081 1,258

Total operating expenses 18,573 16,087 -

Operating income 432 2,185 (1,596)

Total other income/expenses net 4,689 (219) (296)

Earnings before interest, taxes 5,121 1,966 (1,892)

Interest expense 1,263 1,420 1,404

Income before tax 3,858 545 (3,296)

Income tax expense 42 7 7

Net income $3,816 $539 (3,303)

BALANCE SHEET

Assets: Current Assets

Cash and Cash equivalents 1,150 1,580 146

Net receivables 6,986 5,841 4,101

Inventory 5,970 3,858 5,491

Other current assets 953 381 434

Total current assets 15,059 11,661 10,172

Property plant and equipment 967 3,729 5,470

Goodwill 241 241 241

Intangible assets 357 483 193

Other assets 356 309 243

Total assets 16,980 16,424 16,320

Liabilities: Current liabilities

Accounts payable 7,030 7,707 8,353

Short/Current long-term debt 5,967 4,831 11,250

Other current liabilities 2,388 2,045 1,458

Total current liabilities 15,385 14,583 21,061

Long-term debt 3,081 7,885 1,383

Deferred long term liability charges 1,100 - -

Total liabilities 19,566 22,467 22,444

Stockholder's equity

Common stock 9 8 8

Retained earnings (21,177) (30,345) (30,259)

Capital surplus 24,658 24,301 24,170

Other stockholder equity (76) (8) (42)

Total stockholder equity (2,586) (6,044) (6,124)

Net tangible assets (3,184) (6,768) (6,559)