Ultralife Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Ultralife Corporation Third Quarter 2023 Results Conference Call. All participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Berfening.

Operator

Please go ahead.

Speaker 1

Thank you, Bella, and good morning, everyone, Thank you for joining us this morning for Ultralife Corporation's earnings conference call for the Q3 of fiscal 2023. With us on today's call are Mike Manna, Ultralife's President and CEO and Phil Fain, Ultralife's Chief Financial Officer.

Operator

Www.ultralifecorp.com,

Speaker 1

where you'll 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 The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-nineteen on related supply chain disruptions, potential reductions in revenue from key customers, acceptance of new products on a global basis and uncertain global economic conditions. 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 publicly update forward looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could AFFECT Ultralife's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest Annual Report on Form 10 ks.

Speaker 1

In addition, on today's call, management will refer to certain non GAAP financial measures that management considers to be useful and differ from GAAP. These non GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Speaker 2

Thank you. Good morning, everyone. Welcome to our call on Ultralife's Q3 2023 operating results. I'm extremely pleased with the team's Q3 progress to stabilize and improve gross margin. Our initiatives have started to deliver With a year over year 460 basis point increase in gross margin for the business, resulting in an operating profit increase of $2,700,000 year over year.

Speaker 2

We have a strong backlog position across the portfolio that sustained in Q3 with a strong pipeline of new products that should continue to to support our main objective of continued profitable growth. We have mostly recovered from the cash imbalance due to the cyber event reported in Q1 of this year, which will allow us to now start utilizing generated cash to pay down our debt, which is our highest near term priority. This will provide headroom to examine accretive acquisitions and invest in strategic business initiatives supporting overall growth going forward. I will now turn it over to Phil to talk through the Q3 financial results.

Speaker 3

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our 3rd quarter results for the quarter ended September 30, 2023. We also filed our Form 10 Q with the SEC and updated our investor presentation, which you can find in the Investor Relations section of our website. Consolidated revenues for the 2023 Q3 totaled $39,500,000 compared to $33,200,000 for the Q3 of 2022, an increase of 18.8%. Government defense sales increased 48.1% and commercial sales increased 5.6%.

Speaker 3

Revenues from our Battery and Energy Products segment were $31,900,000 compared to $28,600,000 last year, An increase of 11.7%, reflecting strong year over year growth in our medical and government defense markets, which increased 37.9% and 36.2% respectively. While oil and gas market sales were essentially flat year over year due to the timing of shipments to international customers, We experienced a 14.9% decline in other commercial sales, primarily in China due to the timing of certain orders. The sales split between commercial and government defense for our battery business was 7,6.24 Compared to $78.22 reported for the 2022 year and the domestic to international split was fifty-fifty compared to 49.51 last year, demonstrating the continued success of our global revenue diversification strategy. Revenues from our Communication Systems segment were $7,600,000 compared to $4,700,000 last year, a 62.7% increase, Primarily attributable to shipments of vehicle amplifier adapters to a global defense contractor for the U. S.

Speaker 3

Army In integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor under an ongoing Allied Country Government Defense Modernization Program. On a consolidated basis, The commercial to government defense sales split was 6,139 versus 7,129 reported for the 2022 full year. Our total backlog exiting the 3rd quarter remained over $100,000,000 and is diverse in nature Across our commercial and government defense customer base, we expect over 35,000,000 of the backlog to ship during the last 3 months of 2023. Not included in this amount is approximately $3,500,000 of shipments that were pushed into the 4th quarter due to delays in the deliveries of certain components from vendors. These shipments primarily to medical and government defense customers have commenced.

Speaker 3

Our consolidated gross profit was $9,800,000 up 45.5 percent over the 2022 period. As a percentage of total revenues, consolidated gross margin was 24.8% versus 20.2% for last year's Q3 and remain consistent with that reported for the 2nd quarter. Gross profit for our Battery and Energy Products business was $7,700,000 compared to $5,300,000 last year. Gross margin was 24.2 percent, an increase of 550 basis points Over 18.7% reported for last year's Q3 and an increase of 190 basis points over the 22.3% reported for this year's Q2. The year over year and sequential increases were primarily due to improved price realization as well as a concerted effort to level load production more evenly throughout the quarter, resulting in labor utilization efficiencies and higher cost absorption.

Speaker 3

For our Communication Systems segment, Gross profit was $2,000,000 compared to $1,400,000 for the year earlier period. Gross margin was 27.0 percent compared to 29.2% last year, primarily resulting from the delays experienced in the receipt of certain components. Operating expenses were $7,600,000 an increase of $300,000 over the year earlier period. 22.0 percent for last year's Q3, a 2 70 basis points improvement reflecting the sales leverage of our business model. The combined leverage of our 460 basis point gross margin improvement in our 2 70 basis point operating The sales ratio resulted in a $2,700,000 improvement in operating profit to $2,100,000 compared to an operating loss of $600,000 for the 2022 Q3.

Speaker 3

Our tax provision for the Q3 was $400,000 versus $100,000 benefit reported for the 2022 quarter computed on a GAAP basis, including the impact of interest expense to help finance the Xcel acquisition and foreign currency gains Associated with the strengthening of the U. S. Dollar to pound sterling, net income was $1,300,000 or $0.08 per share. This compares to a net loss of $200,000 or a loss of $0.01 per share for the 2022 quarter. Excluding the provision for non cash U.

Speaker 3

S. Taxes expected to be Fully offset by our net operating loss carry forwards and other tax credits, adjusted EPS was $0.10 per share for the Q3 of 2023 compared to a loss of $0.03 for the 2022 period. Adjusted EBITDA, defined as EBITDA including non cash stock based compensation expense, was $3,500,000 or 8.8 percent of sales for the 2023 quarter compared to $1,300,000 or 4.4% for the prior year quarter. On a trailing 12 month basis, adjusted EBITDA is $13,000,000 or 8.7 percent of sales compared to $6,600,000 or 5.0 percent of sales for the 2022 year. This represents the highest TTM level that we have achieved in the last 15 years.

Speaker 3

Turning to our balance sheet, we ended the 2023 Q3 With working capital of $62,800,000 and a current ratio of 3.4 compared to 50,100,000 And 2.7 for 2022 year end. With the dramatic strengthening of our balance sheet, we are poised to commence in the 4th quarter The pay down of our debt and reducing the costly interest expense, which represents almost $0.12 per share on a TTM basis. Going forward, our backlog, diversified end markets, growth initiatives and ongoing actions to improve our gross margins and strengthen our balance sheet position us well to optimize the leverage potential of our business model. I will now turn it back to Mike.

Speaker 2

Thank you, Phil, for the detailed review of the Q3 results. The team's focus on gross margin improvement has yielded promising early results, but we continue multiple efforts on this front, including price realization, lean projects to improve throughput and level loading the factories to improve labor efficiency and utilization. Material flow is key to our production operations. And although we have seen continued improvement throughout the year, we still experience occasional delays from specialized single source components, which disrupts our production lines. We have established the framework of our S and OP process through which our major customers have provided extended forecasts, thereby enabling us to order parts within lead time windows avoiding expedite fees.

Speaker 2

As this process matures, It will have positive impact in both labor efficiency and supply chain cost benefits going forward. Our lean process journey is underway in Q3 with immediate impact with measured increases in throughput per labor hour. We have started to expand this effort globally across facilities. With the focus on these three initiatives, I expect to see further improvement throughout the last quarter of this year and into 2024 subject to a stable mix of customer demand. I will now review the organic growth opportunities in the business with a brief update on several key projects.

Speaker 2

1st, on the veteran energy side, our ThinCell product line, which is focused on medical wearable products and tracking applications, continues to increase in future sales opportunities. We received our flexible production line equipment as expected in Q3 And we'll finish installation and begin line validation in Q4 to support forecasted demand by our customers in 2024 and beyond. On the UB-one hundred and twenty three A cell lines serving the IoT market space, we continue Cadence production shipments. We are sampling our new XR123a cells now, which have 30% more energy in the same form factor to key customers in the optics and illumination markets. We continue to work multiple opportunities for 123a cell sales, but ultimately believe battery pack assemblies will be a crucial piece of this product line where PACS solutions can offer added value and longer term customer relationships.

Speaker 2

Our improved Thionyl Chloride product line targeting monitoring and telemetry applications is in qualification and field testing with several customers. This technology can power items across an extreme temperature range for up to 20 years. With a 20 year life expectancy, the qualification and validation time for these products can be extensive, leading to a lengthy sales cycle and revenue recognition. On our X5 Medical Hotswap Power System continues to sell well, with a $2,500,000 order received in Q2 expected Fully shipped this year with further backlog increases expected in Q4. The follow on version of this system, the X5 Lite, which provides long term hot swap power to USB devices, is completing safety and compliance certification with preproduction samples available now.

Speaker 2

As mentioned last quarter, we paused work on the Conformal Wearable Battery Project With a 90 day contract extension granted from the government to focus our internal engineering bandwidth on other short term projects, We have resumed design and engineering work on the program and expect to enter first article testing with the government next year. This project being an quantity indefinite delivery contract with uncommitted volume, we will continue to balance internal resources for this project with other known revenue generating and cost reduction projects that have near term impact to the business. Switching over to the communication side of the business. We received a follow on order for $6,100,000 from an international customers to support their ground fleet communications upgrades for our amplification and vehicle integration kits. We have several other awards expected in support of I am pleased to announce that the communications business has received the initial orders for the EL8000 case integrated server systems, which I mentioned previously had completed certifications earlier this year.

Speaker 2

This system developed with our strategic partner allows high end computing server power In difficult environments on the edge, in industrial 5 gs and AI applications, truly bringing computational power to the point of use. We expect this area to continue to grow and gain momentum, adding diversity and scale to the business segment. We are Currently reviewing other strategic areas, we can leverage our integrated systems expertise with this type of advanced computing capability to further expand the Communication Systems portfolio. This review is part of the Iterative Strategic planning process we have in development. This process has been a very thoughtful and impactful journey for both business segments, Truly focused on technologies and areas that support our goal of significantly growing the size of the business.

Speaker 2

These projects are now going through a business case and market analysis process, which in the next several quarters will be in niche areas we should focus our precious time and resources on to support future growth, either through product development or acquisition. We continue to work with multiple partners on advanced cell designs with current and advanced materials with 1 development partner resident in our Newark facility. We can look forward to additional discussions on these activities and the Q4 and future earnings calls. With Q3 complete and momentum building, we continue to be laser focused on profitable growth, which allows us to start paying down our acquisition debt. Initial results from our execution of key initiatives are showing promising signs that provide a baseline for us to build upon.

Speaker 2

And as stated in the past few calls, Communication Systems needs increased scale to achieve consistent profitability, Battery and Energy needs to convert on multiple growth initiatives while driving gross margin improvements. Thanks everyone for the attention. That concludes the prepared remarks

Operator

And our first question comes from the line of Josh Sullivan with The Benchmark Company, your line is now open.

Speaker 4

Hey, good morning, Mike, Phil.

Speaker 3

Good morning, Josh. Good morning.

Speaker 4

As cash comes in, you mentioned you started off the call, what do you think the Net debt leverage, you want to get through, what's appropriate?

Speaker 3

Josh, I look at past acquisitions. I look at us having we paid off The previous acquisition in 32 months with the positive cash gap based on The EBITDA level that we're seeing, my goal is to extinguish the debt because I see $0.12 staring us Right in the eyes, right in the face. So that's certainly built into our iterative strategic plan That really enables us to see a nice cash build up across the next couple of years.

Speaker 4

Got it. And then as you look at strategic opportunities, I mean, what are you comfortable going to back up to on the leverage?

Speaker 3

Well, it certainly depends on the opportunities that we see. In today's economy, It's not just one opportunity that we're seeing. It's multiple opportunities that we're seeing. And at any one point in time, we have a couple of books in front of us, Some of which are intriguing, some of which we've seen before. So it really depends on the opportunity.

Speaker 3

I would be comfortable with the level of where our business is going and you can see over the last couple of quarters the pace of where our business is going. I look at Q3 being almost similar to Q2 had it not been for a couple of the parts that were pushed out. So you can see the trajectory, you can see the EBITDA and I'm not looking for any specific multiple. I'm looking at I'm Just focused on the actual dollars, knowing that we're not going to vary whatsoever from our acquisition criteria, Which are very, very it's been very disciplined. You look at Accutronics, you look at SWE, you look at Excel, all performing just admirably.

Speaker 4

And then on backlogs, you mentioned $35,000,000 release, just as supply chain improves and manufacturing efficiencies. Is there a natural level of backlog we should think about as run rate going back to 2021 levels? Just curious on what we should expect in 2024 is kind of the run rate there. I know it's hard to estimate, but It's

Speaker 2

hard to judge at this point, Josh. I mean, last year we were a third of this level. So now it's we've been lucky to be at over $100,000,000 now for multiple quarters in a row. My guess is, is supply chain loosens up and everything else happens depending on what's going on in the world. There's probably Somewhere between where it was and where it is now probably that $60,000,000 to $75,000,000 range is probably where it's going to settle short term, Especially if we execute and ship it out the door.

Speaker 2

I mean ultimately we're not trying to hold shipments. We're trying to ship as quickly as we can based on component availability, labor and etcetera.

Speaker 3

And from what I see I couldn't agree more with Mike. I see the leverage of our business model by our ability to move it out quicker.

Speaker 4

Got it. And then how should we think of the margin profile at this point with That backlog release is going to be beneficial to Q4, but what are your thoughts on the run rate margin profile as we get into next year?

Speaker 3

Sure. The way I'm looking at this Josh, I think we're going to see approximately 150 basis point improvement this year over last year. I would expect to see that same improvement and whether it's 150 or 170 does make a difference. I'm looking at 150 next year, 150 the following year, 100 the next year and that's the base case. And The reason why that's so important to us is that every 100 basis point improvement in gross margin yields a $0.07 of EPS after tax.

Speaker 3

So that's why we're so focused on gross margin. So I'm looking at 150, 150, 100.

Speaker 4

And then on the EL8000 service system order, Great news. Are you able to say how large that order was? Are there milestones where that order could expand? And then what do you maybe see as the opportunity over the next 2 years?

Speaker 2

Well, we're not going to comment right now on the size of that order, but I mean it's not insignificant to the Comm Business, let's just say that. So it's a huge market. I mean, our strategic partner has a huge backlog, Multi billions of dollars of servers that need to go out in the marketplace. We are the preferred and only real vendor in this Based the package that equipment to get it to the edge. So I don't even think I can quantify what the opportunity really could be.

Speaker 2

We know it's going to be significant or we wouldn't be Investing the time, energy and resources into the effort, but we'll have to see how it develops just like you.

Speaker 4

Sounds good. And then just on staying within Communications, the $6,900,000 order on the ground fleet upgrades, You mentioned some additional programs coming down the pipe. Should we expect those to be about the similar size or are those potentially larger opportunities?

Speaker 2

They're about the similar size at this point.

Speaker 4

Got it. And then just broadly, obviously, just looking at industrial markets, Do you have any comments on kind of broader themes within industrial, energy, or consumer markets? Just any dynamics you're seeing, obviously, a focus of investors right now?

Speaker 2

Well, there's still a lot of activity in certain spots. I mean, obviously, oil and gas is still strong. I mean that market definitely has not went away. We don't anticipate that it's going to anytime soon. The monitoring and telemetry of a lot of the industrial markets continues to be strong.

Speaker 2

Everybody wants to monitor everything these days. So there's sensors and things on every pipeline, every water line, every PowerLine, every switch gear, every there's just a lot of activity. And then all of that's going into a lot of AI equipment monitor for failures and other things to predictively try to maintain some of the systems and reduce costs. So That's what kind of what we're seeing at our

Speaker 4

end. Good. Well, again, congratulations on the quarter and Thank you for taking the time.

Speaker 2

Thank you, Todd. Thank you.

Operator

And I don't see any questions at this time. I will now turn the call back over to Mike Manna.

Speaker 2

All right. Thanks everyone. We will talk next

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • Ultralife reported 18.8% revenue growth in Q3 to $39.5 million, backed by a backlog above $100 million and a 48.1% surge in government defense sales.
  • Gross margin expanded by 460 basis points year-over-year, lifting operating profit by $2.7 million and delivering net income of $1.3 million versus a loss last year.
  • The company has largely recovered from its Q1 cyber-event cash shortfall and is now prioritizing debt paydown to cut interest costs and free up capital for strategic acquisitions.
  • Key operational initiatives—price realization, lean manufacturing and a new S&OP process—are boosting throughput, labor efficiency and cost absorption.
  • Ultralife continues to advance its product pipeline with new orders and upcoming launches for ThinCell, XR123a, Thionyl Chloride cells, X5 Lite hot-swap systems and the EL8000 edge server platform.
AI Generated. May Contain Errors.
Earnings Conference Call
Ultralife Q3 2023
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