Ultralife Q2 2023 Earnings Call Transcript

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July 27, 2023

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Ultralife Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Speaker 1

Thank you, Jada, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the Q2 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. The earnings press release was issued earlier this morning. And if anyone has not yet received a copy, I invite you to visit the company's Web site www.ultralifecorp.com, where you'll find the release under Investor News in the Investor Relations section.

Speaker 1

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. The potential risks and uncertainties that could cause actual results to Differ materially include supply chain disruptions, potential reductions in revenue from key customers, acceptance of our 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 to publicly update Forward looking statements to reflect subsequent events or circumstances.

Speaker 1

Further information on these factors and other factors that could affect Altra Life'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. 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 supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Speaker 2

Good morning. Welcome to the call on Ultralife's Q2 2023 operating results. Let me first say I'm very proud of our internal team and valued supplier network, which after a slow start to the quarter due to the lingering impact Of the previously reported Q1 cyber attack, the teams rallied. Both businesses delivered strong Q2 performance With revenue up 33% and operating profit increasing over 3 60% year over year, highlighting the leverage of our business model. We increased gross margin for the total business over Q1 even with the slow start to the period.

Speaker 2

I am pleased Even with the strong revenue, our total backlog was not only replenished, but increased to the highest in company's history exiting Q2. I will now turn it over to Phil to talk through the Q2 financial results.

Speaker 3

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our Q2 results for the quarter ended June 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. I'd like to thank all those that helped make this happen. Before starting the financial review, I want to point out That our business interruption insurance claim resulting from our Q1 cyber attack is still in process.

Speaker 3

I look forward to sharing with you the details of our claim once the settlement has been finalized and funded, after which We will include the settlement amount in our financial results. Consolidated revenues for the 2023 Q2 totaled $42,700,000 compared to $32,100,000 for the Q2 of 2022, An increase of 32.9 percent. Government Defense sales increased 111.5 percent And commercial sales increased 9.2% compared to the year earlier period. Our total backlog The 2nd quarter increased 2.6% over the 1st quarter to 110,900,000 The highest level in the company's history and representing a 40.1% increase over the comparable period last year. The backlog is diverse in nature across our commercial and government defense customer base and we expect approximately 70% of Backlog to ship during the second half of twenty twenty three.

Speaker 3

Revenues from our Battery and Energy Products segment were $33,900,000 Compared to $30,100,000 last year, an increase of 12.3%, reflecting Strong year over year growth in our 3 major markets that together accounted for approximately 83% of the segment revenues. Government Defense sales increased 26.6%, medical battery sales increased 25.2%, And oil and gas sales increased 17.9%. These increases were partially offset by an 18.8% decline In other commercial sales, primarily in China due to the timing of certain industrial sales, The backlog for our Battery and Energy Products business exiting the 2nd quarter increased 12.1% over the 1st quarter to $98,500,000 also the highest level in our company's history for this segment. The sales split between commercial and government defense for our battery business was eightytwenty compared to 78twenty 8 reported for 2022 year and the domestic to international split was 5,149 compared to 4,951 for last year, Accentuating the continued success of our global revenue diversification strategy, The $27,000,000 of commercial sales for the Q2 was the highest for any quarter in the company's history. Revenues from our Communication Systems segment were $8,800,000 compared to $2,000,000 last year, A more than fourfold increase primarily attributable to shipments of vehicle amplifier adapters to a global defense contractor For the U.

Speaker 3

S. Army, an integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor Under an ongoing Allied Country Government Defense Modernization Program. The backlog for our Communication Systems business Of $12,300,000 was down 38.8 percent from the backlog of $20,200,000 exiting the 1st quarter As we continue to deliver on existing programs, while working towards securing the next round of defense program orders in the first round Our significant commercial orders. On a consolidated basis, the commercial to government defense sales split was 6, threethirty 7 versus 7,129 reported for the 2022 full year. Our consolidated gross profit was $10,600,000 for the 2023 Second Quarter, up 38.5 percent over the 2022 period.

Speaker 3

As a percentage of total revenues, consolidated gross margin was 24.8% versus 23.8 percent for last year's Q2 and increased by 150 basis points over the Q1. Gross profit for our Battery and Energy Products business was $7,500,000 compared to $7,200,000 last year. Gross margin was 22.3%, a decrease of 60 basis points from 22.9% reported in the 1st quarter And a decrease of 140 basis points from 23% reported last year. The year over year decline was Primarily due to lingering inefficiencies resulting from the Q1 cyber attack, the disposition of certain non conforming materials And continued investments in the transition of new products to high volume production, partially offset by improved price realization. For our Communication Systems segment, gross profit was $3,000,000 compared to $500,000 for the year earlier period.

Speaker 3

Gross margin was 34.5% compared to 24.9% last year, reflecting higher factory throughput, leading to higher cost absorption and favorable product mix. Operating expenses were 6,900,000 The same as that reported for the year earlier period. As a percentage of revenues, operating expenses were 16.2% Compared to 21.3 percent for last year's Q2, a 510 basis point improvement Demonstrating the sales leverage of our business model. The combined leverage of our gross margin improvement And flat operating expenses resulted in a $2,900,000 or more than 4 fold increase in operating profit To $3,700,000 compared to $800,000 for the 2022 Q2. During the Q2, the company confirmed its Eligibility for the employee retention credit, ERC, which is a refundable tax credit against certain employment taxes Under the CARES Act of 2020 and the American Rescue Plan of 2021 and filed the necessary amended payroll tax forms with Internal Revenue Service to claim a refund for the credit.

Speaker 3

The ERC refund receivable of $1,500,000 is reported in the other current assets Our tax provision for the 2nd quarter was $1,400,000 versus $200,000 reported for the 2022 quarter Computed on a GAAP basis, including the impact of interest expense to help finance the Xcel acquisition, Foreign currency losses associated with the strengthening of pound sterling to the U. S. Dollar and the ERC, Net income was $3,300,000 or $0.21 per share. The ERC net of taxes computed on a GAAP basis Represented $0.07 per share with the remaining $0.145 per share resulting from operations. This compares to net income of $200,000 or $0.03 per share for the 2022 quarter.

Speaker 3

Excluding the provision for non cash U. S. Taxes expected to be fully offset by our net operating loss carry forwards And other tax credits, adjusted EPS was $0.29 for the Q2 of 2023, with operations contributing approximately $0.20 per share compared to $0.03 for the 2022 period. Adjusted EBITDA, defined as EBITDA including non cash stock based compensation expense, was 6 $300,000 or 14.7 percent of sales for the 2023 quarter, including the ERC, compared to $2,200,000 or 6.8 percent for the prior year quarter. Turning to our balance sheet.

Speaker 3

We ended the 2023 Q2 with working capital of $58,600,000 and a current ratio of 3.0 compared to $50,100,000 $2,700,000 for 20 22 year end. While inventory Reached 2.6% on a sequential basis. The 11.8% increase over 2022 year end primarily reflects The impact of the Q1 cyber attack as well as continued actions to proactively influence our position to service our substantial backlog. With the cyber attack in our rearview mirror, going forward, our backlog, diversified end markets, Growth initiatives and ongoing actions to improve our gross margin position us well to continue to optimize We'll leverage potential of our business model. I will now turn it back to Mike.

Speaker 2

Thank you, Phil, for the detailed breakdown on the Q2 performance. As mentioned, we continue to focus on executing our backlog and improving gross margin. Several operational initiatives are in process to smooth production flow, better manage inbound and outbound materials, which improves cash flow. We realized some improvement in gross margin in Q2, but many of our initiatives are in the early stages of implementation. So I expect to see further improvement throughout this year and into 2024 subject to the stable mix of customer demand.

Speaker 2

Supply chain improved in Q2, where we were able to produce and procure parts needed to execute our ship backlog, except for some specialty parts that still have excessively long lead times. Customer forecasts and orders remain strong, allowing us to order parts within lead time windows and eliminate expediting fees, which is expected to generate some cost side improvement by the end of the year. Direct labor remains tight in all locations, both internally and within our supply chain, but we were able to increase our headcount in Q2. To recap the top initiatives in progress, we continue price realization activities, experiencing some benefit on gross margin in Q2 and continue initiatives to improve and stabilize our gross margin performance for both businesses. Communication Systems, Specifically as a backlog of contracts who are priced in some cases over a year earlier, which results in margin pressure from pricing, then award to actual delivery.

Speaker 2

We expect to complete this heightened pricing initiative this year and return to normal cadence price reviews, while transitioning focus to internal cost down activities. We continue our journey of extending the time horizon of our sales and operations planning process with both customers and suppliers, Improving our end to end forecasting. This process is being refined and we've experienced strong orders and forecasts from most of our recurring customers aiding our planning and procurement functions. Lastly, we continue to improve our process of launching new products and transitioning to higher volume production with appropriate design for manufacturing and lean principles. Next, I will give some brief updates on our organic growth strategy 1st, on the batteries and energy side of the business, we continue to develop and improve products Product Tracking Market Spaces, we have purchased additional CapEx, which began arriving in Q2 and should be operational by the end of Q3.

Speaker 2

This equipment should start qualification and validation in Q4 to support forecasted demand by our customers. On the UB123A cell line servicing the ILT market space, we continue Cadence production shipments and expect volumes to ramp this year. The XR123a, our carbon monofluoride blend version of this cell with 20% to 30% more energy in the same size, Just successfully completed UL safety testing last week, enabling us to start commercial sales in our target end markets. Both of the 123a cell variants, we continue to work multiple opportunities for cell sales, but ultimately we believe battery pack assemblies will be a crucial piece of this product line where custom solutions can offer added value and longer term customer relationships. We have multiple partners evaluating our improved Thionyl Chloride product line, targeting monitoring and telemetry applications, where this technology can power items across an extreme temperature range for up to 20 years.

Speaker 2

With a 20 year life expectancy, the qualification and validation time for these products Can be excessive. In Q2, we received a follow on purchase order for 2,500,000 dollars from an international partner for our Xfi power system for medical cards initially launched in 2022. We launched a follow on hot swappable power system for USB powered devices, the X5 Lite earlier this year, which is currently sampling to prospective customers. The development of the conformal wearable battery used to power advanced dismounted soldier equipment was paused in Q2 temporarily To utilize our engineering resources to support near term growth projects, we committed revenue for this year. With a 90 day contract Extension with the government in place, we anticipate the work will resume on Conformal in Q4.

Speaker 2

This being an indefinite quantity, indefinite delivery contract With uncommitted volumes, we will continue to balance internal resources for this project with other known revenue generating and cost reduction projects. Secondly, on the communications system side of the business, we anticipate commercial orders this year for our EL8000 server case and power system as validations are complete. This will help diversify and at scale to the business. Meanwhile, we continue to work on advanced amplification and power products With multiple partners to support air, ground and sea communications, primarily military in nature. Lastly, On growth, we continue developing strategies and relationships on how to best position us to take advantage of the electrification and 5 gs market spaces, Looking for niche applications and investments that will enhance our competitive advantage, leveraging our cell design expertise and power system capabilities.

Speaker 2

As an example, we currently have 1 commercial OEM development partner resident at our Newark facility and are in discussions with several other partners to collaborate on Advanced Cell Chemistries and Designs. In closing, after a strong Q2, we continue to be laser focused on our goal of returning to profitable growth, which is key to paying down our acquisition debt. Execution continues the main priority for both businesses. With Communication Systems increasing To achieve consistent profitability, battery and energy converting on multiple growth initiatives while driving gross margin improvements. Thanks everyone for the attention.

Speaker 2

That concludes the prepared remarks. Now back to the operator for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. And wait for your name to be announced. Our first question comes from Josh Sullivan of The Benchmark Company. Please go ahead.

Speaker 4

Hey, good morning. Impressive results here.

Speaker 3

Good morning, Josh.

Speaker 4

Good morning. I know you're still working through the cyber attack paperwork, But can you talk about how you were able to recover so quickly and then any residual impact we should think about going forward at all?

Speaker 2

Well, it's really a testament to our whole team and the external resources that We use to help us basically get through the event and back on our feet as quickly as we did. There's still some pockets of recovery going For the most part, the attack did not disrupt any of our technology or our manufacturing systems. It was mostly documentation and other things that can be recreated over time. And luckily, the team did a great job. Phil, you have anything to add?

Speaker 3

Yes. We talked about the lingering effects of The cyber the Q1 cyber attack, the lingering effect is that we both businesses and together, we regrouped in the month of April To figure out a course going forward, so the April results were what we did in April really helped drive a more Successful May June and more level loading and that certainly is our hope going forward. But bottom line is The team is working 20 fourseven to recover the data, recover the systems and ultimately push the business in the right direction.

Speaker 4

And then on the supply chain, as things begin to ease, and I know we're in a new reality, but Any detail you can provide where bottlenecks are starting to ease and allowing you to deliver on some of these backlogs?

Speaker 2

Well, I think as we commented, I mean, we've got a pretty strong backlog now and have had for A couple of quarters, where it's really allowed us to get out in front of a lot of our supply chain problems, Where things were out over 52 weeks, now they're typically in the 24 to 36 weeks, which is manageable. I'm not going to say it's perfect, But it allows us to actually at least execute. Part of it, I will say, the cyber event from Supply chain side might have helped us a little bit because we didn't ship everything we thought we would in Q1. So we had an inventory surge We needed to plow through and execute and get out of the building. There's still some pockets of parts like especially on the RF side that Our pretty long lead and there's not a lot of vendors.

Speaker 2

So you're pretty hostage to whom you're using and Most of them are in qualified products where you really don't have an easy option to change. But other areas, MOSFETs and Some of the things that were really difficult previously seem to at least be within a 26 week lead time now.

Speaker 4

And then just on the operating investments you've made, it sounds like hiring is getting a little easier at least. Can you help us think about the leverage going forward and just how we might frame that?

Speaker 3

Sure. I'll look at it purely on the financial side and the most important number ingrained in my brain is for each 100 basis point increase in gross margin, It's worth $0.07 of EPS and that's calculated on a GAAP tax basis, which we know isn't reality for us. So, it really comes down to just the basics. Keep the revenue stream going, which I think we've been very successful at improved gross margin. And when we say improved gross margin, we have a Whole series of different actions that we're attacking that we meet.

Speaker 3

When I say 3 to 4 times a week, that's probably an understatement. But We're after that next 100 basis point increase in gross margin and we can't get that soon enough, but These actions have to get to the root cause. They can't be Band Aids and that's what our focus is really all about. The spending, while the spending we control, That's really what it comes down to. So when you look at the difference in the quarter, we went up 33% in sales, 38.5% increase in gross profit, which defines to us leverage and then keeping operating expenses Flat.

Speaker 3

So and then we look back, Josh, and we say, well, if this happened or that These things happen. There's always things that you know that could have happened that could have helped us out, but it really comes down to the basics. Improving operations and efficiencies that are sustainable and then going on to the next batch of issues.

Speaker 4

Got it. Got it. And then maybe just turning over to some end market comments. Up 25% in battery and The medical side, what are you seeing there? I mean, is that a supply chain getting easier?

Speaker 4

Is that demand coming through? Maybe just some comments on the medical supply market, why that was so strong?

Speaker 2

It's a combination of factors, Josh. Really, the supply chain coming through has been a big piece of it. We've got some customers in the medical side that have been that have launched products and they're starting to see their market penetration and growth Start back up now that we're through the COVID time and some of the supply chain issues that they've had as well. We're seeing some pull through. We have one major OEM that I know is benefiting from increased volume due to a competitor's recall situation That I think has benefited us pretty dramatically.

Speaker 2

And then there's also some recurring revenue coming into that Stream just for replacement products, where some of these products we put out in early COVID, are due to have batteries replaced, Just by the normal course of maintenance. So I think it's been strong on a couple of different fronts.

Speaker 4

Got it. And then the oil and gas sales, you're up 18%. I mean, are you seeing the offshore rig activity translate into demand for your products?

Speaker 2

Yes. We've seen a lot of international business. We've seen a lot of offshore business. We're kind of in a unique spot where we're servicing a lot of the bigger players and a lot of the smaller players. So we're kind of level loaded there.

Speaker 2

We hopefully, the natural gas price rebounds a little bit here in the fall because I think that may even help. But right now, that segment continues to be pretty strong. I mean, there was a few players that announced over the last couple of days earnings that have been pretty strong, And their forecasts have looked pretty positive. So we're hoping that that stays solid.

Speaker 4

Got it. And then maybe I'll just wrap up on government defense. I mean, really impressive here. I mean, how should we think about that Going forward, and then you mentioned, as we think about the next round of defense backlog growth, what are some of the opportunities there and just what we're seeing in defense?

Speaker 2

On the defense side, obviously, on the communication systems side, there's been a substantial backlog for a while that we've been wanting to Get out the door and execute on, that really was a supply chain bottleneck. We think that Revenue is going to continue. They're embedded in some pretty long term contracts that have year over year buys and named programs for Either the U. S. Government or others.

Speaker 2

On the battery and energy side of the business, a lot of our military sales right now have been direct OEM Sales and pass through sales are our sales direct to DLA and others for products like the 5,390 and others that we've talked about in the past Have actually been very low, and we are in IDIQ contracts, that Could assist with some additional revenue if they were to actually have an order awarded.

Speaker 4

Great. Well, again, congratulations on the quarter and

Operator

There seem to be no further questions. I would now like to turn it back to Mike Manna for closing remarks.

Speaker 2

All right, everyone. Thanks for listening to today's call. We look forward to talking to you next time at the Q3 earnings call. Everyone have a great day.

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Ultralife Q2 2023
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