Ultralife Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Ultra Life Corporation's 2nd Quarter 2024 Results 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

It is now my pleasure to hand you over to our first speaker today, Jodi Berfening, Managing Director of LHA Investor Relations. Please go ahead.

Speaker 1

Thank you, Evelyn, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the Q2 of fiscal 2024. 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 website, www.ultralifecorp.com, 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 expectations.

Speaker 1

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 uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U. S. And foreign military spending, acceptance of our new products on a global basis, disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather or other factors not under our control. 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.

Speaker 1

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 are 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 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.

Speaker 1

Good morning, Mike.

Speaker 2

Thank you. Good morning. Welcome to our call on Ultralife's Q2 operating results. Earlier today, we reported Q2 sales of $43,000,000 and operating income of $3,900,000 the 3rd consecutive quarter of $42,000,000 or more in sales and 8.3% over Q1 to the highest revenue level ever for the segment. Our combined gross margin continued to be strong at 26.9% compared to 24.8% a year ago, 0.9% compared to 24.8 percent a year ago as our gross margin improvement projects continue a top priority.

Speaker 2

Our top three initiatives for the year material cost deflation, lean productivity and sales funnel improvement continued favorable progress in Q2 with additional expertise in place to drive future revenue growth. During Q2, we were able to pay down our acquisition debt by over 52%, which will significantly decrease our interest expense going forward and allow for future accretive M and A. As a result of our strong operational performance, I am happy to report that Ultralife was included in the Russell 2,000 Index this year, which will enhance our profile in the investment community, which is something Phil and I are focused on. I will now turn it over to Phil to talk through the detailed numbers.

Speaker 3

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our Q2 results for the quarter ended June 30, 2024. We also filed our Form 10 Q with the SEC and updated our investor presentation in the Investor Relations section of our website, which includes a summary and status of our transformational new products. Consolidated revenues totaled 43,000,000 compared to $42,700,000 for the Q2 of 2023. Revenues from our Battery and Energy Products segment were $36,700,000 compared to $33,900,000 last year, an increase of 8.3%.

Speaker 3

This growth was driven by very strong performance in our sales to government defense and medical markets, which increased 30.5% and 20.1%, respectively. These increases were partially offset by a decline of 10.9% in oil and gas market sales. The sales split between commercial and government defense for our battery business was 70five-twenty 5 compared to 78-twenty 2 reported for the 2023 full year and the domestic to international split was 50 three-forty 7 compared to 49-fifty 1 for the 2023 full year, demonstrating heightened domestic demand for our core products and the continued success of our global revenue diversification strategy. Revenues from our Communication Systems segment of $6,300,000 declined 28.7% from the $8,800,000 we reported last year. Primarily attributable to shipments in the 2023 period of vehicle amplifier adapter orders to a global defense contractor for the U.

Speaker 3

S. Army and have integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor for which shipments had been delayed from earlier periods due to supply chain disruptions. On a consolidated basis, the commercial to government defense sales split was 60 Fourthirty 6, identical to that reported for the 2023 full year. Our total backlog exiting the 2nd quarter was 93,000,000 dollars and remains diverse in nature across our commercial and government defense customer base. The replenishment rate remains high and the backlog represents 55 percent of TTM sales.

Speaker 3

Our consolidated gross profit was $11,600,000 up 9.2% over the 2023 period, far eclipsing the 0.7% increase in revenues. As a percentage of total revenues, consolidated gross margin was 26.9%, a 210 basis point improvement over the 24.8% reported for last year's Q2. Gross profit for our Battery and Energy Products business was $10,000,000 compared to $7,500,000 last year, an increase of 32%. Gross margin was 27.1%, an increase of 480 basis points from the 22.3% reported for last year's quarter and an increase of 140 basis points on a quarterly sequential basis. The year over year and sequential increases were primarily due to higher cost absorption and more efficiencies resulting from our concerted efforts to level load production more evenly across the 2024 quarter as well as improved price realization.

Speaker 3

For our Communication Systems segment, gross profit was $1,600,000 compared to $3,000,000 for the year earlier period. Gross margin was 25.6% compared to 34.5% last year, primarily due to sales product mix and factory volume. Operating expenses were $7,600,000 an increase of $700,000 or 10.4 percent from the year earlier quarter. As a percentage of revenues, operating expenses were 17.8% compared to 16.2% for last year's Q2. The increase is spread evenly among investments in new product development, addition of experienced sales resources to drive future growth and executive bonus accruals, which were not recorded in the 2023 Q2.

Speaker 3

The leverage provided by our 2 10 basis point gross margin improvement resulted in an increase in operating margin to 9.1% compared to 8.6% for the 2023 Q2. Other income reported below operating income includes $200,000 as a preliminary payment from our insurance carrier pertaining to the cyber attack, which occurred in the Q1 of 2023, with a considerably larger amount remaining in review with the carrier. Other income for the Q2 of 2023 includes an employee retention credit of $1,500,000 under the CARES Act of 2020 and the American Rescue Plan of 2021. We are still waiting to receive our ERC refund plus the interest earned on this amount from the IRS. Our tax provision for the 2nd quarter was $900,000 versus $1,400,000 reported for the 2023 quarter computed on a GAAP basis at statutory rates.

Speaker 3

Including the impact of interest expense to help finance the Xcel acquisition and foreign currency gains and losses, net income was $3,000,000 or $0.18 per share on a GAAP fully diluted basis. This compares to net income of $3,300,000 or $0.21 per share for the 2023 quarter, which included $0.07 per share net of GAAP taxes from the recognition of the ERC. Excluding the provision for non cash U. S. Taxes expected to be fully offset by our net operating loss carryforwards and other tax credits, adjusted fully diluted EPS was $0.22 per share for the Q2 of 2024 compared to $0.29 per share for the 2023 period, which included $0.10 per share from the ERC.

Speaker 3

Adjusted EBITDA defined as EBITDA including non cash stock based compensation expense was $5,400,000 or 12.6 percent of sales compared to $6,300,000 or 14.7 percent for the prior year quarter, which included $1,500,000 for the ERC. On a TTM basis, adjusted EBITDA is $18,900,000 or 11.2 percent of sales. Turning to our balance sheet. We ended the Q2 with working capital of $63,200,000 in a current ratio of 4.1 compared to $66,500,000 $3,800,000 for 2023 year end. A highlight of the second quarter was the reduction of our debt by $13,200,000 or 52.2 percent from $25,300,000 to $12,100,000 This reduction on top of a $3,600,000 reduction in accounts payable during the quarter was primarily driven by our continued strong operating results, the favorable impact of the level loading of our operations resulting in more consistent customer remittances and a $2,400,000 reduction in inventory.

Speaker 3

The pay down of our debt has a significant impact on our EPS as each $1,000,000 reduction reduces interest expense by approximately $18,000 per quarter. So the $13,000,000 pay down of debt should lower interest expense by $234,000 in the 3rd quarter, excluding any further pay downs and equates to $0.01 of GAAP EPS and $0.015 of adjusted EPS. Accordingly, our focus is to continue the heightened pace of the pay down of our debt. Going forward, our backlog, diversified end markets, growth initiatives and ongoing actions to improve our gross margins, while further strengthening our balance sheet position us well to realize the leverage of our business model. I will now turn it back to Mike.

Speaker 2

Thank you, Phil, for the detailed review of the Q2 results. As I mentioned on previous calls, we have 3 major 2024 priorities to accomplish. First, continued material cost deflation. In Q2, we favorably negotiated our main logistics contracts and expect to realize positive savings of a few cents per year based on current volumes. We continue to work on kanban and pull systems with key suppliers to smooth material and cash flow and positively impact inventory turns.

Speaker 2

Secondly, lean productivity. Continue to reduce waste and inefficiencies in all of our processes throughout the business. We have hired a 25 year lean process veteran in our Newark location to focus on improving manufacturing and back office efficiencies throughout the organization with a target of decreasing labor 3% to 5% on several of our high volume lines. Lastly, sales funnel improvement. We have a larger and increasing pipeline of new products with a healthy funnel sales opportunities that needs to continue to grow.

Speaker 2

To that end, we have hired 2 additional sales resources to focus on large program wins with key OEM partners, driving commercial sales growth of both custom and Ultralife branded products. One sales resource is a 30 year battery industry veteran where the other joins us from a major medical device manufacturer. We are currently transitioning multiple CRM systems to a new global CRM system to better manage global opportunities and funnel status. Next, I will give updates on the organic growth projects and new product development underway for the businesses, which are key to future sales and market expansion. Our communication systems business continues to ship EL8000 server cases to several customers, and we are working diligently to elevate our partner status level, which will enable us to work more collaboratively with other partners on the integration and engineering projects within the organization.

Speaker 2

As I have noted in past calls, we have several new exciting next generation amplification products underway nearing completion. We are completing validation and testing on a new amplification product with several international customers. This product is targeted to be radio agnostic with an optional test and maintenance package to support customer sustainment, and we expect it to be available for production orders by the end of the year. Meanwhile, we are advancing our next generation high performance amplifier engine to be used across all advanced radio platforms. This advanced amplifier continues our heritage of small, high power, high efficiency, man worn amplification products in the Ultralife family of brands.

Speaker 2

Lastly, we received a follow on $5,500,000 IDIQ from the U. S. Government to continue its purchase of radio power supplies and mounts for vehicular modernization initiatives and a logistics support contract of $3,100,000 supporting fielded amplified and non amplified vehicle communications platforms. On the battery and energy side of the business, we're excited about the opportunity funnel growth across the variety of new and existing products and are optimistic we'll see incremental orders this year. As previously mentioned, we have production equipment in place for our ThinCell to support customers in the medical wearable space and several applications in Bluetooth tracking.

Speaker 2

The sales funnel is strong with multiple projects in the qualification phase, primarily in the medical application space. We expect further updates on qualification and forecast in Q3 as our customers continue their qualification and commercialization efforts. The 123A product line currently supporting IoT and illumination markets has seen opportunity funnel growth in medical battery pack assemblies, both with domestic and international customers. We continue to make improvements in both the CR and XR123A products to reduce costs and increase performance as we quote opportunities. Our improved final product the final chloride product line targeting monitoring and telemetry applications continues qualification and field testing with several customers and are currently in commercial discussions and quality reviews of manufacturing locations.

Speaker 2

With respect to the Conformal Wearable Battery, the U. S. Government has ended our program coincident with the expiration of the 3 year base contract due to lack of visibility for long term production volume because of delays and technical issues with the integrated visual augmentation system program known as IVAS. Nevertheless, we are continuing to develop this product to support several allied government and defense customers and believe our investment in the product will pay off long term as we've already received a $270,000 order from an international customer. Sales funnel and opportunity pipeline growth in both businesses continues to be key for 2024, and I expect with the added focus and resources, we will continue to expand our aperture and opportunity wins.

Speaker 2

We continue to work on our key gross margin initiatives and expect to see steady improvement as CapEx investments, lean projects and material efforts continue to enter our production lines. We expect to strategically pay down our debt throughout 2024, balancing debt pay down with other business investments to support our key objectives as we concurrently look for possible accretive acquisitions. Thanks everyone. That concludes the prepared remarks for today. Now back to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of George Sullivan from The Benchmark Company. Please ask your question.

Speaker 4

Hey, good morning. Congratulations on the results here.

Speaker 2

Good morning.

Speaker 4

Just maybe starting off looking at the impressive debt pay down in the quarter, how should we think of free cash generation going forward? Can we stay at these levels? And then maybe what are the priorities for cash?

Speaker 3

Well, certainly the level loading has been a major help for us. And it was just a matter of time before we got that functioning across all the various functions. Now you can talk about level loading and manufacturing, but that is it extends downward into the whole supply chain. It extends upward to the customers throughout the S and OP process and it ends up on the balance sheet in terms of cash if it's all properly operating. And that's exactly what we saw in Q3.

Speaker 3

Payables down meaning a more steady supply of products from our supplier meaning an improved S and OP chain throughout the supply base, throughout the customers, all the way through the customers. And at the end of the day, we wind up with cash sooner on a steadier basis. So the way I look at what's going to happen with debt, I mean, I could tell you right now that we've already reduced our debt by a couple of $1,000,000 in just in the few weeks since the Q2 ended. God willing, I expect that to continue. And then going forward, as Mike mentioned, it's a matter of balancing the pay down of the debt with other strategic spending opportunities, including the full spectrum of strategic CapEx, potential acquisitions and anything and everything that's going to help grow our business profitably.

Speaker 4

Got it. And then Mike, as far as the efficiency efforts you're pursuing here on a number of levels and have over the previous quarters, what inning do you think we're in here as far as kind of your strategic plan as you look at it?

Speaker 2

We're early in the game still, Josh. I mean, we're we've, I guess, attacked the easy things, obviously, and tried to get those quickly mitigated and functioning and producing results. But there's things in all of our businesses. We've done I'll start with the back office side. The back office, we've had a host of acquisitions over the last decade.

Speaker 2

They've been at different levels of integration and whatnot. We have a new CIO that we brought on board almost a year ago now, well, 9 months ago. And one of our functions there is to really get all the locations really functional as 1. So we can all share systems and collaborate properly and get rid of some of that waste and multiple licenses at multiple facilities, etcetera, etcetera. And then you've got the operations and we're it takes time to go through the variety of products we have and actually lean things out.

Speaker 2

So we're starting with the things that we think are going to give us the biggest bang for the buck right up front. But with all lean journeys and efficiency journeys, they never really end, because as you get done with leaning it out once, people get better at doing their jobs, they find better ways to do things and all of a sudden you're in a line imbalance situation and you need to really rebalance the line again. So it's a continual process, but we're in inning like 2 out of a 9 inning game.

Speaker 4

Got it. And then on the within the battery segment, the products in the government and defense that are driving some of the near term strength, as we look at the 2025 defense budget, do you feel this type of growth can continue?

Speaker 2

Well, there's reviewing the 2025 budget, there's really no, what I would call, significant decreases in any of the programs that we're involved with through our prime customers. So we don't expect to see a dramatic change to that short term. But it's also part of it's we're hostage to our customer supply chain difficulties as well. So if they're not pulling product, we're not selling product. So it's a two way street there.

Speaker 4

Got it. It. And then just on the decline in oil and gas, anything going on there cyclically? Is there anything in the offshore activity that we should be thinking about?

Speaker 2

For us, it really seemed like it was more of an overbuy with 1 customer, that 1 or 2 customers towards the end of late last year and then some reorganization in their part where I think they got a little bit flat footed and we expect that volume to rebound pretty well in the back half of the year. But who knows on that stage, a lot of things can happen in the oil and gas market over the next couple of years.

Speaker 4

Got it. And then just And then just And then just

Speaker 3

Josh, is that our oil and gas portfolio is really diversified. It's diversified between 50% is international, 50% domestic and the domestic breakdown is pretty evenly split between the blue chip companies and I guess what I call the wildcatters.

Speaker 4

Right.

Speaker 2

And we do a little bit of everything also, Josh. We're down hole on the drills, but we're also in pipeline inspection. We're in monitoring of devices. There's a lot to the whole flow of oil from the ground to your car or to a plastics processing facility or wherever.

Speaker 4

Got it. And then as we think of the thin cell opportunities, the update in Q3 you're anticipating, could this be a major gating event? And then how quickly can you ramp up to support that product?

Speaker 2

Well, we always hope it's going to be a major event. I mean and to be clear, I mean all these initiatives are relatively in production stage and we are selling all of the products. It's just I would say we haven't landed that what I would call anchor customer where it's an announceable type of an event that would make people excited. So we're going through a lot of different qualms with a few different customers and they have to get through all their stuff with the FDA and whatnot before they're going to pull from us. Again, we're not driving the bus, so to speak.

Speaker 2

So it's frustrating. I wish it would happen quicker, but I've been involved in the medical side for a lot of years. And one of our largest medical customers that we now have, it took 6 years for us to really start seeing any real production volume. So I also know it takes time.

Speaker 4

And then on the new sales resource investments, where are their efforts going to be? Maybe what are they shading in areas where you couldn't touch before?

Speaker 2

Well, the first resource I mentioned, the industry veteran, I mean he's really focused in on how do we move thin cell, how do we move final, I mean how do we get into some of these bigger accounts. And we've we need to have more conversations going with bigger OEM customers and that's really where his focus is. If we get in the door and have the conversations, we have the technical people that can offer a solution. And as far as the manufacturing side, we're pretty agile and able to respond very quickly. So I think once we get those conversations going, we're going to be much better.

Speaker 2

The second resource, she's really focused on some of the major medical companies that we don't necessarily have relationships with. I look at the top 100 device manufacturers in the medical space and we have some relationship or sales with probably 20% of them. So there's 80 major medical device manufacturers that we have to go out and we've got to develop the relationship. And she's got a list and she's going out to do just that.

Speaker 4

Got it. And then I guess just one last one on the IVAS battery, just given the increasing need for power by foot soldiers kind of globally, You mentioned some international efforts there, but could you just expand on why you're continuing to invest and maybe what other programs you see where that technology could be used?

Speaker 2

Well, all our technology, we try to develop it so that it's agnostic and it's a toolkit in the bag or a tool in the bag, so to speak. So we've learned a lot going through the conformal development. We've been developing various versions of this battery for the last 12 years. We sell 1 and have been selling 1 version, our UVVL35 for the last decade. And we think that there's going to be need for conformal.

Speaker 2

We want to recoup obviously some of the investment that we've made in developing the technology. But on the military side, the power is going to like you said, it's going to continue to be more and more needful. The power requirements are not going away. The conformal is a premium product and we still sell a lot of Land Warrior batteries because the price point per energy is just way better. And we expect that we want to be a complete soldier supplier, soldier power supplier.

Speaker 2

So we're going to have a conformal in our product portfolio along with some of the legacy Land Warrior battery products.

Speaker 4

Got it. Got it. Well, thank you for the time.

Speaker 3

Sure. Thank you, George.

Operator

Thank you, George. I'm showing no further questions. And I'll turn the conference back to Mike for closing remarks.

Speaker 2

All right. Thank you. Thanks for listening to today's call. We look forward to talking to you all next time during the 20 24 Q3 earnings call. Bye now.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Ultralife Q2 2024
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