Ultralife Corporation (NASDAQ:ULBI) Q3 2023 Earnings Call Transcript

Ultralife Corporation (NASDAQ:ULBI) Q3 2023 Earnings Call Transcript October 26, 2023

Ultralife Corporation reports earnings inline with expectations. Reported EPS is $0.1 EPS, expectations were $0.1.

Operator: Good day, and thank you for standing by. Welcome to the Ultralife Corporation Third Quarter 2020 Results Conference Call. All participants are in a listen mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 1 on a telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Jody Burfening: Thank you, Pavel, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the third quarter of fiscal 2023. Eith us on today’s call are Mike Manna, Ultralife’s President and CEO; and Philip 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.

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 the impact of COVID-19 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 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 the company’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 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.

Michael Manna: 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 $2.7 million year-over-year. We have a strong backlog position across the portfolio that sustained in Q3 with a strong pipeline of new products that should continue 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.

Philip Fain: Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third 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 third quarter totaled $39.5 million compared to $33.2 million for the third quarter of 2022, an increase of 18.8%. Government defense sales increased 48.1% and commercial sales increased 5.6%. Revenues from our Battery & Energy Products segment were $31.9 million compared to $28.6 million 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 76:24 compared to 78:22 reported for the 2022 year, and the domestic to international split was 50:50 compared to 4.51% last year, demonstrating the continued success of our global revenue diversification strategy. Revenues from our Communications Systems segment were $7.6 million compared to $4.7 million last year, a 62.7% increase primarily attributable to shipments of vehicle amplifier adapters to a global defense contractor for the U.S. Army in integrated systems of amplifiers and radio vehicle amounts 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 61:39 and versus 71:29 reported for the 2022 full year. Our total backlog exiting the third quarter remained over $100 million and it’s diverse in nature across our commercial and government defense customer base. We expect over $35 million of the backlog to ship during the last 3 months of 2023. Not included in this amount is approximately $3.5 million of shipments that were pushed into the fourth quarter due to delays in the deliveries of certain components from vendors. These shipments primarily to medical and government defense customers have commenced. Our consolidated gross profit was $9.8 million up 45.5% over the 2022 period. As a percentage of total revenues, consolidated gross margin was 24.8% versus 20.2% for last year’s third quarter and remain consistent with that reported for the second quarter.

Gross profit for our Battery & Energy Products business was $7.7 million compared to $5.3 million last year. Gross margin was 24.2%, an increase of 550 basis points over 18.7% reported for last year’s third quarter and an increase of 190 basis points over the 22.3% reported for this year’s second quarter. 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. For our Communications Systems segment, gross profit was $2.0 million compared to $1.4 million for the year earlier period. Gross margin was 27.0% and compared to 29.2% last year, primarily resulting from the delays experienced in the receipt of certain components.

Operating expenses were $7.6 million, an increase of $0.3 million over the year earlier period. As a percentage of revenues, operating expenses were 19.3% and compared to 22.0% for last year’s third quarter, a 270 basis point improvement, reflecting the sales leverage of our business model. The combined leverage of our 460 basis point gross margin improvement in our 270 basis point operating expense to sales ratio resulted in a $2.7 million improvement in operating profit to $2.1 million compared to an operating loss of $0.6 million for the 2022 third quarter. Our tax provision for the third quarter was $0.4 million versus $0.1 million benefit reported for the 2022 quarter computed on a GAAP basis, including the impact of interest expense to help finance the Excel acquisition, and foreign currency gains associated with the strengthening of the U.S. dollar to pound sterling, net income was $1.3 million or $0.08 per share.

This compares to a net loss of $0.2 million or a loss of $0.01 per share for the 2022 quarter. Excluding the provision for noncash U.S. taxes expected to be fully offset by our net operating loss carryforwards and other tax credits, adjusted EPS was $0.10 per share for the third quarter of 2023 and compared to a loss of $0.03 for the 2022 period. Adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense was $3.5 million or 8.8% of sales for the 2023 quarter compared to $1.3 million or 4.4% for the prior year quarter. On a trailing 12-month basis, adjusted EBITDA is $13.0 million or 8.7% of sales compared to $6.6 million or 5.2% of sales for the 2022 year. This represents the highest TTM level that we have achieved in the last 15 years.

Turning to our balance sheet. We ended the 2023 third quarter with working capital of $62.8 million and a current ratio of 3.4 compared to $50.1 million and $2.7 million for 2022 year-end. With the dramatic strengthening of our balance sheet, we are poised to commence in the fourth quarter the paydown 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.

Michael Manna: 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&OP process through which our major customers have provided extended forecasts thereby enabling us to order parts within lead time windows avoiding expedite fees.

As this process matures, it will have positive impact on both labor efficiency and supply chain cost benefits going forward. Our lean process journey is underway and imperative to offset rising costs and inflationary pressure in the supply chain, direct labor and utilities. The manufacturing teams completed several lean projects in Q3 and with immediate impact with measured increases in throughput per labor hour. We have started to expand this effort globally across facilities. With a focus on these 3 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.

First, on the Battery and 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 123A cell line serving the IoT market space, we continue cadence production shipments. We are sampling our new XR 123A 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 pack solutions can offer added value and longer-term customer relationships.

Our improved final 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 hot swap power system continues to sell well, with a $2.5 million order received in Q2 expected to fully shift this year with further backlog increases expected in Q4. The follow-on version of this system, the X5 Light, which provides long-term hot swap power to USB devices, is completing safety and compliance certification with pre-production samples available now.

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 in our first article testing with the government next year. This project being an indefinite 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 communications side of the business. We received a follow-on order for $6.1 million from our 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 funded U.S. government programs in the coming months, which will contribute to the Communication Systems backlog. We continue engineering efforts for advanced amplification and power products with multiple partners to support air ground communications, primarily military in nature. I am pleased to announce that the communications business has received the initial orders for the EL 8000 case integrated server systems, which I mentioned previously had completed certifications earlier this year. This system developed with our strategic partner allows high-end computing server power to be using difficult environments on the edge in industrial 5G 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 interim 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 to support our goal of significantly growing the size of the business. These projects are now going through a business case and market analysis process, which in the next several quarters were real 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 advanced materials with one development partner resident in our Newark facility. We can look forward to additional discussions on these activities in 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. And as stated in the past few calls, communication systems need to increase scale to achieve consistent profitability Pattern Energy needs to convert on multiple growth initiatives while driving gross margin improvements.

Thanks, everyone, for the attention. That concludes the prepared remarks for today. Now we’ll go back to the operator for questions.

See also 20 Best Boarding Schools in the World and 10 Best Bitcoin and Blockchain Stocks To Buy Now.

Q&A Session

Operator: [Operator Instructions] And our first question comes from the line of Josh Sullivan with The Benchmark Company. Your line is now open.

Q – Josh Sullivan: Good morning, Mike, Phil.

A – Michael Manna: Good morning

A – Philip Fain: Good morning, Josh.

Q – Josh Sullivan: 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?

A – Philip Fain: 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 eye, right in the face. So that’s certainly built into our divertive strategic plan that really enables us to see a nice cash buildup across the next couple of years.

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

Philip Fain: 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. 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, 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 — has been very disciplined. You look at Accutronics, you look at See, look at Excel, all performing just admirably.

Josh Sullivan: Got it. And then on backlog, you mentioned $35 million release just as supply chain improved 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 ’24 as kind of the run rate there? I know it’s hard to estimate, but.

Michael Manna: It’s hard to judge at this point, Josh. I mean, last year, we were 1/3 of this level. So now it’s — we’ve been lucky to be at over $100 million now for multiple quarters in a row. My guess is as 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 million to $75 million range is probably where it’s going to settle short term. Especially if we execute and ship it out the door. 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 et cetera.

Philip Fain: And from what I see from that, I couldn’t agree more with Mike. I see the leverage — the leverage of our business model by our ability to move it out quicker.

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