Ultralife Corporation
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good day, and welcome to the Ultralife Corporation Fourth Quarter 2020 Earnings Release Conference Call. At this time, for opening remarks and introductions, I’d like to turn the call over to Ms. Jody Burfening. Please go ahead.

[Jody Burfening:]

Thank you, Sergei, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation’s conference call for the fourth quarter of fiscal 2020. With us on today’s call are Mike Popielec, 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 in the Investor Relations section.

[Mike Popielec:]

Good morning, Jody, and thank you, everyone, for joining the call. Today, I’ll start by making some brief overall comments about our Q4 and total year 2020 operating performance, after which I’ll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I’ll provide an update on the progress against our 2020 revenue initiatives and the focus areas for 2021 before opening it up for questions. For the fourth quarter of 2020, our Battery & Energy Products core business posted its third consecutive quarter of double-digit organic revenue growth year-over-year. Total B&E fourth quarter Medical sales and B&E Government & Defense sales were up strongly despite the ongoing operational impact of the pandemic on supply chain, logistics and customer availability. This solid core B&E performance fully offset continued oil and gas market sluggishness and led to a total Q4 B&E revenue increase year-over-year. Communications Systems revenue was down year-over-year, again, primarily due to the prior year vehicle adapter and mono power amplifier sales under the U.S. Army’s network modernization initiatives. As a result, total company was below the previous year. Sequentially, quarter-over-quarter revenues increased, and when combined with disciplined cost control, led to an increase in operating income by over 70%.

[Phil Fain:]

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter ended December 31, 2020. We also filed our Form 10-K with the SEC and have updated our investor presentation which you can find in the Investor Relations section of our website. I would like to thank all those that helped make this happen. For the fourth quarter, consolidated revenues totaled $29 million, representing a $2 million or 6.6% decrease from the $31 million reported for the fourth quarter of 2019. The year-over-year variance reflects a significant increase in battery sales to our Medical and Government Defense customers, which was offset by lower oil and gas market and Communications System sales. We estimate that approximately $2.6 million of the year-over-year variance is due to demand impacts associated with COVID-19. With a substantial increase in sales of medical batteries, especially those used in ventilators, respirators and infusion pumps, more than offset by weakness in the oil and gas and international industrial markets. Revenues from our Battery & Energy Products segment were $25.3 million, an increase of 0.7% from last year, attributable to a 94.3% increase in medical battery sales and an 18.8% increase in government defense sales, offset by a 67.4% decline in oil and gas market sales. Sales for our core battery business were at the highest quarterly level in 10 years, with Medical sales for the fourth quarter comprising 38% of total sales for this segment. The sales split between Commercial and Government Defense was 68/32 compared to 67/33 for the 2019 fourth quarter, and the domestic to international split was 54/46 compared to 49/51 last year. Revenues from our Communications Systems segment were $3.7 million, a decrease of 37.6% from last year. The decrease reflects 2019 shipments of vehicle amplifier adapter systems to support the U.S. Army’s network modernization initiatives under delivery orders announced in October 2018. These orders were completed in the second quarter of 2020.

[Mike Popielec:]

Thank you, Phil. To date, the combination of our business model, growth strategy and execution has enabled us to deliver respectable revenue growth and to sustain profitability and operational cash flow in even the most difficult of times. Regarding our growth strategy, continuing in 2021 we are focused on increasing our revenue growth opportunities through diversification, expansion of market and sales reach, new product development and strategic CapEx and potential acquisitions. For the Battery & Energy products business, diversification and market and sales reach expansion into the global commercial markets and international government defense markets has lessened our historical concentration in the U.S. Government Defense market. In Q4 2020, our UK operations continued to drive this global diversification strategy, with sales increasing at a strong double-digit rate and at record levels. We continue to expand our participation in major medical device OEM companies with new and existing products and our UK technical resources have also been instrumental in the global development of newly designed forthcoming medical card battery systems. For 2021, the UK team has a solid order book with its current customer base, and they will also serve as a key European launch point for our new 3-volt range of products for already engaged potential customers.

[Operator:]

Your first question comes from Gary Siperstein from Eliot Rose Wealth Management. Please go ahead.

[Gary Siperstein:]

Good morning guys and congratulations on the 70% improvement in operating income on a sequential basis.

[Mike Popielec:]

Thank you, Gary.

[Gary Siperstein:]

My first question is, we’re still struggling with the gross margin, Mike. I know the goal is to get it back to 30%. Is the entire 5% differential due to the fact that it’s the deleveraging from Communications Systems versus the period of the prior year when you had those contract shipments and the decline in oil and gas from SWE?

[Mike Popielec:]

Yes. I’d say there’s three pieces, as we mentioned in the prepared remarks. I mean you’re correct, the deleveraging of the Comm Systems volume, a little bit of the same thing in the oil and gas space, and then really, the transition of some products from the new product development realm into the high-speed production. There’s been some excess scrap and some challenges along the way there. Nothing insurmountable, and we’re making some great improvements to get past that, but I would say it’s those three things collectively that add up to that slight drop in gross margin.

[Gary Siperstein:]

Okay. And is there any room on the expense side to address that? Or is it all a function of volume? And maybe when the volume comes back in the second half of this year that will take care of itself?

[Mike Popielec:]

Yes. We’re trying to be extremely frugal in operating expenses. At the same time, we’re trying to get some of these transformational projects into realizing revenues, so a little trade-off. We don’t want to cut back too much on things that’s going to drive us towards future revenue growth. But we’re aware of the fact that gross margins are a little bit lower. So we have been tighter on operating expenses, as indicated in Phil’s remarks.

[Gary Siperstein:]

Okay. And I might have missed this, but the opportunity in Communications with a commercial customer that you alluded to last quarter, I might have missed it. Did you make any comments on that?

[Mike Popielec:]

It just continues through testing. I mean we have a number of these new integrated solutions that we have end market interest in our core Government Defense space and some of the same other industries we’re working in, like oil and gas, and factory and automation. And we’re just really trying to pursue those opportunities as well as to maybe some opportunities in the 5G space. We don’t want to get too much into it because it’s still emerging, but the potential is quite large if it should come to fruition. So we’re trying to be transparent in talking about what we’re working on, but not oversell until we actually have something tangible we can talk about.

[Gary Siperstein:]

Understood. Is it a brand-new product? Or is it just tweaking the amplifiers we already sell to military?

[Mike Popielec:]

The thing that’s really interesting, if you look at Comm Systems over the last decade, when we started out, at least within my tenure, they had a really strong position in 20-watt audio-only amplifiers. They had some vehicle amplifiers. And then we really migrated their offering to be an integrated solution. And so it ended up having amplifiers plus power supplies for deployment in vehicles and other type of opportunities. And so we’re really leveraging this experience in integrating some of these pretty sophisticated devices, particularly for the harsh environments of military and oil and gas in all the kinds of places. And this really plays off of that with some other key electronics, those electronics being servers and uninterruptible power supplies and the like. So it’s a natural migration of the integrated solutions thrust that Comm Systems has done a great job of doing over the last couple of years into a commercial space. So we’re really excited about that.

[Gary Siperstein:]

Okay. Thank you for that color. In terms of SWE, so I know it’s going to be a little bit of a lagging indicator, but price of oil has gone from like $45 back to $54. And there’s speculation that with vaccines, there could be economic recovery in the back half, travel could pick up where it could get back to $60. I’m wondering if you guys think we’ve bottomed on SWE, and that doesn’t mean it’s going to increase yet until we’re into more of an economic recovery, and if indeed, oil does get back to $60. But do you think we’ve seen the worst in terms of bookings there?

[Mike Popielec:]

I tend to look at it this way. I tend to look at how did our team there perform under an excruciating set of circumstances? I mean I can’t think of a more robust stress test than that business went through last year. And fact of the matter is they were still EPS accretive for the year. And so they performed well in the core oil and gas business that they did have, they did some things in medical. Our SeaSafe business is continuing to emerge. And so it’s hard to make projections as to what’s going to happen in the oil industry, and there’s a lot of rhetoric swirling around that. But we’re just trying to make sure that the highly valuable technical and great team that we bought when we bought that company are deployed as efficiently as possible. And if the oil and gas business should come back strong, we don’t know when that would be or not, but we certainly expect something will happen. But in the meantime, we’re trying to really control our own destiny by getting them involved in other kinds of things. So I’m very pleased with how they performed last year, and heck, I’m not expecting it to be another difficult year like it was last year this coming year.

[Gary Siperstein:]

Okay. Thank you for that color. And again, I’m not trying to be a Monday morning quarterback. You said it was accretive, and you’re expanding them into other areas, and then if there’s any rebound in oil and gas, that will be wonderful. But it is an acquisition that was in a cyclical business tied to a commodity. Is it safe to say your next acquisition will be more on the lines of Accutronics with medical or some industry that’s secular, got secular growth as opposed to cyclical where the wind is at our back instead of potentially in our face?

[Mike Popielec:]

That’s hard to say. I mean at any given time we’re farming through multiple different opportunities for M&A. Many times, you start a relationship in one set of economic circumstances. And then you end up having an opportunity to maybe do an acquisition in a different set of economic circumstances. We try and make a real concerted effort to understand what it is we think that the acquisition brings to us from a strategic level, from a financial perspective. And sometimes you have to do the acquisition when it may not be in the most advantageous economic cycle. And make a long way of saying really we’re just trying to evaluate individual acquisitions on their individual merits. And I wouldn’t make any blanket statements at this point about whether or not it would be a cyclical or noncyclical type of business.

[Gary Siperstein:]

Okay. It just seems a lot easier to buy something where there’s a secular growth like medical people getting older, that’s not going to change. What other secular areas could we play in? Is there anything with taking advantage of the work from home environment and taking advantage with 5G? I think you mentioned some 5G in the commentary. Fulfillment, knowing that people are shipping stuff to home due to COVID and the whole Amazon accelerated digital thing. What other areas going to play in besides medical net more secular?

[Mike Popielec:]

I think you’re right, Gary. I mean we are looking at all those spaces that you talked about. One of the areas that we referenced a little bit in our prepared remarks was some of the automated guided vehicles in warehousing and distribution. Of course, anything medical is very attractive to us. I mean I think we’re trying to look at acquisitions that would contribute to our reputation of being someone who performs really strongly in a mission-critical type application. So I think everything that you mentioned is on the table. I think with more and more things happening with EV and charging stations and all the different opportunities and things that are evolving there, we’re looking at what would make sense for us to participate there. And I think everything is on the table at this point. That’s really all I want to say about it.

[Gary Siperstein:]

Yes, something in EV would certainly be exciting. Mike, you talked about 3-volt, I guess that plays into Internet of Things. We’ve made a lot of investment in the last couple of years in 3-volt. Do you think that will start contributing as early as the third quarter, or is that a fourth quarter contribution?

[Mike Popielec:]

I would hope sooner than the fourth quarter for sure.

[Gary Siperstein:]

Super. Okay. And the same with the IDIQs, you said there’s $85 million remaining. You called out two of the bigger awards and talked about testing completing and the possibility of orders. Is that also a possibility for Q3? Or is that Q4?

[Mike Popielec:]

Probably later, I mean it really has to do with the testing and then the evaluation by the customer and then next step action items. And that cycle, back and forth cycle has slowed down as a result of COVID and people working out of their homes and those kinds of things.

[Gary Siperstein:]

Right. Is that also true for Leader and ManTech? I saw L3Harris, just a few weeks ago, get another I think it was $57 million or $59 million LRIP. And within the news release, they reiterated it was a $3.9 billion award for 100,000 radios. So I think that’s the third or fourth low-rate initial production order. So I’m just curious, I don’t know this field, how many low rate orders do you get before you go into a high rate order? I mean is it three, is it five, is it seven? And also following up on that, if they get a – since there’s two manufacturers for that next-gen radio and L3Harris got that $57 million, does that mean Thales also got a $57 million order? Is it apples-and-apples, or is it different times for the different companies?

[Mike Popielec:]

Well, to answer your first question, what we do know for the overall leader program is that they’re going through the operational and testing evaluations right now. And I don’t have specific statistical experience as to how many LRIPs are going to get into a high-rate production type of award. But what I do know is that these OT&Es that are taking place right now were key milestone to get into that high rate production area. So we’re cautiously optimistic to get through the OT&E phase. And depending if people need amplifiers or VAAs or if people need radio batteries, we’re ready, willing and able for any hybrid awards that should happen to come our way.

[Gary Siperstein:]

Okay. So there is a possibility that whether it’s low rate or high rate, that there could be some back half of the year business, Q3, Q4 for that? I would think since you completed shipment to Thales in Q2 of last year on their amplifiers that they – maybe they’re getting close to working down their inventory.

[Mike Popielec:]

I mean that’s a good point of view on that. I don’t have any way to confirm it at this point.

[Gary Siperstein:]

Okay. So I just want to talk from like a mile up looking down. So you just did a 7% or 8% quarter during the worst of times for oil and gas and without Leader in the IDIQ is really helping in terms of future business. So it seems to me, if by the back half of this year comparisons get easier year-over-year on the EPS front, and if oil and gas doesn’t get work out, god forbid actually starts getting better, and if Leader kicks in, ManTech kicks in, the IDIQs kick in, maybe get your first revenues out of this commercial communications effort, the back half could look pretty interesting. And after four years of having earnings roughly between, I guess $0.37 and $0.41, maybe we could start to break out. So if we’re at $0.07 or $0.08 now with all that wind in our face and no contributions for all these seeds you planted, it could get pretty interesting. And then when I look at it, if you can get back to $0.10, $0.12 quarters that implies growth again on an EPS basis, and obviously the revenue will grow on top of that. Once the Street – the stock has been in the penalty box because earnings have been flat and we’re trading at a terrible discount to book. But once the Street can anticipate positive earnings comparisons and earnings starting to grow again, it seems to me once you get back to that $0.40, $0.50 level on an annual basis, the stock could easily go back to $10. And then you know how the math works. If you can get to a $0.50 plus, maybe the stock is $12 or $15, $0.60 plus an annual earnings $0.15 quarters, the stock could make a run to $20. And we know we’re sort of under-owned, and we’re off the radar, even though the volume on the stock has been robust, there’s no analyst coverage. So I guess what I’m saying is, and usually, the stock market starts to anticipate things six months in advance. So we shouldn’t be too far, everything else being equal, and assuming the third quarter is going to be good, and we can approach the fact that we’re going to have an up year in earnings on an annual basis and start having nice year-over-year comparisons in Q3, that the stock shouldn’t be too far from maybe moving to the upside in anticipation of all this. And the fact that we’re starting here at $6 at a 20%, 25% discount to book, I think with this latest quarter, book is over 7.25% now with a clean balance sheet. So in light of all that, Mike, I guess what I’m saying is, does it make sense come this spring/summer ahead of the Q3 print, that maybe we start to put something in place for a little bit of a different IR to really get the street interested in us and plant the seeds for – instead of waiting until the numbers hit and then doing it after the fact, sort of getting out there maybe this summer, early fall before the three-quarter print to have people ready to maybe take a look at our stock, buy our stock in anticipation of better things.

[Mike Popielec:]

I think you bring up out very good points, Gary, and I have to be honest with you, I can’t wait to get out. We were seeing over 45 customers a year face-to-face. I mean there’s no greater oxygen than to be face-to-face with the customer where we spend a ton of time, and then we applied that to as well a lot of face to face with investors. So as soon as we get the all clear and things get back to whatever new normal is, I’ll probably be gone for about a month, just going out and sitting in customer offices and investor offices and trying to pick their brain to what we can do to serve both constituents better. But I’d also pass it over to Phil. Phil, if you have any comments you’d like to add.

[Phil Fain:]

Sure. Gary, I’d certainly agree with everything that you had mentioned. And I’ll add a few more reference points that are in our 10-K that was issued this morning. When we go back and look at what a realistic estimate on 2020 of the net financial impact of COVID, I would say sales were adversely impacted by $7 million for the year, operating profit $2.6 million. The impact on GAAP EPS was $0.12. The impact on adjusted EPS was $0.15. So hopefully, god willing we’ll have that at our back in the not-too-distant future. Another point that I do want to reference that’s also deep in the 10-Q and 10-K, and I’ll save you some digging, is when you look at the backlog exiting Q4 of 2020, which was just shy of $40 million and you compare that to the backlog of exiting the prior year, which was approximately $42 million, and you look at $40 million versus $42 million and then you just take a step deeper, we talked about the delivery of $4.8 million of the DLA 5390 batteries. We talked about concluding the Leader Radio shipments, all which were in the backlog exiting last year. So I think our resilient business model, the ample liquidity, the diverse end markets and the growth opportunities that we have, especially those, the transformational projects that are covered by Mike, once those hit, I think we’re in the position that we want to be in to recognize the leverage and scalability of our business model.

[Gary Siperstein:]

That’s very helpful, Phil. So let me just drill down on that a little more. So if you take out from the $42 million, you mentioned the $4.8 million. And then the Communications, the Thales order, so apples-and-apples was last year’s backlog actually like $30 million or $32 million?

[Mike Popielec:]

I would say, we always try to do it on an apples-to-apples basis. And it’s more cherry picking than anything, but those are the two biggest obvious ones that fall out because you’re always looking apples-and-apples, and you’re not quite able to get there. So instead of looking backwards at the comparison, which we do, our goal is just to look forward and to increase that and ensure that we’re in a position to ship it all in 2021. But I think overall, what you mentioned is correct.

[Gary Siperstein:]

Okay. Yes, you’re not going to have any shipments in the first half of this year from that large contract that completed in Q2 last year and the other IDIQ on top of it. So yes, that’s pretty significant then. So maybe a 25%, 30% increase in backlog, apples-and-apples, with the possibility of getting orders to ship in the back half of this year on any new awards out of Thales or L3Harris as they work down their inventories and start shipping these new LRIPS. One last question.

[Mike Popielec:]

Gary, I would have you refer to the 10-K where all this is explained in detail. It’s all publicly stated.

[Gary Siperstein:]

Okay, super. And I don’t know if this is a question or more of a suggestion or an observation. But if all this comes to fruition and we get post-COVID so we don’t have the headwinds on SWE and we get new business as Mike and I just went through in the Q&A for the back half of the year, if the earnings come through and the stock is back to $8, $9, $10, $12, whatever it goes to, on improving earnings and the expectation, positive comparisons and the expectation that we could grow this for two to three years in a row after being flat on an EPS basis for three or four years. Would you consider possibly hiring an investment banker? Let’s say, the stock is $10 and you haven’t made an acquisition yet, and then if you make a nice secular acquisition, something with a little sex appeal, maybe medical or EV or whatever that’s more secular than cyclical, at the same time as the acquisition maybe you do a secondary and you float 1.5 million, 2 million shares with the stock at $10. So the balance sheet gets less of a hit from the acquisition and by bringing onboard an investment banker that could lead to sponsorship or analyst coverage. And you guys did buy in 2 million, 2.5 million shares, around $4, $4.5 on the buyback program. So if you had an opportunity to issue that with a real sweet acquisition that moved the needle, and it was accretive by doing it at $8, $9, $10, $11, whatever the stock is, it could be a win-win. Is that something that you’d consider at that time?

[Mike Popielec:]

Gary, I’ll just say that we have surrounded ourselves with some outstanding resources, and we’ll keep it at that.

[Gary Siperstein:]

Okay. All right, guys. Again, congratulations on the 70% sequential improvement in operating income and fingers crossed for the new year.

[Mike Popielec:]

Thank you, Gary.

[Operator:]

As there are no further questions in the queue, that will conclude today’s Q&A session. And I would like to hand over, back over to Mike for any additional closing remarks. Over to you, Mike.

[Mike Popielec:]

Great. Well, thank you once again for joining us for our fourth quarter 2020 earnings call. We look forward to sharing with you our quarterly progress in each quarter’s conference call in the future. As Phil had mentioned, we’ve put a number of documents out today and there’s a new investor presentation on our website, so please take a look. Everybody, have a great and safe day.

[Operator:]

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