Ultralife Corporation
Q1 2017 Earnings Call Transcript

Published: 7 May 2017

[Operator:]

Good day and welcome to this Ultralife Corporation First Quarter 2017 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead, ma'am.

[Jody Burfening:]

Thank you, Alan and good morning everyone, thank for joining us this morning for Ultralife Corporation’s earnings conference call for the first quarter of fiscal 2017. 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 will 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. These include potential reductions in U.S. military spending, uncertain global economic conditions and acceptance of the company’s new products on a global basis. The company cautions investors not to place undue reliance on forward-looking statements, which reflects 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 Ultralife’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 metrics and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With those housekeeping items out of the way, I would now like to turn the call over to Mike. Good morning, Mike.

[Mike Popielec:]

Good morning Jody, and thank you everyone for joining the call this morning. Today I'll start by making some overall comments about our Q1 2017 operating performance. Then I'll turn the call over to Phil who will take through the detailed financial results. After Phil has finished I'll provide an update on the progress against our 2017 revenue initiative, then open it up for questions. For Q1 of 2017 we were pleased to deliver our 10th consecutive quarter of both total company operating profitability and positive earnings per share generating an operating profit of $1.8 million on revenues of $22.0 million for an operating margin of 8.4% and an EPS of $0.11. First quarter 2017 revenue increased 5.8% year over year with each business unit posting organic revenue growth. This sales increase was leveraged by gross margin improvement in the communications business, reductions in discretionary spending in both B&E and Comm Systems and a favorable impact of cost synergies and non-recurring prior year cost from the Accutronics acquisition leading to a more than tripling of first quarter 2017 operating profit year over year. We are encouraged to start the New Year with one of our best first quarters in some time, and the highest revenue level since Q4 2012. In addition to achieving revenue growth in each business segment including organic growth from Accutronics it was also nice to see sales increases in some of the recent lagging components of B&E business such as mango, China and government defense. Reflecting the success of our efforts at commercial and international revenue diversification and new product development. And whereas we know the customer demand for our products can be lumpy at times our revenue mix this quarter nicely illustrates our leveraged earnings growth potential. In a few minutes, I'll talk more about our revenue initiatives for 2017, but first, I would like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the first quarter 2017 financial performance. Phil?

[Phil Fain:]

Thank you, Mike. And good morning, everyone. Earlier this morning, we released our first quarter results for the period ended April 2, 2017. We also filed our Form 8-K and Form 10-Q with the SEC this morning. And I would like to personally thank those individuals that made that happen, and you know who you are. For the first quarter, consolidated revenues totaled 22.0 million, representing a $1.2 million or 5.8% increase from the 20.8 million for the first quarter of 2016. Both of our business segments experienced sales growth over the prior-year period. Revenues from our Battery & Energy Products segment were 17.5 million, an increase of 1.0 million or 6.3% from last year. The year-over-year increase was attributable to higher government/defense, medical and 9-Volt sales. Government/defense sales increased 11.2% over the 2016 period, due primarily to higher shipments to a large global defense prime contractor and the U.S. Department of Defense to fulfill orders placed in early January prior to the inauguration of the new administration. The growth in government/defense sales was the first quarterly increase experienced for this sector since the fourth quarter of 2015. Commercial revenues for the first quarter of 2017 grew 2.4%, driven by an 11.8% increase in shipments to medical customers, including a 4.1% increase in Accutronics revenues and a 10.0% increase in 9-Volt battery sales, partially offset in large part by the timing of other commercial shipments. As a result, the Battery & Energy Products sales split between commercial and government/defense was 54-46 compared to 56-44 for the 2016 period. Communication Systems sales of 4.6 million increased by 0.2 million or 3.7% from the prior year. This increase is attributable to shipments of power supplies to a large global defense prime contractor, which more than offset the year-earlier shipment of VIPER systems. On a consolidated basis, the Commercial to government/defense split was 40 to 58 versus 44-56 for the year-earlier period, reflecting the higher rate of growth for our government/defense business in the quarter. Our consolidated gross profit was 6.9 million compared to 6.4 million for the 2016 period, an increase of 7.6%. As a percentage of total revenues, consolidated gross margin was 31.3% versus 30.7% for last year's first quarter. The 60 basis point improvement in gross margin resulted from the favorable sales mix of products in our Communications Systems business. Gross profit for our Battery & Energy Products business decreased 5.5% from 5.2 million in 2016 to 4.9 million, reflecting the higher mix of government and defense battery sales. As a result, gross margin was 28.2%, 350 basis points lower than the 31.7% reported last year due to the product mix. For our Communication Systems segment, gross profit was 2.0 million, an increase of 0.8 million or 65% from the year earlier period. Gross margin was 43.0%, a significant basis point gain over the 27.0% reported for last year's first quarter, also due to sales mix. Operating expenses totaled 5.0 million compared to 5.9 million last year, a decrease of 0.9 million or 14.8%. The decrease reflects the favorable impact from discretionary spending reductions completed during, subsequent to, first quarter of 2016, cost synergies resulting from our acquisition of Accutronics and 0.2 million of nonrecurring expenses incurred last year related to completing the acquisition. The incremental annual operating expenses associated with Accutronics, which totaled approximately 2.6 million at the time of the acquisition, have now been fully offset on a consolidated basis by the actions taken throughout the company, in line with our acquisition integration strategy. As a percentage of revenue, operating expenses represented 22.9%, an improvement of 550 basis points from the 28.4% reported for the first quarter of 2016. Operating income for the first quarter of 2017 was 1.8 million compared to 0.5 million for the 2016 period, representing a 3.8 times improvement on sales growth of 6%. The operating profit generated in the first quarter, the highest reported in any quarter in over four years, is further demonstration of the leverage of our business model. Operating margin was 8.4% for the 2016 period, an increase of 610 basis points over the 2.3% for the first quarter of 2016. The 610 basis-point increase reflects the 60 basis-point improvement in gross margin and the 550 basis-point reduction in the operating expense to sales ratio. First quarter noncash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses, amounted to 0.7 million compared to 1.0 million for the year-earlier period. The decrease primarily reflects lower depreciation and stock compensation expenses, as well as the noncash purchase price adjustment for Accutronics for the 2016 period. This brings us to adjusted EBITDA, defined as EBITDA, including non-cash stock-based compensation expense, of 2.5 million or 11.2% of sales versus 1.5 million or 7.2% for the first quarter of 2016. Adjusted EBITDA for the trailing 12 month period is now 8.5 million, representing 10.2% of revenues for that period. Other expenses primarily comprised of interest expense and foreign currency transactions totaled 93,000 versus 113,000 in 2016, and our tax provision was 87,000 primarily reflecting the amounts in geographic mix of earnings. Our tax provision was 88,000 for the 2016 first quarter. Driven by the solid operating performance, net income was 1.7 million or $0.11 per share compared to 0.3 million or $0.02 per share for the same period last year. On a trailing 12 month basis earnings per share increased to $0.32. Also driven by the solid operating performance in addition to effective working capital management the company's liquidity remains strong with cash on hand of 13.7 million, no debt, working capital of 40.7 million and our current ratio of 4.6. By comparison cash on hand at year end was 10.7 million. During the first quarter of 2017 we generated $3 million of operating cash flow through our operating results and 0.7 million or 3.1% reduction in inventory. In summary the actions we have taken to grow our revenue are demonstrated with our 10th consecutive profitable quarter, our replenished cash position and strong overall liquidity. Our intent remains on driving volume in sales through further organic and synergistic initiatives to unleash the full leverage potential of our business model. I will now turn it back to Mike.

[Mike Popielec:]

Thanks Phil. For 2017 to continue to widen our revenue opportunity basket our focus remains on three proven points - expanding our markets sales reach, new product development and acquisition. Over the last few years in the Battery & Energy products business market and sales reach expansion has focused on diversifying more into the global commercial and international government defense markets and lessening our historical concentrations in the US government defense market. In the first quarter of 2017, total commercial revenue was up 2.4% year over year and total world government defense sales were up 11% year over year. Overall medical business revenue was up 12% with Accutronics up 4% and the legacy core medical up 22%. Transactional activity with medical device customers remains high and broad based with recent contracts, win notifications and ongoing shipments of our battery charger products, serving applications such as portable ventilators, other breathing devices, digital imaging, fusion pumps, medical cards and AEDs. Other commercial and international activity consisted of both the continuation of shipments for [indiscernible] products from our China facility or asset tracking application as well as new purchase orders including a 2.2 million purchase order from an international defense customer for land wear batteries and chargers. Orders totaling $1 million from another international customer for rechargeable battery, a new 2590 rechargeable battery industrial measurement equipment applications and several mango purchase orders which drove mango sales up 10% year over year in Q1 of 2017. We're also starting to see the early stages of more international government defense business development activity directly as a result of our Accutronics footprint in the UK Regarding U.S. government/defense customer activity, last March, we received from DLA a new firmed fixed price IDIQ contract for purchases not to exceed $21.4 million for our lithium manganese dioxide non-rechargeable BA-5390 batteries. The award consists of a three year base contract, with [two-one] year option periods. Although the amounts and timing of deliveries under this contract are at the discretion of the DLA, it is significant for us, as lately we've been seeing a reasonably steady volume of 5390 delivery orders. And this award confirms that we will be the preferred supplier for several more years to come. In Q1 2017, we received delivery orders from DLA totaling $1.75 million for a variety of primary battery products. Regarding new product development revenue for B&E, in Q1 2017, revenue from products introduced less than 3 years ago, and including Accutronics, was 23% or $4 million of total B&E revenue, again, demonstrating the impact of new products on our ongoing revenue stream. Progress continues in the development, market introductions and shipments for a wide range of new products recently mentioned, including, but not limited to, the new Sealed Lead Acid replacement U1 smart battery for general medical cart applications; customized medical cart batteries and charger systems that support specific cart OEMs; prototype stackable large format battery modules for an energy storage system integrator; several next-generation chargers, including wireless for medical devices; various new cells for medical and asset tracking applications; the continuing multigenerational product planning development and product range expansion of small cylindrical 3-Volt sales; and expanding the range of our final chloride cell product line for serving newly identified commercial, utility metering OEM and industrial applications. We continue to provide value and expand our long-term relationships by closely collaborating with key customers in the development of new product and the evolution of existing products, ultimately helping them to create and widen their product's competitive advantage. At our Communications Systems business in Q1 of 2017, new product development represented approximately 15% of sales, as 66% of the quarter's revenue mix was heavily weighted by $3 million in shipments of legacy commercial off-the-shelf power supplies under the large U.S. government/defense OEM prime award mentioned in last quarter's call. In addition to this large order, the Communications Systems business continue to also capture significant orders from U.S. SOCOM in support of the various family of Special Operations vehicles program. OEM collaboration activities within the Communications Systems business are at an all-time high, multiple domestic and international programs. Some of these programs are for standard products, while the vast majority is for new products, from existing technologies. Products include various amplifier, power supply, and communications accessory systems. This high level of activity and developmental actions continue to drive our new product developments and multigenerational product plans. As an example, OEM and end-user customers, for whom we have developed new products in the past few years, have come back to us to develop new offshoot technologies and variations to accommodate their growing needs globally for advanced communication capabilities. We've also noticed that the performance and acceptance of our new products in the field is resulting in the expansion of our OEM and industry partnership network and revenue opportunities. Once again, the overall key for Communications Systems in 2017 is to continue to grow revenue in this core amplifier and everyday ancillary equipment products business by simultaneously capturing the larger program opportunities critical to leveraging the Communications Systems business model, being mindful of the needed upfront development costs and technical resources. In closing, in Q1 of 2017, we were delighted to start the new year by achieving top line organic revenue growth and to deliver another consecutive quarter profitability. We are growing the revenue opportunities created by continued investments in market and sales reach expansion and new product development and generating strong cash flow. In 2017, we're looking to continue to reap the benefits from the aggregation and the maturation of the numerous initiatives implemented over last several years to drive revenue growth, in the medical, safety, security, Internet of things, asset tracking, energy storage and both international and domestic government/defense markets. These revenue increases, when combined with disciplined execution of our business model and further utilization of our worldwide capabilities and global platforms, position us well to realize additional operating leverage and another year of profitable growth. We will also continue to pursue accretive acquisitions and strategic partnership opportunities while remaining disciplined in our approach. Operator, this concludes my prepared remarks, and we'd be happy to open the call for questions.

[Operator:]

[Operator Instructions] And we'll take a question from Gary Siperstein with Eliot Rose Wealth Management.

[Gary Siperstein:]

Mike, I just wasn't quite clear, well actually, let me start with Battery & Energy. So can you tell me, were the new orders enough from the quarter, so that at April 1, you continue to have a similar backlog to Q4? Or did you work off some of that backlog on the B&E side?

[Mike Popielec:]

It still looks to be reasonably at the same level. So I think we'll replace some of the existing backlog with new orders. That being said, as you know, Gary, our convertibility cycle can be anywhere from two weeks to six weeks. So still being early in the second quarter, we're optimistic for some other conversions throughout the rest of this quarter as well.

[Gary Siperstein:]

Okay, great. And the increase in 9-Volt, was that coming mostly out of China? And did that have to do with metering? Or were there other uses for it?

[Mike Popielec:]

No. I think it was spread throughout the entire world, not necessarily for metering.

[Gary Siperstein:]

Okay, okay. And the medical increase in the quarter, I think Phil called it out at 11%. Is that correct?

[Phil Fain:]

Total is 12%. I mentioned that Accutronics comprised of 4% increase. And the core business, excluding Accutronics, was 22%.

[Gary Siperstein:]

Okay. And again, was that growth then on the core side? Was it mostly medical carts? Or is that spreading out now to all the other applications?

[Phil Fain:]

No. Again, it's pretty well spread out. There were some segments that were smaller growth that from a timing perspective we expect to see in subsequent quarters but as we look through all the different categories it was pretty broad based.

[Gary Siperstein:]

Okay, great. And then, Mike, you called out the Idea and Q award and that you're starting to see some action on that. I wasn't clear, did you actually get some orders starting in Q1 or is that just starting in Q2.

[Mike Popielec:]

It's more to, I would say more of a 2018 type of event, I mean we have an existing relationship where the DLA can do spot orders of our existing product line and this was the contract that took several years to mature, and there's some minor changes to the product which will entail additional first article of testing and some other accepting testing which would likely last through the end of this year and into beginning of next year, but in the meantime we still get continual spot orders of the it’s just called the older product.

[Gary Siperstein:]

Okay, and then, you know you talked in prior conference calls about the $300 million potential opportunity on the Comm Systems side and then you called out some interesting awards this quarter so you were able to offset the VIPER shipments from last year. Is that I guess the question is that starting to finally loosen up, I mean what made the quarter different, was it just the long gestation process or any more color on that.

[Mike Popielec:]

You know last year we had the VIPER contract drop in the entire year and as you may recall from the last quarter's call we mentioned a contract for the first quarter. You know there is still a pretty large pending business opportunity funnel for our communications systems business the real indicator's going to be what ultimately happens with government spending in the United States and how they allocate that funding towards tactful communication. I haven't seen any strong visibility to whether that goes up, goes down or still the same though it seems, feel like it wants to go up but it’s too premature to comment on what the ultimate funding would be. That would be the strongest indicator of some of the products that we've been working on over several years with our key partners and whether or not they start to take the next step into final testing and they have some revenue generation opportunities.

[Gary Siperstein:]

Okay so the improvement we saw in Q1 is still not really to Trump winning, that's still you know being settled out, I know they have the budget agreement I guess it's more of a continuum resolution so until that really gets fine tuned this is just normal stuff for us and not really a Trump bump yet?

[Mike Popielec:]

That’s correct. We like to wonder if it’s because of the constraints in the past perhaps some money for day to day stuff hadn’t been spent, now it's being spent. I don’t think that's having a huge impact one way to other in our financials. To your point we haven't seen any additional funding directly attributable to the change in administration at this point.

[Gary Siperstein:]

And then can you give us any color on any additional Accutronics cross selling with our US medical products, has anything gotten traction there yet.

[Mike Popielec:]

Yes, we actually we haven't noticed them and they're not massively material at this point but we actually had two development contracts that are directly attributable to the relationships that Accutronics introduced to us for ironically a US based multinational OEM.

[Gary Siperstein:]

That was super, and there anything, I don’t know this last conference call, the one before I think there was something, it might not have been Accutronics might have just been our original organic stuff on the medical side, but I thought you're waiting for some kind of FDA approval? Did that come to fruition? Or is that still outstanding?

[Mike Popielec:]

Gary, I don't recollect anything specifically that we're waiting for an FDA approval.

[Gary Siperstein:]

Okay. So maybe I got confused. And can you give us any color on the M&A pipeline, what kind of stuff you're seeing? And has that increased or decreased since the election?

[Mike Popielec:]

A lot of activity, looking at a lot of different deals, both in the course base, the adjacent space and even the vertical integration plays. We're starting to broaden our tentacles through informal relationships with investment bankers just to make sure we're scouring the globe for opportunities. I mean, we're delighted with the way the Accutronics acquisition came out, and it's created a pretty high bar for us in terms of a subsequent acquisition. But we recognize that we have to do both organic and inorganic or M&A means to try to drive the maximum utilization to our business model and personally, as is Phil, as the division presidents are involved in M&A activity on a weekly basis.

[Gary Siperstein:]

Okay, super. And lastly, Mike, not to beat the dead horse, but it's a super quarter. And the stock's unchanged at 555 on 16,000 shares. I guess, I'm going back to a little more industrial relations. There's just so many thousands and thousands of companies out there. And first and foremost, obviously, is execution, which you're doing brilliantly. And then once you execute, you got to get people to know the story, so they know you're executing. Is there any sense of a pickup in IR? Because now, as Phil pointed out, with $0.32 in trailing earnings, you're about a 17 PE, and yet you've been growing earnings at about a 30% click. And if the company just finishes the year, and I know you don't make any forecast, but if $0.035 to $0.040 is possible, growing earnings 30%, I mean, if you give it a 25 PE, you have an $8 to $10 bill. So I think as the company gets discovered, a lot of interesting things can happen for the stock price.

[Mike Popielec:]

That's correct. And in the first quarter, we met with over 6 potential new investors directly face to face. And that was on top of roughly 15 customer visits that I did throughout Q1.

[Operator:]

[Operator Instructions] We'll take our next question from Sam Bergman with Bayberry Asset Management.

[Sam Bergman:]

A couple of questions, one regarding R&D. I noticed R&D was down quite a bit this quarter. Where do you expect it to be for the rest of the calendar year?

[Phil Fain:]

Sam, our business model that we've talked about in other calls was sort of generically 35 by 10 equals 10, which means that on a longer-term basis that we look to allocate at the minimum 5% to revenue and new product development, R&D, technology-related activities, what you see in terms of the year-over-year difference in operating expenses with our R&D. There's some one-time DBT testing that was done a year ago, Q1, which we tend to make look like the operating expenses went down year-over-year. But on a run rate basis, indeed, they're holding in there at roughly 5% level.

[Sam Bergman:]

Okay. Can you talk about any new medical applications that you're working on currently?

[Mike Popielec:]

Not speaking out of school with some of the MDAs we have with some of our contracts, but just there seems to be a plethora of new devices for patient care and monitoring, that we have people and our engineers are going to meet with them, them coming to see us, that utilize some of our cylindrical cells as well as some of our ThinCell capabilities. It just takes so darn long for the whole design process and the validation process and the approval process. And that's like internal quality assurance approvals. But I'm not able to really go into any specific details about what those devices are. But we're seeing new opportunities on a weekly basis. We see two different development activities on a small level over last month. So it's encouraging. And I know people are impatient, as are we. We just wish it would have a more material impact on our revenue sooner than it does. But it's nice to see that it's quite broad-based. And I tried in my prepared remarks to give you an indication of what some of those general application areas were.

[Sam Bergman:]

Can you give us any idea when those revenues will hit the numbers or not?

[Mike Popielec:]

Typically, we'd look at six to nine months, sort of a reasonable development and getting into production level revenues. And we try to look at projects at least to a point of organic growth or two points of organic growth, and we try to aggregate as many as possible. So six, nine, twelve months time frame and anywhere from 0.5 million to 1 million to 1.5 million, as they start and ramp up. And really, the sky is the limit depending on how our OEM customer adapts their devices or not.

[Sam Bergman:]

Can you also give me an idea on percentages of commercial business versus noncommercial business this quarter?

[Phil Fain:]

Sure, Sam. The commercial business, just for Battery & Energy Products, is approximately 54%. When you look at the total company, just for the quarter, it was approximately 42% versus 44% last year. However, I go back to 2016 because one quarter doesn't really set a trend. When I look at 2016 for four quarters, it's 50-50. And that's essentially where we are. And the quarter was skewed more than anything else by the accelerated growth in G&D.

[Sam Bergman:]

Okay. And Gary had asked about, I know what you did last quarter because that was mentioned. What's the plans for this quarter and the rest of the year?

[Mike Popielec:]

We'll continue to go out and talk with investors on a one-to-one basis to ensure the story gets out there.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back to management for any additional or closing remarks.

[Mike Popielec:]

Okay. Well, great. Well, thank you once again, everyone, for joining us for our first quarter 2017 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. Have a great day, everybody.

[Operator:]

And ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.