Ultralife Corporation
Q3 2017 Earnings Call Transcript

Published: 4 Nov 2017

[Operator:]

Good day, everyone. Welcome to this Ultralife Corporation Third Quarter 2017 Earnings 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, Schalan, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter 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'll find the release under Investor News in the Investor Relation 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 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 measures, metrics rather, that differ from GAAP. These non-GAAP measures should be considered as 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 Q3 2017 operating performance. Then I'll turn the call over to Phil, who would take you to the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2017 revenue initiatives and open it up for questions. For Q3 of 2017, we were pleased to deliver a solid quarter of year-over-year revenue and operating profit growth, generating an operating profit of $1.3 million on revenues of $21 million for an operating margin of 6%. Revenue was up organically 7% year-over-year, driven by an 8% increase in commercial revenue and a 6% increase in Government/Defense revenue, while operating profit was up 11% due to the leverage of the revenue increase on prudent cost containment. Third quarter revenue for the battery and new products business increased sharply and was at the highest level in 19 quarters. Medical market revenues were up 14% while domestic international Government/Defense premium revenues were up 58% and 56% respectively. For the Communication Systems business, while base revenues were essentially flat year-over-year, total revenues were down, reflecting a $2.2 million difference in present year VIPER shipments versus the prior year third quarter. That said, shipments under a new $4.7 million VIPER contract announced this summer have already begun and will continue to the end of this year and into 2018. As we continue to gain new revenue streams from diversification into commercial and international markets, the earnings leverage achievable from a disciplined execution of our business model is apparent also encouraging, other early signs of improvement in the domestic G&D market. In a few minutes, I’ll talk more about our revenue initiatives for 2017 but first, I’d like to ask Ultralife’s CFO, Phil Fain, to take you through additional details of the third quarter 2017 financial performance. Phil?

[Phil Fain:]

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the period ended October 1, 2017. We also filed our Form 10-Q with the SEC this morning and have updated our investor presentation in the Ultralife website, I’d like to thank all of those that made this happened. For the third quarter, consolidated revenues totaled $21.0 million, representing a $1.4 million or 7.2% increase from the $19.6 million reported for the third quarter of 2016. Revenues from our Battery & Energy Products segment were $18.6 million, an increase of $3.7 million or 24.6% from last year. The year-over-year increase was attributable to higher commercial and government and defense sales, domestically and internationally. Commercial revenues for the third quarter of 2017 grew 8.3% driven by a 14.2% increase in shipments to medical customers. Sales to our medical customers represented 57% of our commercial sales or 33% of total revenues for this segment. Government and defense sales increased 57.5% over the 2016 period due to higher demand from our U.S. and international defense customers. After four quarters of year-over-year sales decline from this sector in 2016 this year, we have posted three consecutive quarters of growth in government and defense sales with third quarter G&D sales reaching the highest levels since the fourth quarter of 2015. As a result, the Battery & Energy Product sales split between commercial and government and defense was 58-42 compared to 67-33 for the 2016 period. The geographic distribution of our Battery & Energy Product sales was impacted by the higher U.S. government sales with an international to domestic split of 51-49 compared to 55-45 for the 2016 third quarter. Communication system sales of $2.4 million decreased by $2.3 million or 48.2% from the prior year, when we had $2.3 million of VIPER unit shipments. VIPER shipments will increase in the fourth quarter following the $4.7 million follow an award we received in August. The segment’s core products including 20 watt amplifiers, universal vehicle adapters and power supplies were essentially flat with the year earlier period. Sales on a consolidated basis split 51-49 between commercial and government and defense sectors, identical to the mix for the year earlier period reflecting the solid overall growth in both sectors. Our consolidated gross profit was $6.3 million compared to $6.0 million for the 2016 period an increase of 4.3%. As a percentage of total revenues, consolidated gross margin was 29.7% versus 30.5% for last year’s third quarter. The 80 basis point decline in gross margin primarily resulted from the sales mix of products, including the smaller contribution of Communication System sales to total sales and supply chain variances. Gross profit for our Battery & Energy Products business segment increased 14.7% from $4.5 million in 2016 to $5.2 million, reflecting higher sales, partially offset by sales mix, incremental supply chain and logistics fees, and manufacturing variances incurred on the startup of certain new products incurred during the quarter. As a result, gross margin was 27.9%, 240 basis points lower than the 30.3% reported last year. For our Communication System segment, gross profit was $1.1 million, a decrease of $0.4 million or 27.5% from the year-earlier period. Gross margin was 44%, a significant basis point gain over the 31.4% reported for last year's third quarter. The 2017 gross margin demonstrates the high value proposition associated with our core amplifier and Integrated Solutions products. Operating expenses totaled $5 million compared to $4.9 million last year, an increase of $0.1 million or 2.7%. As a percentage of revenues, operating expenses represented 23.7%, an improvement of 110 basis points from the 24.8% reported for the third quarter of 2016. The improvement reflects our continued control over discretionary spending, augmented by the leverage of our business model. Operating income for the third quarter of 2017 was $1.3 million compared to $1.1 million for the 2016 period, an 11.3% gain. Our year-to-date operating income of $4.4 million has more than doubled from the year-earlier period. And now exceeds the $3.8 million reported for the full 2016 year by 18%. Operating margin was 6% for the 2017 period, an increase of 20 basis points over the 5.8% for the third quarter of 2016. The 20 basis point increase reflects the 110 basis point reduction in the operating expense to sales ratio, partially offset by the decline in gross margin. Third quarter noncash operating expenses, including depreciation and tangible asset amortization and stock compensation expenses, amounted to $0.8 million compared to $0.9 million for the year earlier period. This brings us to adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense of $2 million or 9.5% of sales versus $2 million or 10.4% for the third quarter of 2016. Accordingly, adjusted EBITDA for the trailing 12-month period is now $9.3 million, representing 11% of revenues. Other expenses, primarily comprised of interest expense and foreign currency transactions, totaled $58,000 versus $30,000 in 2016. And our tax provision was $104,000 primarily reflecting the amounts and geographic mix of earnings. Our tax provision was $92,000 for the 2016 third quarter. Driven by this solid operating performance, net income was $1.1 million or $0.07 per share, 8.7% higher than the $1.0 million or $0.07 per share reported for the same period last year. On a trailing 12-month basis, earnings per share are $0.36, representing a 57% increase over the $0.23 reported at year end. Also driven by the solid operating performance, the company's liquidity remains strong, with cash on hand of $14.7 million, no debt, working capital of $44.9 million and a current ratio of 4.4. The increase in our cash on hand from $10.7 million at year end demonstrates our highly efficient cash conversion, as our operating cash flow is at a level approximating 1.3x our operating profit. In summary, the actions we are taking to drive profitable growth are demonstrated with our solid year-to-date results. Our intent remains on driving volume and 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, we are keenly focused on revenue growth through 3 avenues

[Operator:]

[Operator Instructions] We'll have our first question from Gary Siperstein with Eliot Rose Wealth.

[Gary Siperstein:]

My first question is just to get a little more color, Mike, on the three contracts won this year. So you mentioned that, there's a year of testing once you get the IDIQ. So does that mean there's the possibility that the $21.4 million contract you've got in March could see some 2018 revenue or do you to expect it all to be 2019?

[Mike Popielec:]

Yes, there's a possibility to be the end of 2018, but it's more likely to be the early part of 2019. And as I said in my prepared remarks, we still continue to see a lot of delivery orders for our legacy products in the meantime.

[Gary Siperstein:]

Okay. And the, would that mean the larger contract the $49.8 million would see revenue in 2019, but towards the latter half because of the delay from the March contract?

[Mike Popielec:]

No, I don't think that I would look at those as being sequential. I mean, the $21.4 million IDIQ for our, the next, sort of, step of our existing 5390 batteries is a separate activity from the CFX lithium manganese dioxide blended product. So I don’t view those as being one after the other as somewhat little bit overlapping although, there probably about a year apart in terms of when initial deliveries would start.

[Gary Siperstein:]

Okay. That’s fair. And on the $4.7 million VIPER that’s already started shipping. You talked about further shipments in Q4 and Q1 of 2018. What’s the cadence on that? Would maybe 40% be in 2018 and you get 60% out between Q3 and Q4 this year or is it 50-50?

[Mike Popielec:]

You know it’s probably best to think about 50-50, but we’re going to always try to do the most amount that can as soon as we can.

[Phil Fain:]

Gary, I’m going to clarify, this is still one point, it’s disclosed in the Form 10-Q, we shipped $133,000 in Q3 of VIPER shipments, you’ll see that again in the 10-Q.

[Gary Siperstein:]

Okay. Okay. So the majority of the contract is Q4, Q1 roughly 50-50. And if I recollect correctly, and I might have this wrong, so point it out to me, but when we started shipping the original contract on the previous VIPER win that was $10 million. I believe your early quarters, we didn’t have any margin on it and as you got the logistics ready and you bought the stuff and before you got into fine tuning the manufacturing, because of that learning curve previously, will this have better margins going for Q4 and Q1?

[Mike Popielec:]

I mean, following that logic, that’s true. There were some start-up costs associated with it. And I would say the market is pretty stable at this point.

[Gary Siperstein:]

Okay, super. That’s what I was expecting. And, Phil, in your comments, you’ve talked about the margin declining on B&E due to besides mix, in addition you highlighted incremental supply chain costs and logistics fees. Can you give us some color on that and is that a permanent thing going forward or is that just something that hit them in the quarter and it’s temporary?

[Phil Fain:]

We look at that as just specific to the quarter. Regardless of the quarter, things generally happen in the quarter, especially when you’re introducing numerous new products whether you call it an R&D incremental spending for development testing or if it’s relating to manufacturing variances to get up to higher volume production levels for new product, it hits your P&L. So, it’s -- in the cases that I mentioned, it’s specific to the quarter.

[Gary Siperstein:]

Okay, super. And then I know you don’t like to talk about customers, but I saw that Harris won a $750 million IDIQ on radios. And I think it was a three to five year kind of deal, similar to the ones you guys won that you’ve highlighted. But, my -- when I read through the contract, it seemed to talk about a certain amount of 2018 revenue in the immediate 12 months since its award. Can you give us any color on that? If you’ve heard anything in terms of how it can benefit us in the next 12 months?

[Phil Fain:]

Gary, you have to ask them more specific questions about the ins and outs of their contract. But just generally speaking, it’s just good to see the overall flow of DoD dollars going into markets that potentially represent opportunities for either our battery or amplifier products.

[Gary Siperstein:]

Okay. And we do supply battery and amplifiers to Harris?

[Mike Popielec:]

We don't comment about specific customers, what we those, we'll provide battery and amplifiers into the telecommunciations segment.

[Gary Siperstein:]

Okay. And Mike, I know it's hard on the M&A side. You call it out each quarter and obviously, no one wants you to make a bad acquisition so you have to be careful. But that being said, what has held us back so far from closing the deal? Has it been more derth of good-quality companies or is it a bunch of good ones but the price is too high?

[Mike Popielec:]

I would say it's been in terms of overall activity level. It's certainly been steady but increasing and as our results get better. I think we're more attractive acquirer extremely, but we're extremely methodical about in our space, looking at acquisitions, it really makes sense for us. And so we want to be able to see if there's a clearer strategic debt. It's not just we do the acquisition, we get the benefit of revenue and that it doesn't go anywhere. We want to do an acquisition that results an immediate revenue benefit in some cost synergies but then an organic growth in revenue stream. For instance, Accutronics grew 15% in Q3. I mean, that's we what like to find more those types of acquisitions. We also look for, because of the upfront purchase costs and the write up of inventory and intangible asset amortization, all the wonky kind of stuff. We look for companies that there's a clear roadmap to get back to at least clarity and hopefully better overall quality of our earnings. Because we know that our investors view our quality earnings as one of the key components to determine what a PO ratio is. We look for, from EPS standpoint, which is the other key element that our investors look for to be not dilutive that first year, and if he ask, we want to be accretive . There's much miracle, Accutronics was $0.03 accretive in the first year, they're on track to beat that this year and last but not least, obviously, a decent return on our capital expenditure. So the pretty rigorous metrics they're not meant to be so rigorous that there's no suitable candidates. But when we look at trying to bring a team on to our team and join together and deliver shareholder value, we go through that very methodical process. And in our industry, there's been some companies that are may bit attractive on the revenue side but their balance sheet isn't so attractive. And so we look deepen into the covers. And so I know it's a long awaited answer to your short question, but I would see that activity is overall improving. We seen a lot more interest from people that we go and to talk to about the potential ability someday. But in many time, we're talking to people that's their life's work, that we are going to be taking over and they want to make sure it's a soft landing for their people. And so that takes a little bit of time.

[Gary Siperstein:]

That's great, thanks for the color. And lastly, Phil, in terms of IR, now that we are going to be finishing our third year in a row of increased profitability. So I guess, almost 12 quarters now. And the fact that earnings should be up 50% plus this year. Liquidity seems a little better in the stock, but can you give us some color on either one-on-one meetings you guys have been having. Or if you're at the point where you can start going to conferences and the efforts to get sell-side coverage?

[Phil Fain:]

Absolutely, Gary. We look at our approach to IR with NIE towards ROI, similar to any dollars that we spend or how we carve out our time. We found that for us, it's a much higher ROI when we do one-on-one or prearranged potential investor meetings and we have a very good track record for that, and this is an ongoing effort just as Mike is out there seeing at least 10 customers a month, we've certain, I'm sorry, quarter, we've certain metrics that we follow with the IR and when I see the form 13, it has brought a smile to my face with the progress that we've made and that will continue.

[Operator:]

[Operator Instructions]. And it appears we've exhausted all questions. We'll return the conference back over to Mr. Mike Popielec for any additional or closing remarks.

[Mike Popielec:]

Thank you, operator and thank you, everybody for once again joining the call for our third quarter 2017 Earnings Call. I look forward to sharing with you our quarterly progress on each quarter's conference call in the future. As Phil mentioned earlier, I'd also like to mention that if we've updated our trailing 12-months financial information as well as some other slides in our investor presentation on the website, so please check that out. Have a great day.

[Operator:]

That does conclude today's conference. Thank you for your participation. You may now disconnect.