Ultralife Corporation
Q2 2018 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to the Ultralife Corporation Second Quarter 2018 Earnings Conference Call. At this time, for opening remarks and introduction, I'd like to turn the call over to Ms. Jody Burfening. Please go ahead.
- Jody Burfening:
- Thank you, Jennifer, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's Earnings Conference Call for the Second Quarter of Fiscal 2018. 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 Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call will 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 revenues from key customers, uncertain global economic conditions and acceptance of our 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 cause Ultralife's financial results is included in Ultralife's filings with the Securities and Exchange Commission, including the latest 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 a useful metric and differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, 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. Today, I'll start by making some overall comments about our Q2 2018 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. When Phil is finished, I'll provide an update on the progress against our 2018 revenue initiatives, then open it up for questions. For Q2 of 2018, we delivered year-over-year revenue, operating profit, and EPS growth with revenue up 15%, operating profit up 24%, and EPS up 47%. Both business segments reported year-over-year revenue growth, leading to the highest total company quarterly year-over-year revenue increase in ten quarters. Battery & Energy Products revenue growth of 6% was driven by strong performance in the Government/Defense, medical and 9-volt end markets, while Communications Systems revenue growth of 65% resulted from a solid contribution of Government/Defense project business. The strong organic revenue increases from both of our business units, combined with disciplined operating expense containment, led to double-digit leveraged total company earnings growth in Q2 2018. In a few minutes, I'll give you a further update on our revenue initiatives, but first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the Q2 2018 financial performance. Phil?
- Phil Fain:
- Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the period ended July 1, 2018. We also filed our Form 10-Q with the SEC this morning and have updated our investor presentation in the Ultralife website. I would like to thank all those who helped make this happen. For the second quarter, consolidated revenues totaled $22.9 million, representing a $2.9 million or 14.7% increase from the $19.9 million reported for the second quarter of 2017. Both of our business segments experienced solid growth, driven primarily by an overall 38.3% increase in Government & Defense sales. Revenues from our Battery & Energy Products segment were $17.8 million compared to $16.9 million last year, an increase of $1.0 million or 5.6%, with gains in Government & Defense offsetting lower commercial sales. Sales to our medical customers increased 7.8% over 2017 and represented 57% of commercial sales, 33% of Battery & Energy Products segment sales and 25% of total company sales. In addition, 9-volt battery sales increased 4%, resulting from higher demand in the U.S. Large shipments to an industrial commercial customer in 2017, which did not re-occur at this point in 2018, resulted in a 5.2% overall reduction in the commercial sector. Government & Defense sales increased 25.0% over the 2017 second quarter, resulting from higher demand from the U.S. Department of Defense for our legacy 5390 batteries as well as other domestic prime contractors. The U.S. portion of our Government & Defense sales was 88% versus 60% last year. As a result, the Battery & Energy Products sales split between commercial and Government & Defense was 58-42 compared to 64-36 for the 2017 period. The geographic distribution of our Battery & Energy Products sales was a domestic to international split of 60-40 compared to 57-43 for the 2017 second quarter. Revenues from our Communications Systems segment were $5.0 million, an increase of $2.0 million or 64.5%. The year-over-year increase is attributable to shipments of our Vehicle Installed Power Enhanced Riflemen Appliqués, VIPER, and Vehicle Amplifier Adapters for the U.S. Army's Security Force Assistance Brigades to fulfill awards announced in 2017. On a consolidated basis, the commercial to Government & Defense split was 45-55 versus 54-46 for the year-earlier period, reflecting the increase in demand for our Government & Defense products. Our consolidated gross profit was $6.6 million, compared to $6.2 million for the 2017 period, an increase of 5.3%. As a percentage of total revenues, consolidated gross margin was 28.6% versus 31.3% last year. The decrease in gross margin reflects a higher mix of Government & Defense sales, including the fulfillment of larger competitively bid contracts. Gross profit for our Battery & Energy Products business increased 3.9% from $4.7 million to $4.9 million reflecting the sales growth. Gross margin was 27.6%, a decrease of 50 basis points from the 28.1% reported last year due to product mix between legacy and new products. For our Communications Systems segment, gross profit was $1.6 million, an increase of $.1million or 9.8%. Gross margin was 32.3% compared to 48.4% reported for last year's second quarter, reflecting sales mix. Operating expenses totaled $4.9 million for both the 2018 and 2017 periods. As a percentage of revenues, operating expenses represented 21.5%, an improvement of 310 basis points from the 24.6% reported for the second quarter of 2017. The improvement reflects our continued tight control over discretionary spending. Operating income was $1.6 million compared to $1.3 million for the 2017 period, a 23.5% gain on 14.7% revenue growth demonstrating the leverage of our business model. Operating margin was 7.1% for the 2018 period, an increase of 50 basis points over the 6.6% for the second quarter of 2017. The 50 basis point improvement is comprised of the leverage in operating expenses to sales, partially offset by the decrease in gross margin resulting from product mix. Second quarter non-cash operating expenses, including depreciation, intangible asset amortization and stock compensation, amounted to $.8 million, compared to $1.0 million for the year-earlier period. This brings us to adjusted EBITDA, defined as EBITDA including non-cash, stock-based compensation expense of $2.5 million or 11.1% of sales versus $2.3 million for the second quarter of 2017. Accordingly, adjusted EBITDA for the trailing 12-month period is now $10.3 million, representing an EBITDA margin of 11.5%. Other income and expenses, primarily comprised of interest expense and foreign currency transactions, improved from expense of $49,000 in the second quarter of 2017 to income of $86,000 for the 2018 period. The improvement is primarily due to the strengthening of the U.S. dollar to pounds sterling. Our tax provision was $78,000 compared to $179,000 for the 2017 period, reflecting the amounts in geographic mix of earnings and the elimination of the alternative minimum tax under the Tax Cuts and Jobs Act. Our NOL remains fully eligible for offset against our future profits for tax purposes going forward. Driven by our solid operating performance, net income was $1.6 million or $0.10 per share, compared to $1.1 million or $0.07 per share for the same period last year, an increase of 47%. On a trailing twelve-month basis, earnings per share increased $.03 from the first quarter, to $0.55, including $0.43 from our operating performance and $0.12 relating to the favorable tax benefit from the new tax legislation reported in the fourth quarter of 2017. Also driven by our solid operating performance, the company's liquidity remains strong. With cash on hand of $20.7 million, no debt, working capital of $52.7 million and a current ratio of 5.9. The increase in cash on hand of $2.4 million from the first quarter also reflects a $2.1 million or 8% reduction in inventory, which helped fund our capital expenditures in the second quarter. In summary, the actions we are taking to drive profitable growth are apparent in our 2018 first half 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:
- Thank you, Phil. For 2018, we continue to be focused on increasing our revenue growth opportunities through market and sales reach expansion, new product development, and potential acquisitions. For the Battery & Energy Products business, building off of our historical concentration in U.S. Government & Defense, the strategy for market and sales reach expansion has been to diversify more into the global commercial markets and international Government/Defense markets. To that end, for Q2 of 2018, commercial and international Government/Defense revenues represented 63% of total B&E sales. Within our global commercial revenue, the largest portion comes from sales into medical applications, which in the second quarter represented 33% of the total B&E revenue, and in Q2 2018 medical revenue was up 8% year-over-year. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown at a compounded annual growth rate of 36%, including the contribution of the Accutronics acquisition in January 2016. Looking at Q2 of 2018, medical device battery and charger product shipments continued to encompass a wide range of applications, including breathing devices, infusion pumps, medical carts, digital imaging, automatic external defibrillators and surgical robotics. Behind most of the medical devices for these applications are long-standing customer relationships, and even though there are typically lengthy multi-year development and qualification processes, as long as we perform, once full production is underway, we get fairly consistent revenue streams and decent up ahead visibility, which helps us run our businesses better. To that end, in Q2 2018, many of the customers for these devices took shipments representing anywhere between $0.5 million to $1.5 million of revenue and also issued new orders for shipments for the coming quarters. We also continue to pursue other non-medical commercial end markets, including industrial equipment, safety and security, metering and sensors, asset tracking, in-transport entertainment, drones and UAVs, and the Internet of Things. Some specific non-medical commercial and international Government/Defense activity in Q2 2018 included
- Operator:
- [Operator Instructions] And we'll go first to Gary Siperstein with Eliot Rose Wealth Management.
- Gary Siperstein:
- Mike, thank you for your thorough remarks. And you've mentioned multiple areas for potential growth and acceleration of growth. Can you sort of give me your best guesstimate of what will be the most significant piece going forward in terms of the government? In other words, is it just regular IDIQ stocking orders or is it the modernization programs on the military side? And then on the medical side, are there any things you're getting designed into that would start giving us revenue in the second half and anything that would extend into 2019?
- Mike Popielec:
- That's a great question. In terms of the military products, we're definitely seeing an increase in activity, as I mentioned in my prepared remarks, through multiple channels, high increases through not only our OEM customers but also through the distributors. What I'm particularly excited about is that you know and you're familiar with the IDIQs that we were awarded last year, one for the new CFX battery and the ther for 5390 batteries. The development work associated with those awards are in process , and while we don’t expect any significant revenue out of those in 2018, but are really excited about the prospects for what they could do in 2019. As you recall, I think the CFX IDIQ is around $49 million and the 5390 was around $21 million, so that was really a positive. In the case of the Communications Systems business, it's always difficult to pinpoint the timing of when things will actually happen, but the activity level that we have with our OEM partners is at a brisk pace. We have very good open dialogue with them. We're working on a number of different activities through multiple OEMs and respecting the privacy and the confidentiality of what each is working on. But I would pay close attention to some of the larger radio OEMs and some of the activity levels and the contracts that they are involved in, as we always need to have those take place before the contracts for our ancillary equipment to yield revenue opportunities. But some of those could happen through the rest of this year and then also particularly into next year. Regarding the medical products, the medical products as I mentioned and I tried to reflect those in my prepared remarks is the really long gestation cycles, but what we love about it is they are really sticky. And so they may not always be huge individual contracts and so many times they don't pass the threshold of a press release, but I tried to indicate that we have multiple programs of about $0.5 million to $1.5 million in size. We get pretty good visibility to what they need for the next couple of quarters. Think about say, for instance, the battery business being a $70 million -- or $65 million, $70 million business, each $600,000, $700,000 of revenue is a point of organic growth. So we get really excited about these opportunities and they sort of just drop into our revenue, and don't necessarily always come with a lot of fanfare, but the activity level with our own partners is at a peak level at this time.
- Gary Siperstein:
- That's great. On the new opportunities, more greenfield in terms of robotics and drones and IoT. Any early indications there, which one might do the best in the soonest time frame?
- Mike Popielec:
- Well, we're already getting awards, again, the same order of magnitude I mentioned for some of the robotics activity, both in the medical space as well as in the industrial space. You may recall, we launched what we call sort of affectionately the Sealed Lead Acid replacement battery, which we sort of piloted and trying to demonstrate the economic and reliability and performance benefits of lithium ion versus lead acid solution. And those have been quietly utilized in a number of different medical applications, whether they'd be robotics or medical carts. And then if you think about the distribution, a lot of those are autonomous type vehicles. Those are finding their way into those applications as well. So those probably -- that's probably the area that's seen the most traction in the recent past.
- Gary Siperstein:
- And has there been anything new on the 3-volt side in terms of maybe smoke detectors going to 3-volt from 9-volt?
- Mike Popielec:
- Well, I think that's an ongoing trend anyway. I think we've mentioned that in previous calls. That's why we're so excited about the new 3-volt project that we have underway. As I mentioned, we are working at it sort of both in China and in the U.S. so we have product available for wherever the customers are and the OEMs are. And like I said, we expect those new products to be coming out for a qualification type testing by the end of the year and then ramping up volume into 2019.
- Gary Siperstein:
- Okay. That's great. And then how about backlog going into the back half of the year? Is it similar to how you started the year? Is it lower? Is it higher?
- Phil Fain:
- Gary, our policy is to only disclose backlog at the end of the year in our Form 10-K filing. But I will say backlog varies depending on what day it is, and we're in a healthy position as we go into the second half of the year.
- Gary Siperstein:
- Okay, thanks. Great. And Mike, we haven't seen an acquisition for 2.5 years since Accutronics. Meanwhile, your cash is now north of $20 million and I think you got north of $35 million with the accordion on the line of credit. Why is it taking us so long to find a good acquisition? Is it fewer choices out there or is it too high? Why hasn't something happened yet?
- Mike Popielec:
- It's a great question. I mean, as we've said on previous calls, our sort of main metrics and objectives for those are to, one, find acquisition that makes strategic sense. So we want to make sure that the day that we close and we're now one, that the acquired company continues to grow organically. It's extremely important to us. We work to try to ensure earnings per share perspective of accretion of at least $.01 in year one, a minimum. It's almost the like M&A Hippocratic Oath of not doing any harm to the earnings share of the company while we're working through integration. Thirdly, we want to make sure from a quality of earnings perspective that once we get through the initial inventory write-up and intangible asset amortization, and closing costs that within about a period of 18 months that we're back to the same quality of earnings operating margin type of level or parity. And then last but not least, in IRR that makes the risk worth the reward. And as we've gone a lot of companies, we're still very actively engaged in looking at opportunities and are in different phases of those discussions. And we're also frustrated we haven't had something to release, but we want to make sure that we're good stewards of the cash that we work so hard to generate. From an overall perspective of cash, when we look at sort of the ranking of how we look to deploy that capital, we look first and foremost, at organic means. So those organic means would be new product development, market expansion, and lately we've seen more and more strategic Cap-Ex. Then comes acquisitions and then comes buybacks. So all those things are in play, and we want to do our best to be good stewards of the deployment of that capital. And at the same time, recognize it's been a little while since we've announced an acquisition.
- Gary Siperstein:
- As the cash builds and a few more quarters would go by with no acquisition, would you guys then look to maybe a new buyback program?
- Mike Popielec:
- All options are on the table and we're in close discussions with our board and the various committees of trying to deploy that in an effective manner.
- Gary Siperstein:
- Alright. Thanks that's all I got. Congrats on the solid first half.
- Mike Popielec:
- Thanks Gary.
- Operator:
- [Operator Instructions] And at this time, there are no further questions. I'll turn the call back over to Mike Popielec.
- Mike Popielec:
- Great. Well, thank you once again, everyone, for joining us on our second quarter 2018 earnings call. I look forward to sharing with you our quarterly progress in each quarter's call in the future. I'd still mention and also like to note that we updated our annual financial information in the investor presentation that's on the website, so definitely check it out. Have a great day, everybody.
- Operator:
- This does conclude today's conference. We thank you for your participation.
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