Ultralife Corporation
Q2 2016 Earnings Call Transcript
Published:
- Operator:
- Good day, and welcome to this Ultralife Corporation Second Quarter 2016 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.
- Jody Burfening:
- Thank you, Katie, 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 2016. 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. 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 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 metrics and 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 Q2 2016 operating performance. Then 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 2016 revenue initiatives, then open it up for questions. For Q2 of 2016, we were very pleased to deliver our seventh consecutive quarter of total Company profitability and positive EPS, generating an operating profit of $0.5 million on revenues of $20.4 million for an operating margin of 2.4%. Included in these results was the favorable revenue contribution of the Battery & Energy Products UK acquisition completed in mid-January. Q2 total company revenue was up $1.4 million or 7.5% year over year resulting primarily from the strong increase in our communication systems business. Battery & Energy Products Q2 revenues were $15.8 million, down 1% from the prior year and including the Accutronics acquisition, which delivered $2.5 million in revenue and again performed to profitability expectations. Increases in B&E revenue from the core business medical batteries, charger products and favorable contribution were more than offset by decreases in the core business revenue due to the non recurring 9-Volt batteries, European demands in 2015, slowness in our China final [core] battery business and smaller then prior year shipments of our MIDI batteries for special communications systems. For our communication systems business, second quarter revenues were $4.6 million, up 55% year over year, again the highest quarterly revenue level in three years, and driven by the deliveries under the vehicle installed Power Enhanced Riflemen Appliqué large program contract announced last year. So for the first half, our revenue was up 8%, we're profitable and our new acquisition is performing to expectations. Yet we have been some sluggishness in some of our core markets segments in both business units, as such, we recently completed some cost restricting, in order to realign our business model parameters to current revenue level. In a few minutes, I’ll talk more about our revenue initiatives for 2016, but first I liken to ask Ultralife's CFO Phil Fain, to take you through additional details of the second quarter 2016 financial performance.
- Phil Fain:
- Thank you, Mike, and good morning everyone. Earlier this morning, we released our second quarter results along with our Form 10-Q and Form-K for the period ended June 26, 2016. Consolidated revenues for the second quarter totaled $20.4 million, representing $1.4 million or 7.5% increase from the $19.0 million for the second quarter of 2015. Revenues from our Battery & Energy Products segment were $15.8 million, a decrease of $0.2 million or 1.3% from last year. For the second quarter, our $2.5 million revenue contribution from Accutronics, and a 4.7% increase in shipments to medical customers were offset by higher 2015 orders or 9-Volt batteries for large global smoke detector OEMs, in response to legislation past in certain European union countries, large shipments of batteries to service the metering and toll pass industries in China and lower military battery shipments. Commercial revenues for the second quarter of 2016 increased 5.3% over the prior year, reflecting the Accutronics sales and the increase in sales to medical customers. Governments and Defense sales decreased 10.4% from the 2015 period due to a timing of battery shipments to service multi-functional information distribution systems in slightly lower sales of primary batteries to the U.S. department of defense; partially offset by higher charter shipments to several larger international defense crimes. As a result, Battery & Energy Products sales were split 62
- Mike Popielec:
- Thanks, Phil. For 2016, our focus on revenue growth remains on three core elements; expanding our market and sales reach, new product development and pursuing acquisitions. In the Battery & Energy Products business, we continue to diversify into commercial and national markets to supplement revenue from and less than our historical concentration in the U.S. defense markets. In Q2 2016, 62% of total B&E sales were to commercial customers versus 58% in Q2 2015 and 56% this last quarter. Drilling down a little further, in Q2 2016 shipments of medical products in the core B&E business were up 5% year over year. Since launching our focus diversification trades toward the end of 2011, our medical product revenues have produced a compounded annual growth rate of over 25%, such that our core quarter, quarterly medical product revenues have approximately doubled since 2011. The new acquisition we announced early this year essentially doubles that core run rate again, resulting in total medical market revenues that are now approximately 30% of total B&E quarterly revenues. As we strive for more consistent top line revenue growth to reduce diversification in our B&E, business, we view the fundamentals for sales growth from medical devices with lithium batteries to be attractive. First of all, medical devices for the growing, ageing population, who desire more affordability and convenience are great applications for our battery and charger solutions due to lithium battery size, energy density and cycle capability. Secondly, the safety performance and reliability requirements are good fits with our product and Company culture heritage as a military defense supplier. Lastly, the necessary collaborative new product development activity helps us create value preposition based sticky relationships with our customers. From initially just providing our long life 9-Volt lithium battery in very simple applications, then broadening participation to include AEDs and fusion pumps and respiratory devices and today serving medical carts, digital X-rays and numerous other patient diagnostic and care machines, the available potential market just keeps getting bigger. Though the medical product qualification process are lengthy and complex, we view the opportunity for consistent and growing revenue streams to be well work the effort. Regarding the recent Accutronics acquisition, the initial 100-day function integration plans have been substantially completed, with no negative surprises and we remain on track for the acquisitions earnings contribution to be EPS accretive within the first 12 months. During the second quarter, we began utilizing the Accutronics facility as a European distribution point for several of our products produced U.S. and China and are now recognizing cost synergies from removing a third party logistics service from the supply chain. Going forward, we have developed growth initiatives aimed at establishing a broader commercial and B&E platform in Europe, and set an initial target of leveraging our Accutronics footprint to double the new European entities revenues over the next three years. Components of that plan include growing organically buy achieving the inherited Accutronics three-year core growth plan, maximizing sales in Europe of our Ultralife's products, leveraging Accutronics headquarters location to grow European G&D business and leveraging Ultralife's existing presence to cross sell Accutronics products into the United States and the rest of the world, particularly with global medical OEMs. In the core Battery & Energy products business, the 9-Volt revenue rebound over 25% from Q1 to Q2, but is still below the prior year surge. That said, the other revenue streams remain fairly stable from a broad range of international and domestic prime and OEM business partners. These include various shipments to the defense and logistics agency, deliveries to our major global medical OEM, continued shipments of our medical card battery systems with a new smart display and sales of primary cells for AED applications. We also secured a new 12-month blanket PO from an international prime for military communication battery shipping in Houston [ph] and beyond. We will continue to diversify our overall revenue by more penetration of commercial markets, international government defense markets and from a broader range of U.S. government defense customers. In terms of new product development, in Q2 B&E revenues derived from products introduced less than or equal three years ago were 24% of sales, once again illustrating the vitality of new products on our ongoing revenue streams. We continue to develop new products and evolve existing products through multi-generational product plans for a number of applications throughout many of our served market. For example, in the second quarter we completed development qualification shipment of our new advanced tactical two-way smart charger to a Middle East customer. We received our first significant order for an ultra-high capacity lithium manganese oxide CFX blend primary ducel [ph] products as part of an international government battery solicitation, and we received purchase order for Sealed Lead Acid replacement products to begin qualification in medical, patient renovation application. Regarding evolution of existing products, we’re following our successful 9-Volt blueprint to develop our next generation 3-Volt lithium medical product lines, encompassing multi-generational product planning and community support. Our redesigned next generation 9-Volt product, is now in its fifth year of full production in our China facility. Our field experience of this product is been very positive and recent testing of actual products retained at ambient temperatures for five years demonstrated excellent shelf life. It should also be noted that in June of 2016, the local Shenzhen Pinson district certified that our China facility met its green energy initiative. This distinction, plus the national high technology entities status it already has, enabled our China facility to receive both government support in expanding its expertise via green energy product developments. Leveraging this community support, and the multi-generational product planning approach, we look towards further advancing our 3-Volt lithium medical products. We are presently undergoing qualification testing for industrial 3-Volt cells with several top tier customers, serving multiple applications, such as for the next generation smoke alarms, tracking devices, metering and more and more the numerous wireless devices supporting the Internet of Things. We truly look forward to the potential new revenue streams, these opportunities should bring. In regards to Communications Systems business, refined focus on our emerging markets and leveraging new products into those markets is a key focus of the 2016 strategic and operational plans. The acceptance of new product developments released over the last three years has been strong domestically and the growth into international markets is continuing, we have ongoing testing both domestically and internationally for our new products and continue to embed our in the multiple program opportunities around the world to support soldier modernization and vehicle programs. In Q2 2016, new products less than or equal to three years old represented over 85% of total Communication Systems revenue, driven largely by the MRC VIPER and MC4 shipments. This represents an increase in new product sales versus the prior year of 58%. Regarding the VIPER program, deliveries throughout Q2 in support of the soldier radio wave firm, [indiscernible] radio care requirements for the U.S. army, a [indiscernible] for operational purposes and also use and support of any I16.2 testing about the network systems, with no shortfalls tentatively identified. Future asset W applicant requirements are anticipated to support the RICO [ph] medium program. As an update to our McDowell research branded MRCMC4 integrated communication systems, which underwent 18 months of co-development effort with an international partner, multiple US OEMs and U.S. Cellcom. Initial purchase order deliveries were made in Q2, with systems now undergoing further operation integration testing by Cellcom for applicable and broader use in command and control platforms. Regarding the U.S. family of special operation vehicles or FOSOV, program execution during the first half of 2016 was steady with additional program purchases anticipated in the back half 2016. This critical program for U.S. Cellcom had provided an incubator for focused new products development based on the knowledge of platforms and requirements of the special operations forces operators, which is reflected in the product acceptance and continued integration. These products and systems are now transiting to global software ramps, providing sustained and future growth opportunities. Looking ahead, new product development remains focused on emerging radio technical requirements and broad capability set that not only comply to sophisticated wave forms but also support existing legacy platforms globally, and the known tech [ph] requirements of our core customer base. In closing, despite some economic uncertainties weighing in on our customers buying decisions, in Q2 we sustained profitability and we still have our sites on our delivering profitable revenue growth for 2016. Our new acquisition unit is strong well and we know that our commercial and international revenue diversification strategy, new product development focus and operating business model position us to achieve better leveraged earnings growth. In Battery & Energy products, we continue to gain revenue traction on our commercial business, particularly in the medical market, where our growth is driven not only by expansion of our core customer products demand, but to a larger extent by new applications from new customers with new product development requirements. We also have the benefit of our Accutronics acquisition, which itself presents us with a new platform in Europe from which to capture new revenue growth opportunities. We will continue to truly globalize new product development, multi-generational product planning and manufacturing capability for maximum leverage and new opportunity creation. At Communication Systems, during the second half of 2016, we are wrapping up shipments against the initial VIPER contracts, while pursuing other new product development driven integrated communications system program opportunities. Our communication systems global OEM, business partner and end user activity remains high, and we remain very selective in allocating the engineering investments required to support the product integration, evaluation and testing necessary to secure the next large program win. Regarding future M&A, we view the B&E Accutronics acquisition we did early this year, though small, as very much a key strategic investment that checks several global organic growth boxes for us; including diversifying more into commercial markets, particularly in medical expanding our global sales reach for all of our other core products and establishing our European platform, for both pursuing EU government defense customers and OEMs more locally as well as for overall logistical and product positioning support. The best part however, is that we instantly have the additional benefit of the many talented people the strategic investment brought along with it. As a result of going through this initial integration process together, we are well prepared for another acquisition, and look forward to pursuing an even larger target. We are looking for strategic accretive business additions that enable us to more quickly gain scale, particular market access or technology, new products and or skilled resources and whether they be in existing core or adjacent products or markets and/or vertical integrations. Operator this concludes my prepared remarks and I would be happy to open the call for questions.
- Operator:
- Thank you. [Operator Instructions] Sam Bergman with Bayberry Asset Management. Please go ahead.
- Sam Bergman:
- So I have a couple of question regarding the military and perhaps you can tell us the blank hit purchase order that received. Can you give a dollar amount on that?
- Mike Popielec:
- We haven’t disclosed the dollar amount of that blanket contract we did we see.
- Sam Bergman:
- Can you give us a range?
- Mike Popielec:
- Phil, do you want to comment on that?
- Phil Fain:
- The range is -- it’s certainly going to help our P&L. It’s something that we don’t consider on an overall basis to be overly material, because if it was, we would certainly have disclosed it. So I would like to keep it at that, but you know, these things, in some cases do come with tails, and do provide other opportunities, and that’s the beauty of the things that we don’t necessary consider material at one point, could certainly drive other opportunities. So that’s how we look at it, Sam.
- Sam Bergman:
- And if you look at the harass [ph] on radios, over the last six months and you being a supplier to them, when is the expectation from Ultralife to start shipping or -- orders and shipping product on those VOs?
- Mike Popielec:
- That’s a pretty good question, Sam, and we’re excited to see any of the radio manufactures get new business opportunities. Obviously most of our product support radio programs. So we don’t get business if they don’t get business. We have ongoing business relationships with other radio manufacturing OEMs in the case of some of the specific opportunities that you referenced. We're involved with customers with a multi generation approach to batteries. We continue to work with our customers to advance our battery capabilities for their additional needs. We don’t get as much visibility as we have in prior years to any particular timing of exact revenue recognition. But we look forward to serving those throughout the next couple of years; likely to be 2017, 2018 and beyond type of timeframes.
- Sam Bergman:
- So your understanding would be the initial shipments would start in 2017. Are we looking at the first half for the second half?
- Mike Popielec:
- I wish I had that granularity. And we don’t assume anything. We know that there is qualification cycle. We know that we have to win business each and every day. We feel very strongly about our existing relationships, but we don’t take anything for granted. So we have a whole development process and coding process and evaluation, discussion process to go forward and to try to pin point particular revenue or even first half to second half, at this time would be I think extremely premature.
- Sam Bergman:
- Going to Accutronics, is your break code of sales for Accutronics this quarter? I know you did it last quarter. Do you have any numbers for us on this product?
- Mike Popielec:
- I think in my prepared remarks, I actually said $2.5 million.
- Phil Fain:
- Yes, we did it, it’s $2.5 million Sam, very consistent with what we showed in Q1, and you will also see it referenced in the 0-Q that we filled with the SEC this morning as well.
- Sam Bergman:
- Do they carry any type of backlog going into the next couple of quarters or not?
- Mike Popielec:
- Obviously they certainly do, because their whole business is dealing -- or a large portion of business I should say is dealing with large global medical device OEMs. So a large part of that is a combination, a back orders and expected pulse.
- Sam Bergman:
- So piggybacking that company onto your company, is there any one particular product line or award that you can talk about that has been received recently because of the Accutronics acquisition?
- Mike Popielec:
- Most of those revenue streams for Accutronics are ongoing contracts. That's one of things we liked about the acquisition when we pursued it, that they had a little bit more visibility to revenue over a number of quarters than we did. We have numerous -- and we review then every week, numerous different contract opportunities underway with them. Their process, because it tends to be a customer as they refer to a bespoke type of application is that there is an extensive amount of upfront co-development with the end user. Sometimes NRE is involved. And so we have our iron in many of those fires and we talk about those each and every week. The development cycle from going to that stage into revenue stream, which should be similar to most medical products could be two to three years. If at any time there should be a large award, we would certainly reveal that. And further sort of stepping back a little bit to the comment that you asked earlier, certainly wasn’t meaning to evade answering your question. When we look at any revenue organic growth opportunity for our Battery business or Comp business for that matter, we think about in terms of points of organic growth. And for looking at a roughly $70 million or so -- every $700,000 represent a point and we're trying to get multiple point of organic growth each and every year. So when I give you a list of things for instance that we talked about in energy product business, that was those opportunities could be anywhere from the several hundred thousand dollars up and over to a $1 million, $1.5 million. Anything Sam, that I believe would be over $2 million or so especially for the strategic, we would like put forth a press release.
- Sam Bergman:
- And if we go back to the medical device area, and the expenditures are indeed, can you give us an idea of how much R&D -- how much of your expectations for R&D to be up this year, just in that area of commercial medical devices. And are you planning to add any sales people in that area, knowing that you can probably pull sales people from Accutronics and over keys, but still there's that much growth, that much development going on, one we would think there would be some increase in sales, in the sales area?
- Mike Popielec:
- The expenditures in R&D, new product development technologies, we said and we have referred if you remember from previous calls, the 35 by 10 equals 10 type of business model. That's just really sort of the navigational vehicle to make sure that we're spending in the places we think we need to spend regardless or whatever the revenue level is. So typically the spending has been anywhere between say 5% and 7%in the new product development technology area. We would expect to continue to do that going forward. Of course if there is a unique opportunity that comes up, that's not our firm and fast rule, that's more of a guiding principle to make sure that we stay consistent with our revenue levels. So I don’t anticipate that that overall level spending would necessarily increase. However, the allocation of that spending would logically be more weighted towards some of the medical opportunities than perhaps in the historical around some of the other military opportunities. Relative to sales people, we don’t comment about individual sales force levels but we have put in place and we have very specific plans for organic growth targeting, not only -- like we said in the comments -- not only in Europe, but also back in the United States. And so we've mobilized several quite powerful and capable sales resource in the United States to advocate for the Accutronics products to be able to help expand our present to the United States. And the last thing I’ll say is that whereas in many ways the Accutronics acquisition was a regional player working with some large global OEMs, we hear over and over can again from those global OEMs that they're delighted that now Accutronics is part of Ultralife, because those globally owned OEMs have presence in Asia, they many times corporate headquarters is in United States, and they look at us overall as a much better supply than perhaps in the legacy form Accutronics would have been.
- Sam Bergman:
- And the last question, and we got to the medical device area being a high growth area going forward. Who is your two biggest competitors in the lithium batteries for medical devices?
- Mike Popielec:
- I think there's a broad spectrum of competitors. I'm not giving any specific names that exist, some very good reports out there, for us and following and other type of experts that to go through different aspects of our competitor base, that we look at many different competitors. There's some competitor's, we've seen them primary space, and some competitors we see in the rechargeable space, sometimes we see for high volume sort of more commoditized or custom development products we see, certain competitors' others the times. We know that it may be a lower volume but more complex custom design. So there is lot of the existing players that are well known in the marketplace, whether they are batteries or battery pack suppliers and I think there would be other people that would be able to give you a little bit more detailed price specific competitor. But we keep a close eye and those, and don’t underestimate their capabilities on each and every transaction we take look at.
- Sam Bergman:
- So can you give you us any color in terms of what type of pilots you’re putting out right now versus let's say the prior quarter or even the prior year? Are you doing ten different pilots with OEMs? Are you doing five? Is there any way to gauge, what growth is going on in terms of pilots that are going on?
- Mike Popielec:
- It’s interesting, Sam. I think organically at any given time it’s probably in the dozen range or so. We've picked up a least a dozen or with the acquisition of Accutronics. I would say it's in that order of magnitude. We recognize that we’re always going to be constrained if we have any ambition at all with financial and human resources. So we’re trying not to get too distracted by the shiny new one in the quarter, but look at the things where we think we can be the most competitive, provide the most value and spend some of our precious up front engineering and human resources on the ones and things that have the highest probability for new term revenue. But I would say, the dozen or two range is probably as qualitatively or quantitatively -- I could answer that question.
- Sam Bergman:
- Is there any capacity you can give us for prior quarters or I would assume that if it is growing, there must be some increases in those pilots?
- Mike Popielec:
- And my understanding is from like other indicators and this may be very unscientific, but we do know that there is an increase in number of non-disclosure agreements that are coming through our legal operation. So that’s an indicator for new opportunities, I'd say is positive.
- Operator:
- We’ll take our next question from Gary Siperstein with Eliot Rose Wealth Management.
- Gary Siperstein:
- So Mike in the quarter, we talked about how the original organic business exiting now Accutronics and exiting now the VIPER contract has been down year-over-year, and you called out the 9-Volt win from last year and the new earning win. What else do you attribute the trailing organic business to? You mentioned economic uncertainty, but can you give us a little more granularity, clarity on that?
- Mike Popielec:
- If we look at the overall population of different awards that we received, obviously there were some things that we received this year, we didn’t receive last year. We just didn’t call out everything we just didn’t recur. We were pleased with the -- obviously the acquisition and then we are pleased with some of the international government defense opportunities that we talked about. We offset most of the things that you would expect just by normal course of business to not be recurring, but the ones that we highlighted were some of the largest ones. I don’t know Phil if you have any other.
- Phil Fain:
- I'll just add a few points to that, Gary. First of all, regarding the business and regarding metering and [indiscernible] and all that, just recently some new specs were introduced, national -- what's called national grid specs, and there was some of a delay due to the testing that was involved and we're very pleased, very excited about the fact that we have now passed all of the new standards, and that puts us in a very solid, very enviable position. And with regard to those businesses, there is always a number of different competitors that come up that certainly don’t need the specs, that don’t have the quality of records that we have, but do have lower prices and do entertain payment terms that we would think our way beyond what is reasonable. And those are more or less fly by night up type operations and over time we see that the bigger players do come back to us in a number of different businesses that we're involved in. But probably the most important point is the first, is that we have now passed all the national standards and again that puts us in an enviable position going forward.
- Gary Siperstein:
- So some of that metering business, future needing business can come back to you at some point in the future.
- Phil Fain:
- We certainly think so yes.
- Gary Siperstein:
- Okay, super. And so on the other B&E decline, so you called out those two pieces and then otherwise I guess it's timing when and different things hit you maybe went through a slew of opportunities and some POs and some potential POs. Can you give us some color on the cadence, another word is that you are looking presumably for a better second half? You've adjusted expenses to a lower level. You are hopeful to -- you still aspire to some profitable growth in the company. It just seems the leverage is amazing in the operation. In other words, another $3 million in sales per quarter with a 30% margin, it's another it's expense. So, you could almost be at $0.10 quarters, if we can tag on $3 million per quarter or 12 million a year. So would any potential acquisitions or anything happens, more substance on B&E with medical, and or government, and then certainly the $300 million potential pipeline in communication systems, it seems that there is a lot of levers that could happen that could make that differentials, and then an $12 million a year isn’t necessarily to much when you have those many things that could drop at any one time. Is my analysis right on that?
- Mike Popielec:
- Yes, having the small company, I mean $0.5 million, one way or others, has a huge impact on our numbers. I think if you looked at the map, it’s like a $1 million year-over-year decline in organic revenue, and we know that there is multiple hundreds of thousands of dollar type opportunities orbiting pending. Those things could fall this quarter or the next quarter. So you could be sort of frustrated, but I think what we've already tried to do is be very aggressive in the opportunities we pursue, but very pragmatic in trying to make sure our costs align with the current revenue stream, because one of he things we aspired for early on was to have consistent profitability and, we really sort of said that as a minimum requirement to have profitability and $0.5 million here, $0.5 million there could make a big difference in our growth rates, given order size. I think you’re exactly right above the leverage. We've seen that over and over again and. And we’re optimistic about the second half for the year, but felt that it was prudent given some of the sluggishness that we saw, we already talked about, to try to set the deck in the favorable position possible for a profitable and growing revenue year.
- Gary Siperstein:
- So again, just hone down on optimistic for the back half for the year versus the first half. So separate from what you've done in the expense line, is it all the things you mentioned, the blanket PO, this level seasonality, maybe something drops somewhere on the communication side? Or is it basically that will be as it is, and it’s mostly on the B&E side where these opportunities come in?
- Mike Popielec:
- Gary, it's hard to say. I'm not a big fan of blaming anything on seasonality. I think it’s all about our ability to execute and we’re just doubling down on our efforts, making sure all of our executives are out seeing customers, making sure we're not getting tied up in a lot of the admin work, and trying to be really smart about the pending we have and bring them in for purchase orders, for revenue recognition. When I look at 9-Volt activity, and 3-Volt activity and medical activity, rechargeable activity, we always have in the back -- there is government contracts that we bid, even last year that there is ongoing rumors about things happening any day now. My definition of any day now is little different than sometimes what the government thinks is any day now. But we have several of those opportunities in place and sometimes they can be frustrating, waiting for those, but we know we have many different opportunities in play. And as we look to the risk and opportunities for the back half for the year, we still are optimistic about showing total year revenue growth.
- Gary Siperstein:
- And on the investor presentation on the website, talks about that $300 million opportunities on the Comm system side. Has any of those gone away or been borne by competitors or is it still all out there, just that question of waiting on the government.
- Mike Popielec:
- None of them have really gone away. There's pluses and minuses. I think a lot of us, [indiscernible] that anybody -- better crystal ball than anybody else about which way -- I would just say, some of the national elections will go, and what influence that will have on the ability to get budgets done on a timely fashion, that there will be change in direction of philosophy. I think it's impossible for anybody to predict it this time. So we already know that the government defense business. particularly in the United States is in a constrained type of position. So rather than sit back and be using hope that the strategy -- something is going to fall imminently, we've been taking on more conservative, maybe more cautious approach, saying that some of the things may not happen next year. We're still investing in new product development activity to make sure we\re positioned with world class products, but we're not getting ahead of our SKUs and thinking something is going to fall in the third quarter and fourth quarter right in middle of a national election season.
- Gary Siperstein:
- Okay, that $300 million give or take is still out there? You haven’t lost them to competition?
- Mike Popielec:
- Yes.
- Gary Siperstein:
- Okay, and then on the. You mentioned especially start to moderate expenses for the back half of the year. So how will you mentioned $1 million annual savings? Where they any charges in Q2 or would there be any charges in Q3 because of that?
- Mike Popielec:
- What goes along with the items that. If it was material, we would have called that out in our scripts or we would have certainly called it out in our queue. It would just be expenses related to the severance that in total were not material or the cost of avoidance going forward or specific earmarked expenses that we looked upon as being more discretionary and not necessarily related to our more immediate revenue growth.
- Gary Siperstein:
- Okay, so if that's a $0.5 million in savings in the back half of this year, is it like maybe 200 and maybe third quarter in 300 in the fourth, or is it 250-250? What do you think the cadence will be on the savings?
- Mike Popielec:
- I think the cadence is going to be probably very, very close to being split, maybe a little more waiting in the fourth quarter of the year, but pretty close, maybe 45 to 55, 40 to 60, something in that range.
- Gary Siperstein:
- Okay, super and then you called out on trading 12 months EBITDA or cash flow at about $6 million - $6.5 million but I think in your script you had mentioned Q2 was over $2 million. So that annualizes at $8 million? Hasn’t that been the highest quarter of cash flow for the last few quarters? And is that a new higher a level that we can look towards or you think it was just an aberration in the quarter and will be back to the $6.5 million.
- Mike Popielec:
- I'll tell you exactly what it is. Its' simply the EBITDA generated plus reductions in inventory. So EBITDA generated $1.5 million inventory reduced of $500,000 to $600,000 and we've shared with the investment community on an ongoing basis that we continue to see opportunity in reducing our inventory. Of course it's the cheapest form of financing. So we have certainly sharpened our pencil and our focus and the sets scenario that we we're really digging into even more intentionally as we've done in the past. I think the bump up in the inventory that you've seen since yearend is a result of being prepared for the items on back, order including VIPER as well as anticipating when certain sales -- orders are going to be received and sales are going to be shipped. So it’s a delicate balancing act. Nevertheless, there's opportunities in reducing the inventory. So those are the components.
- Gary Siperstein:
- All right, so there could be some continued inventory reduction Q3, Q4 or certainly over the next twelve’s months?
- Mike Popielec:
- We would expect that.
- Gary Siperstein:
- You've got seven quarters in a row now of profitability. Can you give us any color on when the orders will let you put that NOL asset on the balance sheet?
- Mike Popielec:
- Yes, but first of all let me tell you, it’s not the auditors. It’s doing their best be in compliance with U.S. Generally Accepted Accounting Principles and the SEC regulations. And let me just give you flavor for that. You can go back to our 10-K last year and you can see in the income tax foot note that we specifically have a valuation reserve that includes the net operating loss, carry forwards, the overall reserve is $35 million. Specifically, for the NOLs it’s approximately $28 million. So the question is when can we recognize at least a large portion of that. So when you look the guidance, what the guidance says is that -- is a solid. It says that forming a conclusion that a valuation is not needed is difficult when there is negative evidence such as cumulative losses in recent years. And I'm just paraphrasing what the guidance is. So it may not be exact, but the one thing that is not laid out by the SEC or by the Italian guidance, it doesn’t define cumulative losses or recent years. However, we look at trends, we look at where the SEC is commenting, we look that where there are certain GAAP issues. And the trend is generally a two to three-year period, including the current reporting date, with the tendency of -- I guess more focused on three years. And this trend Gary, is looking at cumulative losses. And then further variables that we are assessing, of course I mentioned the Company’s history of profitability, how good we’re at forecasting, and it also does callout the potential of recurring or non-recurring government contracts, and the timing of an impact of that business to us. And let me just give you an example. We put this all together before my time with the Company, and in 2004, the Company reversed its valuation reserve. In 2006, it rebooked that. I certainly believe that the growth for the Company and the profitability of the Company is very, very strong, or else I wouldn’t be here. And with that, we’re deeply involved in reviewing our own internal position, that we will get the concurrence from our auditors of looking each year of net operating loss, when you lay out the schedule in looking at what is the most reasonable position for us to take that will be acceptable by the SEC and under U.S. GAAP. So I can reassure you that we are neck deep in this and we certainly understand the different variables and we just want to get this right. So long winded, the answer with the intent being that it's not just a black and white response, being up two years of profitability, we booked this $27 million asset. There is various idiosyncrasies and trends involved in this, and we just want to capture all of it is, as we do with all aspects of our business.
- Gary Siperstein:
- Okay, thanks for all that. I understand it's just -- since it's just a major, I think the total was at $85 million or something like that. I'm sorry $86 million?
- Mike Popielec:
- Yes.
- Gary Siperstein:
- Yes, so again it represents probably one of the top two or three assets of the company. It would be nice to get reflected on the books sooner rather than later. But obviously it's got to be kosher. You've got to dot the Is and cross the Ts. But if you look at other companies and so forth and you just gave an example of what you've done in the past, at some point as you continue being profitable, it would be nice to get that on the balance sheet. So in terms of additional questions, Sam mentioned the PO and you didn’t do a news release on that, the open PO, blanket PO in terms of materiality. So then you filled in that sometimes these had tails. So is that something that does indeed ship in the back half of the year? When do they typically let you know if there is a tail to it? Does that come -- if you get the production line that up and you are delivering against it as opposed to stopping and then starting again? So do they give you some color of midstream or is it only after full deliveries. I guess that will do the same on the VIPER contract though with Talus. If there is some follow up on that, when do they typically let you guys know?
- Mike Popielec:
- Look, generally what happens is it turns out to be a waiting gain, and trying to specifically point out anything but the delivery schedule that maybe included in the PO or may not be included in the PO, if it's an IDIQ is just surely guesstimating. And perfect example certainly goes back to VIPER. We were all set to go with VIPER. Then we waited for a year or 18 months, and that's a difficult part of this Gary, that's the anticipation of nailing down the closing for any government -- generally any significant government related contract.
- Gary Siperstein:
- Okay, and then jus the last two. So, it was good to hear that Accutronics is on track 100 plus days in and keeping to your budget, and that you did what you had to do on the currency. And despite Brexit. So that's encouraging and it's very exciting, what's going on in the medical space and with the increased RFPs and the potential opportunities. And you sort of called out that now you are starting to look at cross selling. Can you give us any more color on that? Have we had any actual sales on the cross selling yet or is it still too early?
- Mike Popielec:
- Gary, it's too early. But let me give an example. There may be a multinational global OEM that had a plant that Accutronics may have served in the UK before. Now we're going and working our way up that company hierarchy to say hey we're a big supplier of yours in the UK. We've proven we're high quality, very competitive collaborative in terms of new product development. We trying to go up the food chain a little bit for other facilities for some of those global OEMs. And those take long time. The medical stuff particularly takes long time to do. But that’s a very active activity, but it will take several quarters before there is any meaningful revenue.
- Gary Siperstein:
- Okay and then last question. On the Sam, our earlier questioner has mentioned the -- I think it was north of $2 million win on the radios for special forces, that included Paris, and I don’t know if it was General Dynamics, or Raytheon or Lockheed, but -- maybe TELUS. I think it was three that it was split. Haven’t we done business with two out of three historically, or have we done business with all of them historically. So we have a shot at -- even if it’s late 2017 revenue, when the POs start coming in on that, we have a shot at supplying two out of three of the winners.
- Mike Popielec:
- Gary, without giving specific on what products we sell to what OEMs, we definitely serve all of them, and we hold very dear to our hearts that when we work with a particular customer that we will protect their intellectual property and proprietary information and so on and so forth. And try to work with them specifically and collaborate as they see -- they need to be successful uniquely with them. So not -- don’t what to really talk about any specific competitors, but we do do business with all three of them in various forms. But I just wanted to make the point that in each and every one of those cases, we sort of do that with an complete isolation to the others, lest we're viewed as not being protective of their intellectual property.
- Operator:
- Ladies and gentleman this concludes question and answer session. At this time, I'd like to turn the conference over to Mike Popielec for any additional or closing remarks.
- Mike Popielec:
- Thank you very much everybody, for joining us again for the second quarter 2016 earnings call. We look forward to continuing to share our quarterly progress on each quarter's conference call in the future. Have a great day, everybody.
- Operator:
- Ladies and gentleman, this concludes today's conference. We appreciate your participation.
Other Ultralife Corporation earnings call transcripts:
- Q1 (2024) ULBI earnings call transcript
- Q4 (2023) ULBI earnings call transcript
- Q3 (2023) ULBI earnings call transcript
- Q2 (2023) ULBI earnings call transcript
- Q1 (2023) ULBI earnings call transcript
- Q4 (2022) ULBI earnings call transcript
- Q3 (2022) ULBI earnings call transcript
- Q2 (2022) ULBI earnings call transcript
- Q1 (2022) ULBI earnings call transcript
- Q4 (2021) ULBI earnings call transcript