Ultralife Corporation
Q3 2013 Earnings Call Transcript
Published:
- Operator:
- Please standby. We are about to begin. Good day. And welcome to the Ultralife Corporation Third Quarter 2013 Earnings 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, Operator. Good morning, everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for Ultralife Corporation earnings conference call for the third quarter of fiscal 2013. 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 at 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 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 metrics that differ from net 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 this morning. Today, I will start by making some overall comments about our third quarter 2013 operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results for the quarter. After Phil is finished, I'll provide a progress report on our top 2013 priorities and give some final thoughts on the full year financial outlook for 2013 before opening it up for questions. We were pleased to generate an operating profit of $0.7 million in third quarter of 2013 with strong P&L execution by the teams and revenue up almost 18% from the loss producing second quarter. Total company gross margin return to our business model target of 30% and with operating expenses down 14% from the second quarter, representing 26.9% of sales, we are able to achieve operating margin rate of 3.2%. Lastly, the business unit reduced inventory by $3.2 million or 10% and the company ended Q3 with the cash balance of $10.8 million. Regarding, Com Systems’ revenue, we were able to convert the opportunities originally expected in Q2 into Q3 sales as referred to you on our last call and reported revenue of $6.9 million. For battery and energy products, revenue was $13.5 million fair consistent to the $13 million to $14 million per quarter revenue that was reported over the last two prior quarters. This revenue stabilization has enabled us to tune our B&E business model to achieve profitability in third quarter. In summary, we are pleased by the continued signs of battery and energy products revenue stabilization and both teams ability to achieve favorable productivity gains and profitability in the face of lower revenue. In a few minutes, I’ll talk more about our third quarter performance and outlook, but first, I’d like ask Ultralife CFO, Phil Fain to take you through additional details of our third quarter of 2013 financial results. Phil?
- Phil Fain:
- Thank you, Mike, and good morning, everyone. Earlier this morning we released our third quarter results for the period ended September 29, 2013. For purposes of reviewing our third quarter financial results, I will discuss operating results from continuing operations for 2013, compared to 2012. Consolidated revenues for the third quarter totaled $20.4 million, representing a $5.8 million or 22% decline from the $26.2 million for the third quarter of 2012. Revenues from our battery and energy products segment were $13.5 million, a decline of $3.1 million or 19% from last year. This decrease is primarily attributable to a large order for M1 primary battery products shipped in the third quarter of 2012 to service an allied country’s Department of Defense. The decrease also reflects the continued slowdown in the U.S. government and defense order rate for chargeable and non-chargeable batteries in charger systems. Our battery sale continued to run 60/40 between domestic and international in 2013, with 46% our third quarter sales to commercial customers. These rates are fairly consistent with 2012 Third quarter revenues was also fairly consistent with the revenues reported for the first two quarters and as Mike had mentioned this revenue stabilization has enabled us to fine tune our battery and energy products business model to achieve profitability for the third quarter. Communication systems sales of $6.9 million decreased by $2.7 million, or 28% from the prior year. The decrease is attributable to shipment of SATCOM units in the amount of $3.4 million to a large prime which services the U.S. Department of Defense during the third quarter of 2012. Excluding the impact of SATCOM sales, communication systems revenue was up 11%. Also sales for the period were favorably impacted by approximately $3 million as we fulfilled several of the amplifier orders, which we told you last quarter had been delayed. As a result, consolidated revenue increased $3.1 million, or 18% over the second quarter. Our consolidated gross profit was $6.1 million compared to $8.2 million for the 2012 period, reflecting the lower sales for 2013. As a percentage of total revenues, consolidated gross margin was 30.1% versus 31.4% for last year's third quarter. Sequentially, gross margin improved by 390 basis points over the 26.2% reported for the second quarter. Gross margin for our battery and energy product segment was 26.7%, a 200 basis point decline from the 28.7% reported last year. The decline was due to lower overhead absorption in our Newark facility with the volume declines, the build of new product launch quantities in the previous year and our deliberate decisions to better balance production in inventory levels with demand, which contributed to the company's inventory reductions of over $3 million from the second quarter and $2.5 million from 2012 year end. The business continued to benefit from improvements in overall productivity, which resulted in the elimination of virtually all labor and material manufacturing variances from the year-earlier period. For our communication systems segment, gross margin was 36.9% compared to 36.1% last year, an improvement of 80 basis points. This improvement resulted from a stronger product mix in 2013 and continued productivity improvements. Operating expenses totaled $5.5 million, a reduction of almost $1 million or 15% from the $6.5 million reported for the third quarter of 2012. This also reflects $0.9 million, or 14% sequential reduction from our second quarter. The reduction highlights the continued actions taken in 2013 to minimize discretionary spending, not directly related to revenue generation. This includes more focused R&D spending on new products and continued reductions in G&A expense is a means to fund increases in future new product development in the sales force. As a percentage of revenue, operating expenses represented 26.9% compared to 24.7% for the year-earlier period. The higher percentage for 2013 is driven by the 22% sales decline, partially offset by the spending reduction actions. Operating profit was $0.7 million, representing an operating origin of 3.2% compared to $1.8 million for an operating margin of 6.7% for the third quarter of 2012. The 2013 results demonstrate the significant process made in reducing the breakeven point. On a sequential basis, operating profit improved $2.5 million on a sales increase of $3.1 million over the second quarter. The sequential improvement in profitability is split almost evenly between the favorable impact of increased sales, higher gross margins and reduced operating expenses. Third quarter non-cash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.1 million versus $1.3 million for the year earlier period. This brings us to adjusted EBITDA defined as EBITDA, including non-cash stock-based compensation expense of $1.8 million versus $3.0 million for the third quarter of 2012. Other expenses primarily comprised of foreign currency translation and interest expense, netted to $39,000 versus $100,000 in 2012. Interest expense continues to be favorable as there were no draws made upon our revolver at any point during the quarter and the revolver balance remains at zero. And our tax provision was a $16,000 benefit, reflecting the official designation of 100% owned China subsidiary as a national high technology company, resulting in more favorable local tax status. Our tax provision was $175,000 for the 2012 third quarter. Net income from continuing operations was $0.6 million or $0.04 per share, compared to a net income of $1.5 million or $0.09 per share for the same period last year. The company's liquidity remains solid, with cash on hand of $10.8 million, no debt, working capital of $45.1 million and a current ratio of 5.1. By comparison, the net cash on hand at the end of the third quarter of 2012 was $5.4 million and the current ratio was 3.1. Our accounts receivable day sales outstanding metrics continued at very favorable levels and inventory decreased by 10% or $3.2 million from the second quarter, an 8% or $2.5 million from year end. I can assure you that our focus on reducing inventory levels through the lean process and building our cash position to fund internal growth and acquisitions continues to be a top priority. In summary, the actions we've taken to improve our gross margins lower our breakeven point, while preserving our strategic investments and reduce our inventory, are demonstrated in our third-quarter results. The further reactions underway and planned will help ensure greater leverage to our business model and profitability, when the results of our efforts to grow the business, both organic and through acquisitions are realized. I will now turn it back to Mike.
- Mike Popielec:
- Thanks, Phil. As a reminder, our top priorities remain, number one, improving profitability and two, executing our growth game plan, each while leveraging our worldwide operations for global growth and competitiveness. Our day-to-day operating cadence is guided by the 30, 5,5,10 equals 10% operating margin business model we established in 2011. In addition to providing a framework for achieving profitability improvement by allocating costs within the (inaudible) gross profit, this model also enables us to efficiently fund new product development and sales force expansion activities. It would be easy during these difficult times to skimp our new product development for the sales force. Yet, world-class new products and sales teams are developed over years not quarters. And we believe that putting either of these activities on hold could have a serious negative impact on future results. Quite simply to achieve sustainable revenue growth, we need a constant pipeline of new products and continuously improving sales force productivity. Therefore, we constantly reengage our 30, 5,5,10 equals 10 business model against actual revenue, so we don't overspend. Yet continuously and prudently fund our growth initiatives. Taking a quick look at how we're doing, regarding the overall company’s 30% gross margin component of our business model, which we have now achieved in four of the last five quarters. We still have room for meaningful margin improvement as we gradually increased throughput in our B&E facilities. For the 5% of sales new product development component, we are currently running about 6.5% of sales and for the 5% selling expense component it's about 9% of sales, reflecting our delivered efforts to return to topline revenue growth as soon as possible despite the current economy. And lastly, our G&A expense to sales is currently around 11% versus our 10% target and this is the area we continue -- we continue to aggressively cost reduce. All-in-all, we are well positioned to continue to improve both the operating profit and margin from productivity gains, topline revenue growth and further operating leverage. Regarding our revenue growth, game plan execution, the focus remains on three core elements. Expanding our market and sales reach, new product development and pursuing acquisitions. The Communications Systems, which has historically been a very U.S. centric business, the sales development teams are engaged in international product placement and capture activities in various countries throughout Latin and South America, Europe and the Asia Pacific region. Year-to-date, Communications Systems international sales represents 23% of their total revenue, which prior to 2012 was typically in the single digits. Domestically, Communications Systems continues to make progress with the U.S. Special Operations headquarters command as well as several component commands in their many vehicle programs. Of note, the U.S. Army Special Forces Groups have upgraded their light All-Terrain Vehicles, the U.S. Navy Special Warfare continues to build the A-320 amplifier and associated accessories and the U.S. Air Force Special Operations Command Units have requested new products to enhance their current mission equipment. While we continue to sell existing products, our Special Forces customers base frequently requires us to evolve certain technologies to maintain compatibility with the most modern radio waveforms and this leads to in many cases a new product. For example, we have recently introduced two additional new products, the A-320V2-A amplifier and the MRC Universal Vehicle Adapter. These new products build on prototypes we’ve been discussing over the last several quarters such as the new Lightweight Portable Amplification System or LPAS, the A-320 Handheld Vehicle Adapter or HVA, our A-301-150 satellite radio combiner and our Vehicle Integrated Power Enhanced Rifleman or VIPER system. The A-320V2-A amplifier is a combination of previous capabilities within the A-320 amplifier series, which offer support to the soldier radio waveform and adaptive networking wideband waveform as well as legacy waveforms. The MRC Universal Vehicle Adapter is a small lightweight cost effective method for installation of primary handheld radios into vehicles of all sizes to maximize the handheld radio operational potential. We leveraged the elements of the A-320 HPA and addressed battery charging monitoring via battery to charge the communications in support of unique customer requirements. The [leasing] capability addressing size, weight, power and costs have been substantial and have provided significant operational improvements for our customers. The MRC UBA is currently planned for installation on multiple vehicle programs with some first models orders received, additional quantities anticipated within the quarter and program deliveries late in the first half of 2014. Average selling prices of A-320V2-A amplifier and the MRC Universal Vehicle Adapter are $5,700 and $3,500 respectively. Updating revenue progress for the LPAS systems, which utilized our very successful A-320 amplifier and integrated reaching chargeable power supply, we have more than doubled the quantity of units build since last quarter’s report with a total to date now of 392 units into Special Operations Forces and international customers. Test and evaluation continues by other potential customers with additional sales anticipated within the next six months. As a running update, Communications Systems revenue just from new products since their introduction over last 24 months is now over $7 million. We continue to add to the pipeline during the third quarter such that the current pipeline of new opportunities is being pursued for these same new products is now approximately four times that amount. We expect that if these products are tested and evaluated within our base customer groups that this pipeline will continue to grow. Lastly, with the lumpy nature of the Communications Systems revenues stream and the ongoing government funding challenges due to the sequester and other recent developments, predicting which programs will happen and when is getting much more difficult and hence it’s creating challenges to internal new product development funding selections. However, as we have said before, given the strong influence, these new products can have in achieving future organic revenue growth for Communications Systems. We will make tough calls and continue to prudently invest in new product developments. As the Communications Systems business is a project, program driven our growth strategy is focused on broadening the number of opportunities on a stream by widening our customer aperture and continuing to advance the product technology to meet specific customer needs. A few years ago, the Com Systems’ total business pipeline for both new and existing products could be referred to as being in tens of millions of dollars. Today, as a result of the strength in sales team, widen customer aperture ad numerous new products, its in hundreds of millions of dollars. Sequentially, each of the last two quarters, the total opportunity pipeline grew by over 20% highlighting a demand for our communication system products. As existing pending opportunity is continuing to mature and a new opportunity pipeline continues to grow, we are looking forward to more robust and predictable revenue growth projections in the coming years. In the battery and energy products business, the revenue makeup today is a compilation of many separate revenue streams. Over the last few years, some fairly large revenue streams went away with the drawback of the U.S. troop from Iraq and Afghanistan, the end of life of automotive telematics contract and the wetting out of some unprofitable contracts in our 9-Volt business. In total, these three events represent approximately a third of our total volume from just a few years ago. To counteract the impact of this revenue loss, we had aggressively restructured and leaned out the business to protect the P&L, the balance sheet and grow margin. This also created the funding to our suddenly developed numerous new products and retook our sales force to enable us to pursue several new sustainable revenue streams. In terms of targeted market and sales reach expansion for the battery and energy products business, one of our objectives has been to develop sustainable revenue streams in the market segments outside of our core U.S. government defense business and to do that by leveraging the proven military grade reliability of our batteries and chargers to grow our business in commercial markets, where given the mission critical demand they serve, also require the highest level of performance and liability. Medical devices is one of those markets. Since the beginning of 2013, our new product engineering team has been developing a new hot-swappable battery and intelligent power management system for the medical cart industry. This battery and an intelligent power management system is a designed to serve both the new medical cart market, as well as the retrofit car market. Unlike traditional medical cart power solutions, ours is unique in several ways. Relative to a led acid solutions, the lithium battery solution is light in weight and small in size, has greater cycle life and is capable of incorporating smart technology for obtaining battery charging and operating care to risk information, versus other lithium solutions, ours is one or two battery hot swappable with unchanged-cart charging capability when AC connected and its small enough for cars that were originally designed for onboard power and has both audible and visual indicators when batteries are running low. In addition to the facility ISO-13485 Certification received in the second quarter. I am pleased to state that during the third quarter we completed the battery UL testing and is now available for shipment. Our new intelligent power management system connects to the battery, connects to an A/C input source when available and connects to the medical device and computers. This power management system is currently going through IC testing. We are anticipating this test seem to be complete in the early part of December 2013. Upon completion of the IC testing, we plan shipping out 200 of these initial systems to our anchor customer and another leading medical cart company. We expect this initial quantity to be valued at approximately $300,000. Depending on the product options specified, our two battery systems and intelligent power management system has an ASP of around $200,000 for low volume quantities. Based on our initial opportunities already in progress, for 2014 where we are conservatively expecting over 2,000 of these systems to be sold. We estimate the annual new medical cart market to be about 65,000 to 75,000 carts North America and the retrofit market to be three to four times that size. As we execute a targeted go-to market plan, working closing with our large customers to work through any unexpected glitches and ensure full customer satisfaction, we believe that the potential is there for double-digit unit growth rates over the next few years. In an other focus effort to expand sales and marketing reach for battery and energy products business, we are about one-quarter in with our new VP of Global primary sales, who has been taped to drive global market penetration of the primary cells that we manufacturing in our own plant in both the U.S. and China. While still in the very early stages, we are expecting to capitalize on emerging opportunities for new medically sealed small cylindrical cells for the 10-year sealed smoke alarms and portable device memory backup, thin cells for RFID tag, (inaudible) and smart cards. New thionyl chloride and magnesium dioxide serves the smart utility metering and security censors, some new telematics and 9-volt private labeling opportunities with some new customers. We look forward to growing our primary battery revenues on a global scale. Our leverage in a competitive advantage gains from over 20 years as a major player in the fire security market and a safety performance quality and brand recognition of our products. On a new product development front for battery and energy products business, the team has recently developed a new family of ruggedized, portable power solutions and I’m pleased to announce we are now shipping 1.2 kilowatt and 2.5 kilowatt systems. These systems are based on a successful multi-kilowatt module MKM large format battery, we introduced last year and allow us to further diversify our customer base. As the name suggest, the portable power system provides power for customers should remain reliable AC or DC power in a ruggedized case. Early customers are those in demanding roles within tactical government, disaster relief, emergency response, military and other segment where mission-critical and silent power is needed. With several potential input to charge the battery such as 120 volt AC or 12 or 24-volt DC from a vehicle or inputs from solar panels or AC power from a generator and numerous common output types, the device can charge a variety of devices like notebooks, portable lighting, phones, radios, portable medical devices et cetera or function as uninterruptible power supply. The long-lasting high-capacity battery will provide over 30 hours for laptop and over 60 hours for a 101-hour equivalent LED light quietly and with zero emissions. We have several small initial purchasers in hand from early adopters and expect to ship approximately 25 units in the fourth quarter. Feedback from customers who had bought units already, is that they like to ruggedized package to take a beating and keep working reliably during critical emergency situations. The higher quantity of operating cycles available during the life of the battery as well as the size and weight benefits as compared to similar lead acid battery capacity, the multitude of different input and output capabilities, its ease-of-use and that it could be setup in minutes. Depending on the size and options, each carries an ASP of approximately $7,500. From a revenue stream perspective, our customers are telling us the available market is estimate in tens of thousands units per year and as such, we are excited about the revenue growth potential from these new product. As a quick update on some of the more noteworthy new product, the batter and energy product business launch over last two years through the third quarter of 2013. For the multi-kilowatt module large format battery, we now have 21 different customers to which we have shipped 112 units, including those used in our new portable power system by disaster response teams with portable AC and DC power for which seven customers have purchased our battery weighting 14 units. Regarding our new high-capacity 5390, 2590 and CFX batteries and cells, we have now shipped over 1800 total units to over 90 customers and for our new confirmed [street] battery, we have shipped over 100 units to 25 different customers for evaluation. In the third quarter of 2013, revenue from new products represented over 55% of the total B&E revenue. And from Q2 to Q3 2013, once again the revenue stream from new products that were less than or equal to three years old, grew approximately 20%. Demonstrating the slow but steady aggregate aspect that the new product develop can have in our growth equation going forward. Regarding the financial outlook for 2013, although the company’s pending business pipelines continue to grow, the ongoing U.S. government budget challenges have modeled our predictability of converting communication systems opportunities into sales in the timeframe previously forecasted. Primarily for this reason, we now expect an overall year-over-year revenue decline could be approximately 20% with communication systems revenues down in a comparable range for the year versus our prior expectation. Given the potential for reduced revenue, we now expect to report operating result in a range of breakeven to a modest operating loss for the year. Looking closely at communications revenue a little closer, since they represent the reason for the guidance change since our prior outlook. Our previous guidance was based on a growing pending business pipeline to overcome the nonrecurring stock comp comparable and show year-over-year growth. However, during the government shutdown in the beginning of our fourth quarter, communication system did see a slowdown in receipt of purchase orders. Even in our quoting activity and customer’s interest in that waiver and we continue to see a strong interest in the new products at the program level. Since we know some shut down related delays, an agency equipment inspections and purchase request and giving the angel in ascertaining the budget, it was prudent at this time to reduce our year end communication system forecast for 2013. As our communication system business opportunity pipeline continues to grow, driven by U.S. special operations addressing the ongoing global warrantor and technology advancement in order to meet present and future and user needs. We remain confident about our long-term revenue growth prospects. For battery and energy product, in Q3, we once again pleased to see relative quarter-to-quarter revenue consistency and are expecting similar revenue levels over the next few quarters. We are working to strengthen existing individual revenue streams, while continue to add new ones in an effort to reimburse a significant recent B&E revenue decline and to start us at a path to a most sustainable growth trajectory. The new medical card battery systems and portable power solutions represent exciting new commercial revenue streams to layer on top of other new battery products of revenue streams that is slowly but steadily gaining traction. Through a combination of new products new markets segments and new customers, we are targeting a return to revenue growth within the next year. In closing, we were pleased to return to total company profitability in third quarter despite the difficult market conditions. The operating discipline that we have to establish is continuing to derive gross margin improvements. Keep operating expenses low and allow us to maintain a debt free solid company cash position. It’s also enabling us to form a new product development and sales force initiative that are gaining traction as a word toward restoring revenue growth. And with several new products and an emerging global market diversification, a strong sales team and leadership and a business model spring loaded to operating leverage, we are confident to the actions we are taking will continue to create meaningful shareholder value. Operator, this concludes my prepared remarks and we would be happy to open up the call for questions.
- Operator:
- (Operator Instructions) And will take our first question from Gary Siperstein with Eliot Rose Asset Management.
- Gary Siperstein:
- Hey, guys, good morning.
- Mike Popielec:
- Good morning, Gary.
- Phil Fain:
- Good morning, Gary.
- Gary Siperstein:
- Mike, with year-over-year forecast, so I guess through nine months, we’re showing a loss on a continuing basis of $0.07, so roughly $0.04 to $0.07 and profitability is what you are looking for in the fourth quarter to get to that breakeven?
- Mike Popielec:
- Gary, just I would say that that certainly is within the range.
- Gary Siperstein:
- Okay. And so, thank you for that. And I think you gave unless I missed it, in Q3 you said EBITDA was $1.8 million, do you have the nine-month figure?
- Mike Popielec:
- Yes. The nine-month figure is $2.5 million four quarters trailing is $5.0 million.
- Gary Siperstein:
- $5.0 four quarters, okay. And is there any color, I know it’s early in the M&A process? Any color you can give us on some of the things you’ve been looking at and have you gotten closed to anything or why have you past on sometimes?
- Mike Popielec:
- Yeah. Gary, this is Mike. We’ve been very active looking at different opportunities. We have some internal resources was external resourcing versus helping us with that activity. We have a very rigorous process to make sure we get it right in terms of the company, not only we go initially talk to but even ultimately decide we want to try to acquire. So that process is ongoing, nothing as eminent as we speak. But there’s a lot of activity in the second that we have something more definite that we’ll be sure to share with you.
- Gary Siperstein:
- Superb. Okay. And just congratulations on managing the company so well on is reduced levels to maintain profitability and positive cash flow and to grow cash year-over-year in the phase of those declining revenues is really remarkable. Thanks really for your hard work.
- Mike Popielec:
- Thank you, Gary.
- Operator:
- We may have no further questions at this time. I’d like to turn it over to Mike Popielec, for any additional or closing remarks.
- Mike Popielec:
- All right. Thank you. Well, thank you everybody once again for joining us for the third quarter 2013 earnings call. We’re going to be out in the marketplace gain over the next couple weeks or so, so I look forward to meeting up several you in person and of course, look forward to sharing with you in a future our quarterly performance on each call in the future. Thank you very much for participating today.
- Operator:
- This concludes today’s conference. We thank you for 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