Ultralife Corporation
Q4 2013 Earnings Call Transcript

Published: 13 Feb 2014

[Operator:]

Please standby. We are about to begin. Good day everyone and welcome to this Ultralife Corporation Fourth Quarter 2013 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Jody Burfening. Please go ahead ma’am.

[Jody Burfening:]

Thank you April and good morning everyone. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the fourth 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 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 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 US 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 the management considers to be useful metrics that 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 this morning. Today, I will start by making some overall comments about our fourth quarter and total year 2013 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 will take the call back to provide a recap of our progress against our 2013 priorities and then talk about our expectation and the priorities we have for 2014. Lastly I will share with you our thoughts on our full year financial outlook for 2014 before opening it up for questions. Regarding the fourth quarter of 2013 we generated an operating profit of $0.2 million and revenues of $20.2 million which were roughly flat to the prior quarter. We continue to see revenue momentum in the battery and energy products business, however it was offset by lower revenue in the communication systems business still feeling the carryover facts of the 2013 budgeting challenges. This revenue mix negatively impacted gross margin which was 27.7% for the fourth quarter and when combined with roughly flat operating expenses led to a slight reduction in operating profit versus the prior quarter. In our battery and energy products business we completed an important testing milestone that triggered initial shipments for our new hot-swappable battery and intelligent power management system for the medical cart industry, developed with a new channel partner with great domain experience on an agreement now expanded to $6.7 million this product solution has potential to be a very exciting new revenue stream for us in the commercial space. Looking at the total year 2013 where as our battery and energy products business revenue was down almost 20% from the prior year. Throughout 2013 the quarterly revenue stabilized and that enabled us to fine-tune the B&E business model by getting our cost right to significantly improved profitability. Through a disciplined approach of adhering to our 30, 5, 5, 10 equals 10 business model the B&E team was able to improve gross margin by 40 basis points reduced our operating expenses by over 27%, decreased inventory by 32% despite the significantly lower volume while maintaining a steady stream of investment in new product development the sales force. For our communication systems business 2013 was a profitability challenged year as contract awards for a number of projects which require a substantial amount of upfront engineering and new product development expense continue to side right. First from the (inaudible) of the sequester then ultimately due to the budget driven government shutdown. That said, the team stayed focus on technology and new product development to create customer value, realizing 32% of its 2013 sales from products less than three years old and improving business unit gross margin by a 160 basis points. The communication systems team continues to reduce cost while focusing on new product development and market reach expansion, driven by the introduction of four new products in 2013, the comm system’s penny business pipeline continues to grow on dollar size, maturity and breadth of customers reach. Both operational business teams performed well in the year, where revenues were severely impacted by the continued uncertainty in economy and government defense spending and delivered a slight total year operating loss of $0.6 million usually consistent with our guidance and then EPS flat for prior year. In a few minutes, I will talk more about our 2014 priorities and outlook, but first I would like to ask Ultralife’s CFO, Phil Fain to take you through additional details of our fourth quarter 2013 financial results. Phil?

[Phil Fain:]

Thank you, Mike, and good morning, everyone. Earlier this morning we released our fourth quarter results for the period ended December 31, 2013. Consolidated revenues for the fourth quarter totaled $20.2 million, representing a $9.1 million or 31% decline from the $29.3 million for the fourth quarter of 2012. Revenues from our battery and energy products segment were $15.9 million, a decline of $3 million or 16% from last year. This decrease is primarily attributable to a large order for our M1 primary battery products shipped in the fourth 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 non-rechargeable batteries and charger systems. Fourth quarter sales were in line with our expectations and represent a 17% sequential growth over the $13.5 million reported at the third quarter. During the year, sales have fluctuated between $13.1 million and $15.9 million for an average of approximately $14.5 million representing a stable basis of sales to which we have right-sized our business model. Our battery sales continue to run approximately 60-40 between domestic and international and 53-47 between government defense and commercial. This is fairly consistent with 2012 levels. Sales classified as domestic include shipments to U.S. based client which in some cases served international projects. Communication systems sales of $4.3 million decreased by $6.1 million or 59% from the prior year period. This decrease is primarily attributable to shipments of 21 amplifiers and accessories for soldier modernization programs undertaken by two allied countries during the fourth quarter of 2012. In addition, similar to the trend experienced throughout 2013 several orders totaling almost $2 million originally expected to close in 2013 have been shifted into 2014, due to delays in obtaining final sign of approval from the commanding officers. The underlying programs are all active and we continue to expect to fulfill these orders. Our consolidated gross profit was $5.6 million compared to $9.5 million for the 2012 period, reflecting the lower sales for 2013. As a percentage of total revenues, consolidated gross margin was 27.7% versus 32.3% for last year’s fourth quarter. A primary driver of the 460 basis point decline is the overall mix of communication systems revenues to total revenues, which declined from 36% in the fourth quarter of 2012 to 21% in 2013. Gross margin for our battery and energy products business was 26.1%, a 19 basis point decline from the 27.0% reported last year. The year-over-year decline was due primarily to product mix in our delivered decisions to better balance production in inventory levels with demand, which contributed to the company’s overall inventory reductions of $1.8 million from the third quarter and $4.3 million or 14% from 2012 year-end. For our communication system segment, gross margin was 33.5% compared to 41.9% last year. The gross margin for the 2012 period was favorably impacted by a stronger mix of 21 amplifiers and the resulting absorption of the higher production volume for that period. Operating expenses totaled $5.4 million, a reduction of $1.7 million or 24% from the $7.1 million reported for the fourth quarter of 2012. This 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 and new products and continued reductions in G&A expense as a means to fund increases in future new product development and the sales force. As a percentage of revenue, operating expenses represented 26.6% compared to 24.3% for the year earlier period. The higher percentage for 2013 is driven by the 31% sales decline partially offset by the spending reduction actions. The company’s operating expenses are now at the lowest level since the second quarter of 2006. Operating profit was $0.2 million, representing an operating margin of 1.1% compared to $2.4 million for an operating margin of 8.0% for the fourth quarter of 2012. The 2013 results demonstrate the significant progress made in reducing the breakeven point and significant operational improvements in our battery and energy products business. Fourth quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.2 million versus $1.4 million for the year earlier period. This brings us to adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense of $1.4 million versus $3.7 million for the fourth quarter of 2012. Other expenses primarily comprised of foreign currency translation and interest expense netted to $22,000 versus $165,000 in 2012. Interest expense continues to be favorable due to the unused line terms of our new PNC Bank credit agreement and our tax provision was 104,000, reflecting income taxes for our profitable China operations and timing of deferred taxes. Our tax provision was $117,000 for the 2012 fourth quarter. Net income from continuing operations was $0.1 million or $0.01 per share compared to a net income of $2.1 million or $0.12 per share for the same period last year. The company’s liquidity remains solid, with cash on hand of $16.5 million no debt, working capital of $46.8 million and a current ratio of 4.9. The company’s cash position was the highest ever reported at the end of the fiscal year and equates to almost $0.95 per share. On comparison, the cash on hand at the end of the fourth quarter of 2012 was $10.1 million and the current ratio was 3.2. Our accounts receivable day sales outstanding metrics continue at very favorable levels and inventory decreased by 14% or $4.3 million from last year-end. Our 2013 balance sheet clearly demonstrates our continuing focus on reducing inventory levels through the lean process and building our cash position to fund internal growth and acquisition is top priority. In summary, the actions we have taken to lower our breakeven point, while preserving our strategic investments, building our cash position and reducing our inventories are demonstrated in our fourth quarter results. These 2013 actions provide further leverage to our business model to drive increased 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. Over the last few years, our priorities have been pretty straight forward, improving profitability, executing our growth game plan and leveraging our worldwide operations for global growth and competitiveness. As a result, the tremendous hard work of our teams when we look at where we are today, we see that Ultralife has a value proposition driven, peer group leading, gross margin rates that supports profitability, continuous new product development and sales force revenue growth initiatives, a validated 35 penny plus 10% operating margin business model lean implementation that guides day-to-day spending behaviors onto revenue level, a strong balance sheet and liquidity that ensures business sustainability during challenging economic cycles and provides upside opportunity for strategic acquisitions and finally, an aggressive new product development and focused expanded sales force that is diversifying the customer base and growing the opportunity pipeline. When these attributes are combined with the changes made in the leadership and sales teams, manufacturing footprint and portfolio, we enter a period of operational stability when all of our efforts come in place and our number one priority for 2014 returning to revenue growth. Therefore, throughout 2014, my prepared remarks will focus primarily on revenue growth initiatives. Whereas we have a clear appreciation for the economic and budget challenges facing our commercial and military defense customers, which in turn affects our prospects for growth, our goal is to get the most out of whatever revenue growth opportunities are available to us and maximizes sales conversion impact in terms of leveraged earnings growth. Regarding our revenue growth game plan execution, the focus continues to be on three core elements; expanding our market and sales reach, new product development and pursuing acquisitions. For communication systems, when we look at what's been done to expand our market and sales reach, over the last few years, we have increased multi-fold our touch points in the vast number of U.S. DoD entities and with the major primes serving those entities. We have also expanded our efforts internationally. In 2013, communication systems international sales represented 23% of their total revenue. As a reference point, in 2011, it represented 5%. We currently are pursuing active price in Latin and South America, North and Southeast Asia, Australia and the UK. Domestically communication systems continues to pursue opportunities across multiple military branches and Special Forces groups, as well as our U.S. (inaudible). Wins from the OEM primes in the fourth quarter and current activity are centered at integrated vehicle adaptors, amplifier upgrade programs and initial radio fieldings. We’re excited about the potential for larger add-on business in 2014. Activity level is clearly increasing, yet we remain cautious about the timing of actual contract awards. Relative to new price development, the nature of our communication systems business end user needs requires us to constantly invest in both the technological evolution of existing products and capabilities, as well as brand new products for new requirements. Two of the new products introduced last quarter, the MRC Universal Vehicle Adaptor and the A-320V2 amplifier are already getting traction. The MRC Universal Vehicle Adaptor or UVA is a small light weight cost effective method for installation of primary hand-held radios into vehicles of all sizes to maximize a hand-held ratio operational potential for end user. From the initial purchase of small double-digit quantities, we’re now currently working with customers who have purchased quantities of several hundreds of units. The less price for the UVA is approximately $3500 per unit. Regarding the A-320V2 amplifier, which is an evolutionary upgrade step of A320, A321 amplifier series providing the capability for soldier radio waveform and adaptive networking wideband waveforms as well as for legacy waveforms. We've already sold over 250 units and are presently in active discussions with several groups with potential purchase up to thousands of units. List price of A-320V3 amplifier is $5,700. Finally, as it relates to communication system business pipeline, after performing a year in reasonable in this clean up of new and/or vintage projects, the pipeline grew by almost 10% in the third quarter of 2013 and currently represents several $100 million of business opportunities. In a nutshell, our growth strategy from new product introduction in the communications systems business has been to leverage technology advancement and our strong existing position at 21 amplifiers space to continue to pursue opportunities with new customers on a global basis as well as to provide upgrade opportunities for our install base. At the same time, we are continuing to provide new innovative product solutions to create competitive advantage by combining these amplifiers with our legacy McDowell capabilities to address the needs for man-pack vehicle and base station applications. Lastly, it is our goal to broaden our amplifier range by moving up to larger wattage capabilities and to build growth platforms around those new frame sizes, like we've done very successfully around the 20 watt amplifier units. And looking at what we've done over last year’s in the battery and energy products business to expand our market and sales reach, while we have been operationally focused on adjusting our business model for the lower revenue streams as a result of the drawback of the U.S. troops in Iraq and Afghanistan, we have also redirected a large portion of our sales efforts towards the commercial international markets. In pursuing new commercial opportunities, we are targeting new revenue streams from niche applications where we can leverage the proven military grade or viability of our products and where there operational demands also require the highest level of performance or viability. Many of these types of opportunities involve lengthy development periods during which time we also create more stickiness with our key customers. As an example from our base in the government defense market we’re expanding our presence in the medical devices market with the new medical cart battery system. Under development for almost two years, the product was designed to serve both the new medical cart market as well as the retrofit cart market. We’ll be making another public debut of the battery system with our channel partner at the upcoming Healthcare Information and Management System Society show in Orlando February 23rd to 27th. Depending on the actions specified, our two battery and intelligent power management system has an average selling price of around $2,000 for low volume quantities. Based on current estimates of the ramp rate for already identified opportunities, in 2014 we are targeting to ship 2,000 of these systems. We have to make the total annual new medical cart market to be about 65,000 to 75,000 carts in North America and the retrofit market to be 3 to 4 times of that size. On another front of our strategy to diversify in the commercial markets, we have launched our new family ruggedized portable power solutions in both the safety and security and energy storage markets. A derivative of our energy storage MKM large format battery, we’re now shipping 1.2 kilowatt and 2.5 kilowatt portable power solution systems. We’ve shipped initial units to end-users and channel partners serving the tactical government, disaster relief, emergency response, military and other segments where [reliably robust] mission-critical and [silent power] is needed. Other key benefits of the units have higher quantity of operating cycles during the life of battery and smaller size in [Norway] as compared to similar lead acid battery capacity. Depending on size and options each carries an average selling price of approximately $7,500 and early market size estimates for a mature product are the tens of thousands units per year, representing another new potential future revenue stream for our battery and energy products business. As a quick rundown on some of the new product the B&E business has launched over the last three years for the multi-kilowatt module large format battery, we now have 23 different customers to which we’ve shipped 149 units including those used in our new portable power system by disaster response teams for which eight customers have purchased or are evaluating 15 units. Regarding a new high-capacity 5390, 2590 and CFX batteries and cells, we now have shipped over 1900 total units to 93 customers. And for our new conformed shaped battery, we have shipped 105 units to 26 different customers for evaluation. At the same time, we continue to take the next steps in new product development from many of our existing and new B&E products. During this U.S. military procurement slowdown, we have been actively improving our legacy battery capabilities and are also looking at new configurations that will used across NATO forces. Specifically, we have introduced and have already shipped some of the highest capacities presently possibly in legacy battery configurations to be used in foreign military training exercises. Correspondingly, we are planning to launch later this year newly upgraded rugged portable chargers for a range of radio battery types including two and six way chargers for the 2590 battery family as well as for OEM specific radios. Regarding the new Ultralife portable power system for which initial units have been well received in the field, we are now in the process of evaluating custom configurations for very specific market uses such as Disaster Recovery, FEMA, First Responder, Fire and Rescue, just to name a few. We are also looking at other applications to leverage the new battery integrated charger inverter system we have launched for the medical cart market to penetrate other markets with similar power carts. And lastly, battery chargeable or primary cells and batteries still remain a core competency for us and we are actively engaging customers with specialty applications for literally no other cell type work. This includes opportunities in metering, asset tracking, smoke detectors, surveillance and telematics. In the fourth quarter of 2013, revenue from new products that were less than or equal to three years old, represented over 49% of the total B&E revenue and for total year 47% of total B&E revenue. In each sequential quarter in 2013, we saw the dollar revenue from new products increase, again showing the slow but steady impact new product developments having on our revenue streams. Regarding the financial outlook for 2014, we expect mid single digit organic revenue growth despite continued constraints on government global spending. Based on this outlook for revenue growth and the improvements made for the business model in 2013, we expect to increase operating profit for the year and generate a mid single digit operating margin. In terms of communications systems revenue expectations for 2014, during the late part of last year and as for beginning of this year, we have clearly seen inquiry and project activity pickup driven largely we believe by pent-up demand as well as projects that were simply put on hold during last year’s budget certainty. We are doing our best to understand the funding sources and likelihood for each of these opportunities, yet predicting the timing and converting of the opportunities into sales revenue remains our biggest challenge. We faced a top comparable very early in year, however depending on the timing of projects currently underway, we conservatively expect communication systems to deliver total year revenue growth in the mid single digit range for 2014. We see the key drivers of communication systems growth in 2014 is being revenue from a new products launched in 2013 for specific customer to find requirements and maturing of several ongoing mid size projects with the potential for upside depending on what projects or combinations of projects hit. Given the speed of technological advancement of our products, the upgrade of existing deployed customer assets, our broad involvement across a wide range of special operations due to military branches and the current world events, we remain very optimistic about the long-term revenue growth prospects at communications systems. For battery and energy products, our pipeline of opportunities continues to deepen and mature and we are starting to see tangible traction in our new commercial products as well as in our international activities. We are excited about the new commercial revenue stream potential that the medical cart battery systems represent to layer on top of other new battery products revenue streams that are growing slowly but steadily. Through a combination of new products, new market segments and new customers, we are expecting total year B&E revenue growth in the mid single digit range. The case for B&E revenue growth in 2014 is based on achieving sales force productivity gains on existing revenue streams while layering on several revenue streams driven by both new products and market reach expansion. This includes the new higher capacity core rechargeable battery and charger products for the U.S. and global customers, broadening the sales reach by new primary batteries, the new medical cart battery system and the various portable and standby power solution streams. Operationally, 2013 was a solid turnaround year for the battery and energy products business by gross margin improvement, operating expense reduction and the balance sheet deleveraging via inventory reduction. We look forward to 2014 year to beat also returns to revenue growth. In closing, we were pleased in 2013 to achieve revenue stabilization in the battery and energy products business and to launch a new revenue stream in medical carts. We are also excited about the new product development traction in communications systems and the maturity of their growing opportunity funnel. With the proven company business model, strong balance sheet and both teams’ demonstrated ability to achieve favorable productivity gains and profitability in the base of constraint revenue, we very much look forward to the leverage growth opportunities in 2014. Operator, this concludes my prepared remarks and we’ll be happy to open up the call for questions.

[Operator:]

Thank you. (Operator Instructions) And we’ll hear from Matthew Paul. Please go ahead.

[Mathew Paul:]

Hi guys, good morning. Thanks for taking my question, and good job fine tuning your expense model. First question, I know you guys have been diligently working out there to find an accretive acquisition; I just wanted to ask if anything in the environmental have change for any color on your search?

[Mike Popielec:]

Thank you. This is Mike. I think we are still very active in the search process and there is the activity level, a lot of it building relationship with potential acquires, we have strong support from the Board, at this point it’s a key priority for me and entire senior executive team to book deals plus our strategic growth in some of our operational objectives for 2014. But we are not in a position right now to talk about any specifics of any potential deals, that’s very much on our screen.

[Mathew Paul:]

Next question I just want to see if you can honing on the communication system pipeline, I know you know, 10% growth quarter-over-quarter and I just wanted to ask about the overall size and the make-up, again provide a little color there?

[Mike Popielec:]

Yes. I mean there is a couple of different items of it. When we look at the amount of revenue achieved over the last three years in products that are pretty brand new, like one of the new metrics that we use for tracking our growth and new product development as traction. So you know that over the last couple of years that contributed about $10 million for our revenue stream. When we look at our current opportunity funnels for those specific products, it’s probably around 8 times of that amount. When we look at the overall opportunity funnel for cart systems as I said in my prepared remarks, it’s several hundred millions of dollars. Included in there are the $0.5 million projects and $2 million, $3 million as well as the large projects. so what we’re trying to do is take a disciplined approach to -- they have been intellectually honest with us about what’s really in that funnel, make sure that we take opportunities that we just don’t think closing a long period of time because not only it’s important for us to entertain our opportunity basket but we’re trying to make it where we spend our budget plans within some source. And so overall we look at the four traction from the product development and the overall size of that opportunity basked continues to increase.

[Mathew Paul:]

All right, thank you guys.

[Mike Popielec:]

Thank you, Matt.

[Operator:]

(Operator Instructions). It appears there are no further questions at this time.

[Mike Popielec:]

Okay. Well, thank you very much everybody for joining the call to review our fourth quarter earnings results. We look forward to meeting up with several of you over the next couple of weeks as we do, so one on one visits and to joining with you on our quarterly conference calls or future progress. Thank you for joining the call today.

[Operator:]

That does conclude today’s conference. Thank you all for your participation.