Ultralife Corporation
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2014

[Operator:]

Good day, and welcome to this Ultralife Corporation Second Quarter 2014 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening of LHA. Please go ahead, ma’am.

[Jody Burfening:]

Thank you, Matt and good morning everyone. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the second quarter of fiscal 2014. With us on today’s call are Mike Popielec, Ultralife’s President and CEO; and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning and if anyone has not yet received a copy, I invite you to visit the company’s Web site at 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 contains 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 our authorized 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 are considered 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.

[Michael D. 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 second quarter 2014 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 provide an update on the progress against our 2014 revenue initiatives and then talk about our full year expectations and financial outlook for 2014 before opening it up for questions. For the second quarter of 2014, our communication systems business revenue grew year-over-year by 16%. In our battery and energy product commercial business grew by 19% both driven by new product development sales. However, these positive revenue gains were more than offset by a 17% year-over-year revenue decline in the battery and energy products government and defense business leading to a total company revenue decrease of 12%. Both business teams performed solidly on the operational elements within their control. We also continue to tightly control costs and made some adjustments to right size our staffing through reflect weaker demand from our government and defense customers, particularly in the area of U.S. tactical communications and accessories, while we continue to fund vital new product development. As a result, operating expenses were reduced 13% year-over-year and when combined with a 150 basis points gross margin increase narrow their prior year operating loss by over 29% to a loss of $1.3 million in Q2 2014. In a few minutes I’ll talk more about our 2014 revenue initiatives and outlook. At first I’d like to ask Ultralife CFO Philip Fain a take you through additional details of the second quarter 2014 financial results. Phil?

[Philip A. Fain:]

Thank you, Mike and good morning, everyone. Earlier this morning, we released our second quarter results for the period ended June 29, 2014. Consolidated revenues for the second quarter totaled $15.2 million, representing a $2.1 million or 12% decline from the $17.3 million for the second quarter of 2013. Revenues for our battery and energy products segment were $12.2 million, a decrease of $2.5 million or 17% from last year. The decrease is fully attributable to a big drop governments and defense sales, which overshadow gains in commercial sales. Later increase 19% over the second quarter of 2013, primarily driven by shipments of our new Medical Cart power systems and new products specifically designed for medical devices. Sales to government and defense customers declined 53% from the second quarter of 2013, the mix of our battery sales for the second quarter of 2014 was 72%, 28% commercial to government and defense versus 50/50 for the second quarter of 2013. As a further point of reference, the split for the 2013 full-year was 47% commercial and 53% government and defense. The domestic to international split for battery sales was 49% to 51% for the second quarter of 2014 versus 61

[Michael D. Popielec:]

Thanks Phil. Throughout the year 2014 we’ve continued to create new products in value proposition that resulting gross margin rates capable of supporting profitability improvement while also funding continuous new product development and diversification initiatives. The expansion of our new product basket and the diversification of served market give us the best sort of controlling our own destiny in the base of decreased government depend spending. I controlling operating expense spending levels is the function of revenue. Our established 30, 55, 10 equals 10 lean business model also have enabled us to ensure business flexibility by maintaining strong liquidity and a strong balance sheet, regarding our revenue growth initiatives, the focus remains on three core elements, expanding our market sales reach, developing new products and acquiring complementary businesses. In Q2 2014, communication systems continued to expand our market customer reach. Our current direct in OEM customer base and C4 market have shown an increasing interest in expansion of our products capabilities within this Special Operations Forces. In addition, to our core ground soldier modernization products and activities, we’re also getting more engage in larger communication networks and Intelligence, Surveillance & Reconnaissance application. Over the last few years, we’ve been developing a robust pipeline of large program activities, such that when is contracted we can make a significant contribution to our revenue in our operating profit. As reaching opportunity requires a length of new product development and testing cycle, we try to allocate our limited resource to projects with our strongest customer relationships and the best opportunities for near-term large revenue captures. In light of the slow government spending we’ve learned how difficult it is to predict, which projects will ultimately make it all the way through contracting enhance make an effort to remain an opportunistically diverse get number of large projects on our screen in any given time. On the global front, communications systems products are currently undergoing final testing and evaluation of three separate NATO countries and we continued to grow our distributor base, because a wider global net. We currently operating 44 countries with 30 plus distributors in each case supporting global special Operations Forces and or our key OEM prime customers. And lastly, our communication systems business development activity has focused on strategic partnerships that will provide our customer base with a more complete C4I solution set from one supplier. Our intent is to provide customers with integrated communication systems, which leveraged the latest technological advancements that improved our user capabilities while mitigating the need for excessive non-recurring engineering expense in the present budget environment. In terms of communication systems new products, in Q2, we shipped $1.9 million of our latest new product to MRC Universal Vehicle Adaptor through a major prime to Cellcom. The UVA is a small light weight cost effective method for installation of primary handheld radios into vehicles of all sizes. It carries a list price of approximately $3500 per unit and we continue to actively pursue other new opportunities for this product. In our core amplifier product line, in Q2, we produced the first sales of the latest in a long line of our successful 21 amplifiers to A-320 B3, in our latest 50 and 75-watt amplifier, the A-7500 with small orders booking for each. These products with approximate list prices of $6400 and $8300 per unit respectively, represents latest amplifier technologies supporting currently implemented radio wave forms. And finally, we continue to support the U.S. Army’s NIE 14.2, network integration of valuation of forklifts, with our Rifleman Radio application known as a VIPER system. Our VIPER system integrates a radio amplifier and accessories with a vehicle adaptor enabling the operator to use the same radio in the vehicle or during this operation. At list price, the VIPER is approximately $13,000 per unit. We’re also currently working under with a major U.S. Army prime contractor with our VIPER solution to support NIE 15.1, scheduled for later this year. As you my recall from the previous call, we’re targeted with one of the four prime contractors who were recipients of 10 year $988 million U.S. Army IDIQ Award for soldier radio wave form vehicle appliqué systems. Under this contract, ultimately several thousands of VIPER units could potentially be purchased. Consistent with the last several quarters, communication systems revenue continues to be driven by new products to less than or equal to three years old. In Q2, new products revenue represent approximately 66% of total revenue, demonstrating the clear importance of new product developments during this present period of difficult government defense budgets. To expand our market and sales region, our Battery & Energy Products business, the primary approach has been a diversified outside of our core U.S. government defense market and as such we have redirected a large portion of our sales efforts towards the commercial and international markets. U.S. distribution of our recently launched medical cart battery system continues to gain attraction and our channel partner has contract with an additional Medical Cart manufacturer building on earlier successes. We will continue to expand the total available market for this innovative solution and/or reaching completion of certification of a new version to release later this month covering the range of international applications from 200 to 240 volts. As a reference point total B&E international revenues were up 7% in Q2 2014, and represented 51% of total B&E sales. Investment our Multi Kilowatt Module or MKM as the large format battery building block for a larger energy storage solution is starting to pay dividends. In July, we receive one of our largest quantity MKM orders to date valued at approximately $1 million for several 100 MKM units to support silent watch on border security. And with the MKM at the heart of the sister product the new portable power system, we’re currently working on a number of customer projects that would incorporate our affordable power systems solution, tied to clean, solar renewable energy and expected to ship over the next several quarters. In each case, the customers are telling us that they choose Ultralife’s lithium battery solution over lead acid batteries due to advantages of size, weight and cycle life. We continue to be pleased with the diversification of our B&E revenue stream into commercial markets. In Q2, commercial revenue was up 19% versus a prior year, deal by the new product introductions into the medical devices market. The battery and energy products business will continue to be focused on growing our commercial business, while refreshing uplifting our G&D portfolio to be positioned with the latest technologies when more favorable of G&D market conditions return. Looking at a quantitative update on some of the new products, the battery and energy products business have launched over the last three years for the multi kilowatt MKM larger format battery, we now have 26 different customers, so which we’ve shipped the 159 units and clean those use in our new portable power system by disaster response team for which a 11 customers have purchased or evaluating 20 units. And the recent several 100 MKM unit we’re mentioned earlier that we’ll ship over the next few quarters. Regarding a new high capacity 5390 and 2590 series Land Warrior batteries and our advanced lithium hybrid batteries and cells we have now shipped over 7,750 units to a 126 customers including a recent 2,800 piece order for our new CFX d-cells and separately we continue to receive small, but steady delivery orders under our five-year IDIQ contract for legacy 5390 batteries as consumed battery inventoris are being replenished after a long period of overstock after the Iraq and Afghanistan war drawdowns. Regarding other new product development we’re starting to get traction our lithium power 12 volt batteries are recently introduced as a drop in fit, form and function direct replacement for lead acid batteries, that are flexible enough to be charged on existing net asset charging infrastructure while offering a longer life and light weight. Two new models were added to lithium power range in July with 12 volt 50 amp power, and 12 volt 100 amp power capabilities, target at mobility, uninterrupted power supply, and renewal of the energy needs. And lastly, our high capacity of CFx blended cathode cells are providing interesting alternatives to our commercial customers with double the energy density of lithium sulfur dioxide and a 40% increase over our legacy lithium manganese dioxide. Our military CFx batteries have been testified U.S Army’s Communication-Electronics Research Development Engineering center, or CERDE, establishing a new standard and 90 series of batteries with a 57-90. And in July, we received the (indiscernible) for supply side information from the DOA. In the second quarter of 2014 revenue from new products that were less than or equal of three years old represented over 50% of the total revenue. It was up 16% sequentially from the prior quarter, once again showing the slow and steady impact new product development is having in growing our revenue streams. Regarding financial outlook for 2014, despite the company’s commercial sales momentum, given the reductions in global government and defense spending to date that are likely to persist. We now expect revenue for the year to be approximately 10% low last year. As a result of the revised outlook for revenue, we now expect despite operating loss for the year in the range of 2% to 3% of sales. With regard to communication system revenue expectations for 2014, after a slow start to the year, we were pleased to see double-digit year-over-year revenue growth in the second quarter, driven by the $1.9 million contract for our Universal Vehicle Adaptor new product. We’re continuing to pursue several other similar sized contracts and a few much larger opportunities. However, the realities of the government defense budget and lessons learned over last few quarters about the current slow pace of conversions from opportunistic to contracts would suggest that some of these projects are likely to be delayed into 2015. Therefore in the absence of some catalyst increasing the government budget or contracting speed, we are forecasting revenue for communication systems in 2014 to be done approximately a third year-over-year. Looking longer-term, our communication systems business is more active than it has ever been in a wide-range of special operation groups and military branch driven programs and global opportunities. The value propositions of our new products continue to resonate with our customer as indicated by our strong margins and our engineering and sales team are very adapt that are helping customers to find their needs and developing products using our latest technologies to serve them. As such, we remained very optimistic about the long-term revenue growth prospects at communication systems. For battery and energy products, we encouraged by the double-digit growth rate year-over-year in our commercial business, which has been driven by the broad-based interest and tangible traction of our new products, including but not limited too, our new higher capacity core rechargeable battery and charger products, our new primary batteries, the new Medical Cart batteries system and the various portable and standby power solutions. This new product driven diversification into commercial markets is crucial for us, to offset the continued government defense revenue decline. We’re making progress against the goal of returning to total year B&E sales growth and now expect into 2014, our B&E revenues will be within 2% to 3% our prior year’s revenue. In closing, we are pleased to deliver 16% revenue growth in Q2 in communications systems, yet remain cautious about the timing and closing transaction throughout the remainder of the year. In the meantime, communication systems is well positioned with advanced technology products in several large projects that continued to incubate. And we continued to actively fund the new products required to add to this pipeline such that we can make a great impacts for P&L from capturing more large projects as the market conditions improve. Our Battery& Energy products, our new product development base diversification into the commercial market underway our the last three plus years is now delivering a clear majority & mix of the total B&E revenue. And has grown by double-digits for last two quarters. Although we’ll continue to fully support, our government defense OEMs and end users, the continued diversification into commercial markets will allow us to better control our future. The present challenging marketing conditions have provided landscape for each of the business teams to show their operational skills, leading to improve gross margins despite lower volumes with much lower operating costs and a solid balance sheet and liquidity. When taking together, the above items give us tremendous flexibility and capability to create organic revenue growth opportunities to new product development, aggressively seek out and integrate bolt-on acquisitions and enhance returns to our shareholders through stock repurchases. Operator, this concludes my prepared remarks and we’ll be happy to open the call up for questions.

[Operator:]

Thank you, sir. (Operator Instructions) And we currently have no question in the queue. (Operator Instructions) And we do have a question from Gary Sebastian with Eliot•Rose Asset Management.

[Gary Sebastian:]

Hey, guys, good morning.

[Michael D. Popielec:]

Good morning, Gary.

[Philip A. Fain:]

Good morning, Gary.

[Gary Sebastian:]

In terms of the forecast Mike. The implication I guess is that you’re going to be a better second half than the first half and I guess it works out to about maybe $17 million to $18 million per quarter or at least for the maybe $35 million for the back half versus $30 million in the first half, if I got the numbers correct and I think you did $75 million last year. So sales going to be down 10% that gets you to 65 we have 30 in the first is that about right.

[Philip A. Fain:]

Gary, we did a $78.8 million last year so that’s the base we’re working off of and some quick math you’ll see in the financials and in the 8-K filed earlier today we did $30 million in the first half so you’re correct we’re looking at approximately $40 million in the second half which would be flat with the second half of last year.

[Gary Sebastian:]

Okay, and roughly 50% in the third and fourth quarter of that 40% or is that more of a 40% to 45% and then 55% kind of thing percentage point.

[Philip A. Fain:]

In the line of 45% to 55%.

[Gary Sebastian:]

Okay, and then if we extrapolate that to what you’re projecting for the bottom line 2% to 3% of sales loss so that loss for the year sounds like it will be about the same or little less than the lowest for the first half so it sounds like you’re projecting break even to slight profitability in the back six months.

[Philip A. Fain:]

There is profitability in the second half of the year, you’ll see in our financials that the operating loss is $2.4 million in the first half of the year. So profitability in the second half and you’ll see in the details the impact of the China relocation as well bring that second half profitability down just a bit.

[Gary Sebastian:]

On the second half I’m sorry the China relocation where there expenses for that in Q2.

[Philip A. Fain:]

No.

[Gary Sebastian:]

Okay, just explain to me what you mean by that?

[Philip A. Fain:]

Yes, you’ll see full details broken out in our Q, the China relocation that we mentioned in the first quarter 10-Q it is going to occur in the second half of the year and there will be expenses associated with that we have included in our forecast.

[Gary Sebastian:]

Okay, okay and but not with standing that you’re talking about a $40 million back half and profitability for the back six months.

[Philip A. Fain:]

Yes, that’s correct.

[Gary Sebastian:]

Okay, super and are you going to – will you be able to pull out the China relow expenses as one time, expense so they don’t hit the operating line.

[Philip A. Fain:]

Unfortunately, not that’s the generally accepted accounting principles won’t allow us to do that, but it is a disclosure item that we will just make the investors certainly will be aware of.

[Gary Sebastian:]

Okay, and does the relocation make the plant more efficient as a reduced cost going forward, what’s the rational behind it?

[Michael D. Popielec:]

Yeah, all those things I mean our lease was up in facility government has jurisdiction over area that our hand is doing some overall development. We’re using this opportunity to go to new facility more modern facility better laid out facilities. So we’re looking at actually improving operations with the move and I think we have a world class its done product line and facility moves before. And we’ve got our eyes all over it from a standpoint of planning and execution and relate not really would necessarily want to move if then have to move. But to the extent that’s really something it’s all out of hands. We’re using it improve our proper operations in China.

[Gary Sebastian:]

Super, okay. And what gives us the sense, what gives you Mike the sense that you can hit this $40 million in the back half. I know we’re seasonally stronger in the back half of the year. I know that government’s fiscal year-ends in the back half so that could be budget flush. Can you give us some reasons why you’re think you can get to that $40 million run rate in the back half?

[Michael D. Popielec:]

Yes, I think in the case of B&E just as we look at the overall revenue streams we articulated in the prepared remarks. As those continue to progress. And in the case of comm. systems we’ve really derisk some of the larger projects and from that standpoint looking at where are those individual transactions are and their lifecycle to be coming into orders and (indiscernible) orders. We feel comfortable that we’ve got a pretty conservative view of that we take changing our guidance very seriously, we wanted to be as transparents we could be to the investor communities like it make judgments and what we are doing and now we are performing, but at this point we feel, we fairly derisk the back half of the year. Given the current realities of government defense budgets.

[Gary Sebastian:]

Okay, super. So that’s the conservative projection in light of what we’ve seen so far this year and despite the conservative projection is still expect to be profitable in cash flow positive. Could that possibly indicate we’ve seen a bottom I mean we’ve certainly you call out a quarter or two ago that maybe we saw the bottom on the battery side and we’ve had and if we’re only a commercial business having 19% growth would be spectacular in this environment compared to whose public companies but it’s the government that’s been hold us back. So is that sort of sense that maybe things have already bottomed for us, with these two losses in the first half?

[Michael D. Popielec:]

I think that, the reason we are more comfort and the ultimate bottoming of their revenue is just a larger percentage of a commercial business versus the government defense business.

[Gary Sebastian:]

Yeah.

[Michael D. Popielec:]

So, much deliberately around and it seems like so much of that is out of your direct control and some depending in the commercial area. First of all there is a broader amount of customers you can talk to – you can really sell your valueable proposition, I think a better indication, when contracts will be later or not. And to the extent that’s a larger percentage of our overall revenue stream, we feel encouraged by that and we are not as, I don’t think we have as much risk as we may have had a couple of years ago, where the overlong maturity of our business with government defense.

[Gary Sebastian:]

Gotcha, super. And, in terms of M&A so you have been looking I guess for about a year now, since you get the line of credit and cashes doubled or tripled over the past couple of years and we’re seeing a ton of M&A out there in the real world, not a pushed it to do something, because you would do something if it make sense. But, a lot of transactions are going down. Are you not seeing enough or the price is too high, what can you give us a little more color on your M&A efforts?

[Philip A. Fain:]

We’re still extremely active in M&A activity both from forming perspective as well as hunting for new opportunities – it’s a high priority of us. We want to use the best – our cash to best extent possible, we want to make sure that the transactions we do make sense, we worked really hard to get our operational efficiencies where at this point, we work hard to generate that the cash and to have the cash balance to be able to deploy it either in (indiscernible) M&A and so when we look at acquisition opportunities we look very, very closely. And we plan for then becoming a very successful part of our enterprise long term. And so, we are not looking for the necessarily the perfect company. We all understand that every company has its ups and downs. We are trying to be very selective because we know how important it is that we do a good one.

[Gary Sebastian:]

Okay, but you are seeing companies and are there any negotiations is going on and you just haven’t met on price is there anything not that it’s eminent, but or anythings in possible process?

[Michael D. Popielec:]

I can comment on that Gary, but the second we get to the point where it’s something we’ve been disclosed, we’d disclose really.

[Gary Sebastian:]

Okay, and then balance sheet question inventories were about flat sequentially. And on a $15 million quarterly run rate granted you are going to improve that in the back half of the year, but $27 million in inventory seems kind of high out of 2015, 2016 again run rate can more be done that?

[Philip A. Fain:]

No, it’s certainly can’t be Gary. The situation that we are currently in is the – the timing between receiving an order and shifting an order based on some of the items that are backlogged in contracting for comms systems has caused our inventory to creep up a just a little bit over the end of last year, but our target is going forward is not to carry $27 million of inventory – is to bring that down rather significantly.

[Gary Sebastian:]

Super, okay so if the back half improvement and revenues and profitability comes true, we should see the inventory over the next six months decline a bit?

[Philip A. Fain:]

Yes, in the 10% range.

[Gary Sebastian:]

Beautiful okay. And then Phil on the buyback program I know liquidity is been challenging on the stock but aren’t there I don’t if they call 10B1s or they are 10B5s. I am not sure but there is certain programs which not only allow you to buy stock during quite periods where its on going but maybe allow you to buy some stock in the market and not just respond to block, so another words that no blocks are ever offered you guys even though the volumes miniscule on daily basis but you could do something.

[Philip A. Fain:]

But we are very familiar with those programs and all that’s a minute details that go into that with trading volume over that the quarter and the 8 to 10,000 range daily going into a program only result in just a couple of thousand shares at this time.

[Gary Sebastian:]

But it is not better than nothing, I mean you did nothing in a whole three month period, so you mean if you only getting a couple thousand shares a day, it will add up. And with the $4.15 cent book where the stock is now at 360 bid, it seems like it would be smart move.

[Philip A. Fain:]

That certainly is debatable we can certainly discuss that further.

[Gary Sebastian:]

Okay, okay, so its something that could be looked at.

[Philip A. Fain:]

Yes, we consider re-consider our positions overtime depending and the overall capital allocation needs of the company but it’s certainly something that isn’t decision made in and now we looked at were – believe me we look at it several times a day, but give problems

[Gary Sebastian:]

Yeah, I just want to go over just to make sure I’m right on the value proposition here. So a book over $4 which is a pretty solid book you have almost $18 million in cash just about a buck of share the NOL, so is the NOL $20 or $30 million?

[Philip A. Fain:]

Yes, it is that the NOL Gary is $60 plus million, we disclosed in the 10-K it’s around $65 million to $75 million overall.

[Gary Sebastian:]

Okay, and even if you had a 20% of that 20% or 30% of that its another buck of share. So there is buck in cash, a buck possibly in NOL value to an acquirer and/or shield future earnings and certainly working capital beyond cash you’re building your land et cetera. So there is at least $4 to $5 of solid value in good business at zero. So all that being said I would just encourage you to be a little more aggressive on the buyback here.

[Michael D. Popielec:]

Gary, I think we look at things very similarly I appreciate the comment.

[Gary Sebastian:]

Okay, thanks guys and good luck on the back half.

[Michael D. Popielec:]

Thank you.

[Operator:]

(Operator Instructions) And with no further questions. I would like to turn the call back to Mr. Popielec for any additional or closing comments.

[Michael D. Popielec:]

Well, thank you once again for joining us for our second quarter 2014 earnings call, look forward to meeting up with several of you or talking via phone over the next few weeks or so and sharing with you in the future our quarterly progress during our future earnings calls. Thanks very much for your time today.

[Operator:]

Thank you, sir. And again that does conclude today’s call. Thank you for your participation.