Ultralife Corporation
Q3 2022 Earnings Call Transcript

Published: 29 Oct 2022

[Operator:]

Hello and welcome to Ultralife Corporation Third Quarter 2022 Earnings Release. My name is Pricilla and I will be your coordinator for today's event. Please note this call is being recorded and your lines will be in listen-only, however you will have the opportunity to ask questions at the end during the Q&A session. [Operator Instructions] I will now hand over to your host to Ms. Jody Burfening to begin today's conference. Thank you.

[Jody Burfening:]

Thank you, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter of fiscal 2022. We apologize for the delay in starting today's call, which occurred due to issues experienced by the conference call provider. So with us on today's call are Mike Popielec, Ultra'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. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 and related supply chain disruptions, potential reductions in revenues from key customers, acceptance of new products on a global basis and uncertain global economic conditions. 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 and other factors that could affect Ultralife's financial results is included in Ultralife's filings with the Securities and Exchange Commission, including the latest Annual Report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics and differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike. Michael Popielec Good morning, Jody, and thank you everyone for joining the call and I apologize for the slight delay this morning. Today, I'll start by making some brief overall comments about our Q3 2022 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. When Phil is finished, I'll provide a brief update on the progress against our 2022 revenue initiatives, then open it up for questions. For the third quarter of 2022, total company organic revenue increased by over 20% year-over-year, driven primarily by strong shipments to government defense end markets. When including the acquisition of Excell, total company revenue increased by over 50%. Each of our business segments, Battery & Energy Products and Communication Systems delivered solid year-over-year revenue increases. Our overall customer demand remains high and at the end of Q3 2022, total company firm order backlog was at a level not seen in over 10 years. During the quarter, we continued to be negatively impacted by ongoing input component inflation and procurement cost increases as well as manufacturing inefficiencies from erratic part lead times and excess material usage during the ramp-up of several new products. As such, these execution headwinds drove B&E gross margins downward and resulted in a total company EPS loss of $0.01 for this year's third quarter. In addition to continuing to work very closely with our customers and suppliers to address the ongoing component cost increases, lead time fluctuation and sell price increases, we are implementing a number of actions to mitigate the ongoing gross margin pressures. In a few minutes, I'll give you a further update on our revenue initiatives and provide a summary of some of the gross margin initiatives. But first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the Q3 2022 financial performance. Phil?

[Philip Fain:]

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter ended September 30, 2022. We also filed our Form 10-Q with the SEC and have updated our investor presentation, which you can find in the Investor Relations section of our website. Consolidated revenues for the 2022 third quarter totaled $33.2 million compared to $21.8 million reported for the third quarter of 2021, an increase of 52.7%. Government defense sales increased 99.8%, with strong growth in both business segments driven by order flow and the commencement of deliveries of some long-lead components. Commercial sales increased 38%, reflecting the contribution of Excell and solid organic growth in oil and gas and industrial commercial end markets. Total organic sales increased 21.1% from the prior year period. During the quarter, supply chain disruptions persisted including increased lead times on components from suppliers, impacting both our internal and customer manufacturing delivery schedules, resulting in continued delays in our shipments to future periods. Revenues from our Battery & Energy products segment were $28.6 million compared to $20.0 million last year, an increase of 42.9% with $6.9 million of the $8.6 million variance attributable to Excell and $1.7 million of net organic growth comprised of increases of 66.4% in government defense sales, 7.4% in SWE's oil and gas market sales and 2.4% in industrial market sales, partially offset by a 12.1% decrease in medical sales due solely to component shortages to fulfill increased demand from a large international medical device OEM. Net organic sales for this segment increased 8.5%. The backlog for our Battery & Energy products business of $88.3 million, the highest in our history represents an increase of $17.2 million or 24.1% over the comparable amount exiting the second quarter. The sales split between commercial and government defense for our battery business, was 80-20 compared to 83-17 for the 2021 third quarter, and the domestic to international split was 47-53 compared to 40-60 last year, accentuating both the continued success of our global revenue diversification strategy and growth in U.S. Government defense sales. Revenues from our Communications Systems segment were $4.7 million compared to $1.8 million last year, an increase of 165.3% reflecting the receipt of components to fulfill a large international order and to continue the fulfillment of a large U.S. order with some modest shipments. The backlog for our Communication Systems business of $17.9 million represents an increase of $9.8 million or 120.4% over the comparable amount exiting the second quarter. On a consolidated basis, the commercial government defense sales split was 69-31 versus 76-24 for the year earlier quarter, again reflecting the growth in government defense sales. Our consolidated gross profit was $6.7 million for the 2022 third quarter, up 31.5% over the 2021 period. As a percentage of total revenues, consolidated gross margin was 20.2% versus 23.5% for last year's third quarter. Gross profit for our Battery & Energy Products business was $5.3 million compared to $4.8 million last year. Gross margin was 18.7%, a decrease of 520 basis points from 23.9% reported last year. The disruptions resulting from supply chain and logistics complications were more pronounced in our Battery & Energy Products business during Q3, in large part because of a sharp uptick for our more advanced rechargeable battery packs, which increased the need for highly sought after components including various electronic components, PC boards, chipsets and certain metals to name a few. Major contributing factors impacting the gross margin variance included the following

[Operator:]

We will now take our first question from Josh Sullivan. Please go ahead. Your line is open.

[Josh Sullivan:]

Hey good morning.

[Michael Popielec:]

Good morning, Josh.

[Philip Fain:]

Good morning, Josh.

[Josh Sullivan:]

On the supply chain headwinds, I think in the past, you characterized your hold-ups with your customers' ability to take orders from you guys and then there's also the issue of your own ability to get things like microelectronics. Curious kind of where is the center of gravity at this point? And maybe what metrics are you watching to maybe suggest some easing at some point?

[Philip Fain:]

Well, I wish we were getting those signals at least during the third quarter that things were easing and what we experienced during the third quarter compared to earlier in the year. Earlier in the year, we ran into weekly or maybe biweekly occurrences of issues that we had to resolve very, very quickly with suppliers. It seemed like during Q3, it seemed like it was a daily occurrence or every other day across a much broader spectrum of suppliers. Now what we're dealing with, Josh, as you know, is we're dealing with large, global primes and medical OEMs, very large companies, our supply chain is comprised of numerous local smaller vendors, pretty much scattered that we have done business with for many, many years So one of the things that we experienced is actually a success-based issue, and that is a surge, let's say, a surge in demand, whether it be for medical, whether it be for government and defense suddenly, quickly without too much advanced notice. And we have to respond very, very quickly. Now the response, if we got these in the normal course of business is extended to start with. So this puts us in a situation where we go to our vendors. And our vendors are pretty much tapped out in their ability to use their normal supply chain. So then we have to look at more extreme means, and I hate to use this word, but the word broker pops up, and we all know the cost and complexities of dealing with brokers. I think that the change now is that with the extension of our S&OP process to look further out. And when I say further out, if you look at our inventory, our inventory has increased $8 million. So we're doing the best we very can to properly stock ourselves across all of our locations with the cells and some of the critical components for at least what we know about or what we believe is going to happen. When you get hit with a surge that has to go out quickly, it puts pressure across the whole chain. Now will that continue to happen, it could. Have we developed alternative sources so that we don't have to go the brokerage route and trying to match costs with price increases and all the mathematical equations of trying to get everything matched one-to-one, it's hard to say. But at least these situations experienced in Q3, I think facilitated the path going forward in how we deal with both our vendors and our customers. It just adds another situation of experience to the what if. But as far as easing goes, I can't say that there's too many visible signs that we're seeing an overall easing in the five items that I had mentioned.

[Josh Sullivan:]

Got it.That makes sense. And then on the energy side, it seems to be a growing cycle for deepwater. Your exposure there in the electrification, some of those activities, curious if you're seeing any increased order activity or what you're seeing along the energy front and the forward look?

[Michael Popielec:]

Josh, it's Mike. It continues to increase in both of our businesses. The SWE acquisition and Excell acquisition both had good content in oil and gas. In addition to the on gas growth, which we're seeing, which we know is a cyclical market as well. Both of those business units are also diversifying into other areas. The SWE operation now is doing well in oil and gas, which we're really excited about, where they are also participating in some of our government defense product designs and execution as well as medical cards. And Excell acquisition, obviously, have seen the benefit of the oil and gas business also is heavily involved in industrial computing and getting in some new brand new products, exciting things we didn't talk about but we'll talk about by next quarter where we're getting into some massive tracking. So I think healthy growth, and I think we mentioned in the prepared remarks, about 7% organic growth in Q3. We see that continuing near term, but we're also extremely excited about the diversification of those two entities as we move forward.

[Josh Sullivan:]

Got it. And kind of just to that point, some other products, the server prototypes in '23, the mobile data cards 5G opportunity. How are you going to measure success externally? Are we going to see orders? Are you going to provide some of those testing results? What should we look forward in some of those new products coming forward?

[Michael Popielec:]

We look for new meaningful revenue streams. I mean, we love our Communication Systems business is really good at what it does, but it has a reasonably narrow lane of what traditionally it has as amplifier to radios. And so one of the things we've been searching for a number of years is there a commercial play that will give us some diversification, how it will be less susceptible to cyclicality of the government defense spending. And what we've developed over the last couple of years is where we had a strong body warrant amplifier capability, we had some vehicle amplifiers, and we got into integrated solutions involving amplifiers and power supplies and other components. And to be able to build those products for sort of battle hardened environments has become a core competency. So the idea, consistent with motors use of trying to get more compute capability closer to where the action is, we're seeing there's an opportunity too for some of these community solutions to be integrated into military products as well as commercial products. So I think we'll find success when we start to get some ongoing meaningful revenue on a recurring basis. And we'll certainly communicate that during future press releases and earnings calls.

[Josh Sullivan:]

Great, thank you for the time.

[Michael Popielec:]

Thank you, Josh for the questions.

[Operator:]

Thank you, Josh. [Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back to Mr. Michael for any additional or closing remarks. Thank you.

[Michael Popielec:]

Great. Well, thank you once again, everyone, for joining us for the third quarter 2022 earnings call, and I apologize again for the slight delay at the start. We look forward to continuing to share with you our quarterly progress...

[Operator:]

So sorry to interrupt, Mr. Michael, so sorry. We have one participant who would like to ask a question.

[Michael Popielec:]

Sure, sure.

[Operator:]

It's Stuart Citron [ph] from Wells Fargo Advisors. Please go ahead. Your line is open.

[Unidentified Analyst:]

Good morning, Mike. I'm sorry I was a little bit late getting on to the call. Did you touch upon the wearable conformable battery contract and whether in that there's been any progress or information about whether or not you're getting any of the business?

[Michael Popielec:]

Yes, we did comment in the prepared remarks and we'll see that in the transcript. Where we stand right now is we're continuing to move forward on the development of the product. I mentioned and you probably didn't hear or maybe didn't hear that the fab testing, which is a core part of the overall process will probably be in the first quarter now as we experience some parts delays. But those things are still moving along well. We're very excited about that product and as being an IDIQ contract, we really don't have any visibility to future delivery orders until we get through this whole first article testing process. So certainly, when there's any development in terms of delivery orders and things like that, given the strategic nature of this contract, we would communicate that.

[Unidentified Analyst:]

Thank you very much.

[Michael Popielec:]

You are welcome.

[Operator:]

Thank you, Stuart. [Operator Instructions] All right. It appears there are no further questions at this time. I would like to turn the conference back to you, Mr. Michael.

[Michael Popielec:]

All right. Well thanks everybody for participating have great day.

[Operator:]

Thank you for joining today's call. You may now disconnect.