Ultralife Corp (ULBI) 2010 Q1 法說會逐字稿

Good day and welcome to the Ultralife Corporation first-quarter earnings conference call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Operator, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the first quarter of fiscal 2010.

With us on today's call are John Kavazanjian, 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 Ultralife 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'd 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 worsening global economic conditions, increased competitive environment, pricing pressures, and the possibility of intangible asset impairment charges that may be taken.

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. A more detailed description of such uncertainties is contained in the Company's filings with the Securities and Exchange Commission, such as the Company's annual report on Form 10-K for the period ending December 31, 2009.

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 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 John. Good morning, John.

Thank you, Jody. Good morning and welcome to the Ultralife Corporation conference call for the first quarter of 2010. Joining me today is Phil Fain, our Chief Financial Officer.

Today, we reported revenue of $38.5 million for the first quarter of 2010, with an operating profit of $900,000 and an adjusted EBITDA of $2.7 million. Quarter over quarter, revenue was down from the fourth-quarter revenue of $50.4 million. Despite the lower revenue, we showed an operating profit due to strong gross margin and disciplined expense control. Even with a very weak gross margin in energy services, strong operational performance in battery and energy products and in communications systems led to this result.

As we continue to grow, our sales of more highly engineered products, and as energy services gains momentum as the economy recovers, we expect further margin growth moving forward.

In our battery business, there has been a hiatus in the ordering of some battery products by the Defense Logistics Agency while they resolicit some of the contracts that expired at the end of last year. This includes the BA-5372, the BA-5347, and the BA-5390. While we are the only currently qualified source for several of these products, there will be competition and we are engaged in the proposal process. We anticipate contract awards to be made this quarter with shipments to resume in the second half of the year, and we assume that any awardees will be the beneficiaries of catch-up in demand orders.

We also saw weakness in the energy services area. A large part of our backlog was pushed out as we saw further delays in capital projects. However, we are seeing a significant pickup in orders and proposals, and expect revenue to pick up this quarter and expect to be back on track in the second half of the year.

Battery and energy products, we continue to make operational progress. In our China operation, we will start production of our new 9-Volt product with major shipments starting in the third quarter. That operation will also commence shipments of a new version of our thionyl chloride batteries targeted at the automated meter-reading market with world-leading performance. Ultralife China is growing and will be a major contributor to profitability moving forward.

We also expect process improvements in our growing rechargeable business and our existing nonrechargeable business to help to grow margins.

A few weeks ago, we announced a $2.4 million grant from the state of New York for development of large-scale -- of a large-scale energy storage system for alternative energy. We will be using that grant to further develop large-scale smart lithium battery systems to be integrated with wind and solar installations.

We know that efficient energy storage can cut the payback time of these systems in half if properly designed and managed. Together with the lithium battery systems that we are developing for backup power, this area will be a major part of our growth strategy in this segment.

In communications systems, a gross margin of 38% was a major contributor to profitability. The addition of the AMTI amplifier business, acquired last year, and operational process improvements were the major reasons for this performance. Moving forward, the ability to utilize these advanced compact amplifier products in our systems offerings will further enhance the profitability of this segment.

As I mentioned earlier, energy services performed below our expectations, but we expect this to improve with the pickup in capital spending that we are starting to see. Our focus on services over product is what will fuel improvements in the margin line of this segment as we move forward. This group is also integral to our strategy to move lithium batteries into targeted areas of standby power.

On the expense side, we've been steadily consolidating operations and bringing down overhead expenses while preserving our investments in development. We saw the further results of this in Quarter 1 with overhead expenses down to $9 million. While our R&D costs were down significantly, much of that was due to the conclusion of development work that we did last year on both new customer designs and on redesigns for product cost savings. While that work continues as needed, it is not at the level that it was at for 2009.

In addition, we expect activity to pick up in 2010 as a result of the work that we'll be doing under the New York state grants for energy storage development. Phil will talk about this more. But by generating positive EBITDA and bringing down our inventory, we will further improve our balance sheet.

Phil has put a significant focus on financial asset management, and it shows. We're now exactly where we wanted to be with excellent revenue prospects for the remainder of the year, a low operating cost base, and a strong and growing product portfolio to drive further profitability. We combine that with a focus on cash management and operational excellence to strengthen the balance sheet and grow margins.

Now, I will ask Phil to cover the financial summary, after which we will open it up for questions.

Thank you, John, and good morning, everyone. Earlier this morning, we released our first-quarter results for 2010.

Consolidated revenues for the first quarter totaled $38.5 million, versus $39.8 million in the same period last year and $50.4 million for the fourth quarter of 2009. The year-over-year variance reflects revenue increases for battery and energy products and communications systems of $0.4 million and $1.8 million, respectively. This increase was offset by a $3.5 million decline in energy service revenue.

The decrease in revenues of $11.9 million from the fourth quarter was primarily a result of the higher level of SATCOM-On-The-Move systems shipped during the fourth quarter in our communication systems segment under the $20 million order we received last October.

Despite lower consolidated revenues, gross margin was significantly higher in the first quarter of 2010, $9.8 million compared to $7.8 million for the first quarter of 2009. As a percentage of total revenues, consolidated gross margin was 25.3% in 2010 versus 19.5% for last year's first quarter.

Gross margin for our battery and energy products segment rose 4.6 percentage points from 16.5% to 21.1%, primarily reflecting manufacturing efficiencies and higher selling prices realized for some of our products. Gross margin also increased in our communications systems segment by 5.4 percentage points, going from 32.1% to 37.5%, benefiting from the addition of the AMTI amplifier business, which was acquired on March 20, 2009.

Project delays and ongoing pricing pressures in our energy services segment pushed the gross margin into the red for the first quarter of 2010. Compared to the fourth quarter of 2009, the consolidated first-quarter gross margin grew by 1.6 percentage points, reflecting higher gross margins for our battery and energy products and communication systems segments.

Operating expenses totaled $8.9 million, compared to $10 million in the same quarter of last year and $10.3 million in the fourth quarter. The across-the-board cost reduction and consolidation actions we commenced in the latter half of 2009 have now been realized. These actions more than offset the increased expenses resulting from our acquisitions of U.S. Energy in November 2008 and AMTI in March 2009.

First-quarter non-cash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses, amounted to $1.8 million, the same amount as a year ago. Operating earnings were $0.9 million versus an operating loss of $2.3 million reported for the first quarter of 2009. This $3.2 million year-over-year improvement reflects the higher gross margins for battery and energy products and communication systems, coupled with our lower cost base and improved operational efficiencies.

Net interest expense for the quarter was $494,000, compared to $179,000 last year. Included in the 2010 first-quarter net interest expense was a total of $278,000 in expenses related to the termination of our credit facility with JPMorgan earlier this year.

Our first-quarter tax provision amounted to $105,000, reflecting the alternative minimum tax on U.S. taxable income and book tax differences related to the amortization of intangible assets.

Net income was $287,000, or $0.02 per share, compared to a net loss of $2.5 million, or $0.15 per share, for the same period last year, and adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $2.7 million in the first quarter, versus a loss of $400,000 for the first quarter of 2009.

With strong cash flow generated from our operations and continued favorable improvements made to our balance sheet, including the reduction of our inventory to $34 million, the outstanding balance on our new credit facility was $8 million and our net borrowings were $3.9 million at the end of the first quarter. By comparison, at the end of the fourth quarter, our outstanding revolver balance was $15.5 million and net borrowings were $9.4 million.

Based on our first-quarter performance, and with orders continuing to pick up, we are optimistic about our ability to at least achieve our base plan for 2010, which calls for revenue of $177 million, operating profit of $4.6 million, and adjusted EBITDA of $11 million.

I will now turn it back to John.

Thank you, Phil. Now I'd like to ask the Operator to open it up for questions.

(Operator Instructions). Steve Sanders, Stephens Inc.

This is Trey Cobb for Steve. John, could maybe we talk about the change in segment reporting? If you guys could walk me through the changes because I'm having trouble tying the previous results with the new segment reporting. I think on the last call, you said primary and rechargeables were going to make up the battery and energy segment, but it looked like some of that maybe has moved to comms, so I'm not sure what the shifting parts were there.

No, not really. Rechargeable and nonrechargeable are pretty much the battery segment. Communications is the communications segment, and the only other changes that we have, a communications services group, RedBlack Communications, that does $1 million or $2 million a quarter, that moved from the services into the comms. Phil, was there anything else there that was in addition?

Yes, Trey, the only other item is the reclassification of tech contracts, which now goes to the various -- to the new reporting --

So whichever segment that they're accrued to.

Okay, yes, because just going back to the prior releases, it looks like primary and rechargeables were $28 million, $29 million in 1Q 2009, and then this is showing $23 million. So, there's that $6 million delta and that's -- I'm not exactly sure where that flowed through. So, other than what you just gave, there's really nothing material that shifted around there?

No, no, that's right. You pretty much match primary and rechargeable up against the battery and energy products segment.

Okay. And then, kind of the top line this quarter was a little lighter than I was expecting. But, was there anything there in terms of timing, issues, etc., that would lead to a stronger 2Q or is your general thoughts that this is going to be spread out fairly even throughout the remainder of the year?

We had some definite timing things and I think -- I talked about two of them. One of them was that some of the major DLA contracts expired last year in the second half of the year, and they've been -- let me use the word deliberate in resoliciting them.

But we know there is demand out there because we've gotten some direct orders from bases or units for product. They are not in dire straits. They have got reserves that they can go into, but they've resolicited for those products, so that's one thing that was in our run rate last year that -- business we know is there that until they get new contracts into place, they won't be reordering. And we think it's going to take maybe a little bit this quarter, but by the time they get these solicitations and awards done, it's second half of the year.

And then, the other -- and that business has run anywhere from kind of $2 million to $5 million a quarter for us pretty steadily in a bunch of different battery types.

And then, the second area is in standby power. This is a business that's really a three-month to six-month lead time business. People plan these things pretty well in advance, and we thought -- we saw a real low -- we had a very strong third quarter last year. Fourth quarter, but we saw a low coming in the fourth quarter and the first quarter, and this quarter was a real low with anywhere from $1 million to $2 million in orders specifically that moved from March into April.

As soon as we saw that, what's happened is we've seen a real pickup in activity in that area, and in fact, almost everybody that we talk to involved in there, some of our suppliers and others are starting to see the pickup also. That there was a lot of reticence right through a good part of the first quarter to start coming into projects. But during the first quarter, we've seen pretty good project commitments going from -- that give us the belief that we're going to get a pretty good recovery in the fourth -- in the second quarter, and by the third, fourth quarter, be back on what we would consider to be the right sizing for that business.

I'll come back to the standby, but sticking with the DLA issue, that though is not going to be really a 2Q definite. That's probably looking at more back half (multiple speakers)

You'll see some stuff in back half, but we do have some -- like I said, we've gotten some -- when DLA stocks batteries, people can buy them right out of inventory. If they don't stock them, if people need them and can't get them from their local inventory, they will order directly from us sometimes, and we've seen a little pickup in that activity, which is how we can gauge what's going on.

That was helpful. Has there been anything else that you've seen announced as far as the 1,300-plus MRAPs that were ordered a few months back?

We can only react when we get an order placed on us, and when we do, we'll let you know. There are -- they are buying more MRAPs to the tune of 1,300 or 1,350 of them. We've been involved in working with the people we supply and giving them lead time information and stuff, but if we have an order, we'll let you know.

Then going back to the standby, obviously it sounds like activity is picking up there. But have you seen any improvement in terms of pricing pressures? How should we think about kind of margins expanding in that business?

We don't see any improvement in pricing pressure. It is still there on the equipment side of the business.

The way we have reacted to that is really redouble our efforts in selling service. In that business, fundamentally, service is where it's at. That's the model, actually, we're trying to change with the lithium batteries in that marketplace.

So, we, last year in second and third quarter, recast our efforts to emphasize service a lot more, and I think that's where you get the pickup. Instead of selling -- most of that business has been selling equipment and then picking up service where you could. We are -- we've changed that, and that's the thing that really has to change for us to improve margins in the short run.

Now in the long run, there's going to be some shakeout, and pricing pressure will abate. Because it's artificially low right now, but we don't -- we're assuming that's not going to change, let me put it that way, and dealing with it in that way.

Right. And you guys have obviously made margin strides this quarter. Kind of what levers do you have left to pull to help drive additional upside? Is it more a function of volume at this point or is there still some fat that you have left that you can trim?

The margin improvement was more than just fat trimming. It was process and product.

We acquired the McDowell business three years ago, 3.5 years ago. That was a $20 million a year business. It's now a $50 million or $60 million a year business for us. It grew very fast. We did very well with it, but we knew that there was engineering work -- while we put our resources on the engineering and the systems side, we knew on the component side there was engineering work to be done.

There was a lot of work that we've done in the last year that was R&D expense, quite frankly, to re-engineer products to reduce costs. You actually had to -- you have to re-engineer to take costs out of some of these things. That's what we did. We put a big effort on it and we're starting to get the payback for it.

We still have more to go. There is still opportunity in those product lines to take existing product and reduce costs for new designs, working with vendors on sourcing and things like that, so.

And you're still expecting R&D, I guess, to tick up a little bit and kind of hit that operating spend, $10 million run rate. 0

Yes, the part of R&D that -- it's not people that didn't -- that we reduced, it was materials, prototypes. We go through a lot of materials when we do a new part to qualify it, actually burn through, whether it's destructive testing or prototypes or whatever, and then we use outside services for some things.

We do some of our own engineering, but we don't do board layout and some of the work, that kind of work -- we did a lot of that last year, both in redesign of products, but also in new products as well. The work that we've done for General Dynamics and UPMOD and several medical accounts. We wanted to own the design, so we did the engineering work.

We can't amortize that stuff, so there was a lot more of that last year just because of where it was. This year, we have a little bit of benefit in that the areas in which we want to do more engineering, we are doing that cooperatively with some of the work we're doing for the state of New York and the large lithium batteries. That's where we have targeted to do a lot of our engineering this year, and the good news is that we're getting help with that.

So, I believe you'll see the engineering line go up a little bit, but we still expect to keep our numbers down pretty low here on the overhead side.

Jim McIlree, Merriman Curhan Ford & Co..

John, you talked about DLA and the resolicitation. And then, you said there will be competition. Were you referring to competition within the solicitation or were you suggesting that there's going to be dual source for these particular battery types?

I can't speak, Jim, to whether DLA is going to single or dual source. They've pretty much done single sourcing in the way they have awarded contracts in the past. They could certainly change that, but I believe it's been solicited as single.

But there will be other people bidding it. There are other people who can build these products. On some of them, like the 5372, which is a small backup battery, there are other qualified sources. But on something like the BA-5347, I don't know if you remember, five years ago we got awarded the 5347, which is a thermal sight battery. We got 60%, somebody else got 40%. That other person never was able to qualify.

So, a couple of things could happen. Number one, we could just get reawarded to things like the 5347 and 5390 where we are the only one, but we are bidding against other people. They could come back and do two sources, just to get somebody else in the game, see if they're qualified. They did not say they were going to do that in this solicitation, but it's possible that they could do that. They are making -- they make it competitive. That's their job.

Right. Back in October of last year, you got a $20 million order for Satellite-On-The-Move products. Did that have -- have you completed the shipment of that order?

Yes, we have. It was completed during the first quarter. Most of it was shipped in the fourth quarter, but -- and we completed it in this quarter.

So, it kind of sounds like Q2, communications systems, unless there's something that a lot of little stuff they haven't announced, it sounds like that would be down relative to Q1. Is that -- and it kind of sounds like Q2 dips again, and then you have a very strong second half in order to make your projections. I guess that's what I'm really asking. Is that how you're mapping out the year? Is that -- Q2 is a little bit weaker, and then you get a big hockey stick for the second half?

We have enough ups and downs -- to be honest with you, Jim, we have enough ups and downs in our business right now that we are looking at it pretty smoothly for the rest of the year, to be honest with you.

We -- I won't tell you we anticipated Q1 being down, but we knew that there were a lot of things up in the air coming into Quarter 1. We see -- one thing I can -- I'd love to tell you I [could pick] right now what's going to happen in Q2, but I can't. But I can tell you that we are seeing a very good, strong, even -- maybe even better than normal order flow in the second quarter. Business is a very healthy in all the segments.

So, I would not assume that there will be a down and I think we're looking at fairly even flow across the rest of the year.

Let me put it this way. If there's some ups and downs, given the diversity of the business right now, if there are some ups and downs, they will be for some artificial reasons, not for demand reasons, as far as we can tell right now. That's absent a SATCOM order on MRAP. You know, we've pretty much given our guidance and talked about it absent an order like that because we learned a hard lesson last year that you don't have anything until you have it.

Ted Kundtz, Needham & Company.

Could you comment a bit more on the gross margins you achieved in the communications systems business? They were sort of at record highs here at this 37% level. And -- 37.5%, and I'm just wondering, you mentioned what led to it. I'm just wondering is that a sustainable margin for you or was it something about the mix in the quarter that led them to be so high because that was a lot higher than I thought you -- certainly than I had modeled, but I thought you could even get to. So, could you maybe comment on your future outlook for that?

I think it's -- absent SATCOM, I think it's sustainable. We now have -- by having our own amplifier line, that's a big deal. By re-engineering some of the products that we had that were electronics-intensive products, that's a big deal.

We have kind of a couple of different kinds of products in our product line. There are the amplifiers which are very complex. There are some electronics products which are power based, kind of power supply type products. Those are less complex, but have electrical parts, and then there's mechanical parts. Cables and mounts and things.

We tend to have really good margins on the mechanical parts and really good margins on the amplifiers, but not so great on the electrical which is kind of counterintuitive if you think about the engineering complexity. So we really took it on, really, 1.5 years ago to go after the electrical parts and get those re-engineered, and it really was a matter of doing them more efficiently, sometimes changing vendors, sometimes changing parts, but even changing vendors you need engineering to do that, to make sure that you have the same performance.

So we've done a lot of that work. We are still doing more of it. That was a big -- so it was both amplifiers and getting the margins up on the electrical parts with engineering, good, solid engineering work, that did that.

I think it's sustainable. The one warning I'll give you is that, quite frankly, at margins -- 35% to 40% margins, SATCOM systems have a lower margin than that. These are government contracts, so we could -- if we got a big SATCOM order, we can actually bring down our margin percentage. Now we're going to take it, okay, and we're going to be really happy with it, but I think we've said in the past pretty clearly that we didn't have any new products coming over the last two years that -- or any going forward that have less than a 30% gross margin. And some of them are better than that. So, we're just seeing the effect of that stuff kicking in, that's all.

Okay.

And I would be remiss -- I know we're focused on talking about communications. I'd be remiss if I pointed that in the battery space, without building any of the DLA products, the cylindrical products for DLA, which really brought my utilization down there in batteries, we still had phenomenal percentage in the factory, and that was pure blocking and tackling. That was -- we've done some process improvements over the last year that are really, really, really helping us there in terms of efficiencies. So, good work by the guys in that group.

That was my next question, where the margins are going on that one as well? And, so you think on the battery side, as a combination now, those can keep -- this 21% level is kind of a base level and you can keep moving up from there with some new (multiple speakers)

There's margin to be had with our new 9-Volt in China. Certainly to be had with our added products in China, our thionyl chloride product. And then, there's margin to be had by bringing back the military cylindrical stuff, which really absorbs a lot of overhead in the factory. So, on an incremental basis, it's really good. Most of our depreciation and factory overhead is in that area. That's where our capital is.

Terrific. Could you give a little more color on the UK MOD? What are you seeing out of that area?

We continue to do engineering work to get parts qualified. We've done -- most of the work that resulted in NRE expenses was done last year. We have a little bit more work to do on -- we're already -- we have a full portfolio. There are a couple of products that they want some changes on, but there's nothing real big and we are starting to produce.

We're doing one battery type of the new ones. There's another one that we think we'll bring in -- it won't be the second quarter, but by the third quarter, and then we have a new charger that we'll have done by the end of the year. So, we are seeing -- we're moving along pretty well there.

Okay, so that -- the UK MOD business is, as a total, is -- can you give us any numbers around that or not?

It's a double-digit percentage of our battery business, let me put it that way.

Walter Nasdeo, Ardour Capital Investments. (Operator Instructions). It does appear that we have no further questions at this time.

Thank you very much. We'd like to thank everybody for joining us today and participating, and we really look forward to sharing our progress with you again next quarter. Thank you.

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