Ultralife Corp (ULBI) 2010 Q4 法說會逐字稿

Good day, and welcome to this Ultralife Corporation fourth-quarter and year-end 2010 earnings release conference call. At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the fourth quarter of fiscal 2010. With us on today's call are Mike Popielec, Ultralife's President and Chief Executive Officer, 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.ultralifecorporation.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 worsening global economic conditions; increased competitive environment; pricing pressures; and the possibility of intangible asset impairment charges that may be taken, should management desire -- decide to retire one or more brands of acquired companies.

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 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 supplemental to corresponding GAAP figures.

With that, I would now like to turn the call over to Mike. Good morning, Mike.

Good morning, Jody, and thank you. Thank you, everybody, for joining the call this morning. As today marks the first time I am speaking to you as the new CEO of Ultralife, I thought I'd start by sharing with you some of my reasons for joining Ultralife, and by providing a top-level overview of my initial assessment of the Company since coming onboard a little over six weeks ago.

After that, I'll turn the call over to Phil, who will take you through the financial results and operational highlights for the fourth quarter. He will then give the call back to me for more of my prepared remarks regarding our priorities and outlook for 2011, before we open it up for questions.

As for reasons for joining Ultralife, when doing my due diligence on the Company, I saw a fundamentally solid manufacturing company, with a strong foothold primarily in the US government defense business, and very little debt. The fit for me was that it looked like I could leverage my experience running and growing larger manufacturing businesses, and selling to customers on a global scale to meaningfully grow the Ultralife business and improve its profitability.

Looking at the lithium battery product Ultralife manufactures, which serve the ever-increasing need for mobile power, whether it be for the military defense, energy, or communications markets, it appeared to me that there were many different directions you could take this Company to grow on a global scale. And the thought of being able to pursue sustainable long-term growth opportunities for a company that could potentially double or triple its size over the next several years, was a very attractive lure. So, here I am today.

Since joining the Company, I thoroughly immersed myself in the business by traveling to many of the sites, conducting operating and strategic business reviews, and learning about our new product pipeline and approach. I've also met with several business partners, including [agent] customers and vendors, with many more to do. One of the recurring themes I come across from the many talented and hard-working employees whom I've met is that they find a way to get the job done -- whether it be from a small company culture, where people work together to make sure nothing falls between the cracks; or from the many former military personnel who bring a must-complete-the-mission attitude, it's my intent to continue this one-team approach as we grow the Company.

I've also been impressed with the breadth of technical capabilities and new product development opportunities. I look forward to working with the teams to select the highest impact projects and focus the necessary resources to bring them to market faster. And lastly, as I referenced earlier, financially, the Company is on solid ground, with some attractive profitability improvement opportunities.

During my predecessor Jon K's tenure, he successfully moved the Company up the value chain. It's my over-arching objective to expand our opportunities at the high end of the value chain by focusing our efforts to deliver timely execution, and by building scale into the business model.

I'll provide some more insight on my immediate priorities in a few minutes, but I'd first like to now turn the call over to Ultralife's CFO, Phil Fain, who will provide some comments on our fourth-quarter financial and operational performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth-quarter and full-year results for our year ended December 31, 2010. I am pleased to report that we had a strong fourth quarter and our full-year results came in above our annual revenue and operating earnings guidance, adjusting for the non-cash impairment charge, which we announced on December 29.

Consolidated revenues for the fourth quarter totaled $49.8 million compared to $50.4 million for the same period last year. Revenues for our Battery and Energy Products segment of $28.2 million exceeded the comparable 2009 period by $7.7 million or 37%. This increase, despite the lack of orders for our 5390 military batteries from the Defense Logistics Agency in 2010, reflects higher shipments across most of our other products, most notably rechargeable batteries. Shipments to the DLA in the fourth quarter of 2009 were $2.4 million.

As we announced in September, Ultralife was awarded a five-year indefinite quantity contract from the DLA to supply our 5390 batteries over a five-year period. Orders totaling $6.5 million have already been placed for shipment in the first half of 2011.

Communications Systems sales of $17.7 million were down 33%, due to the higher volume of SATCOM-On-The-Move shipments in the year-earlier period. The decrease in SATCOM shipments overshadowed the favorable results of other products in our Communications Systems segment. For example, sales of accessories and amplifiers grew by 13% on the strength of great demand from foreign defense organizations. Revenues for our Energy Services segment of $3.9 million increased by 16%, as we commenced work associated with wireless cell towers. Sales for standby power batteries and services remain generally flat with 2009 trends, and we are still not seeing an increase in the larger capital projects previously experienced prior to the economic downturn.

Our consolidated gross profit was higher in the fourth quarter of 2010 -- $12.5 million compared to $11.9 million for the fourth quarter of 2009. As a percentage of total revenues, consolidated gross margin was 25.2% in 2010 versus 23.7% for last year's fourth quarter. In the fourth quarter, gross profit was impacted by almost $1 million or 2 percentage points of additional inventory reserves, primarily associated with our Communications Systems segment, as we continue to move our technology forward with new products.

Gross margin for our Battery and Energy Products segment rose to 25.4% from 20.1%, primarily reflecting manufacturing efficiencies, higher selling prices realized for some of our products, and continued improved performance from our China operation. Gross margin also increased in our Communications Systems segment to 31.2% from 28.8%, benefiting from the continued strong performance for our AMTI Amplifier business. The gross margin for our Energy Services segment reversed to negative 4.3% from positive 5.6%, due primarily to startup costs associated with our wireless cell tower work.

Our consolidated gross margin of 25.2% for the fourth quarter is consistent with that experienced in the first two quarters of 2010, but lower than the 27.9% in the third quarter. The reduction is primarily due to the higher levels of SATCOM-On-The-Move units shipped in the third quarter as well as the incremental inventory reserves recorded in the fourth quarter of 2010.

Operating expenses totaled $24.4 million, inclusive of the $13.8 million non-cash impairment charge to write off the goodwill and intangible assets, and certain fixed assets associated with our Energy Services business. Adjusting for this charge, operating expenses were $10.6 million compared to $10.3 million in the same quarter of last year -- a variance of $0.3 million, which reflects one-time expenses related to retirement and severance, and the timing of certain R&D expenses to coincide with new product development for introduction in 2011.

We continue to benefit from the impact of the across-the-board cost reductions and consolidation actions, which we commenced in the latter half of 2009. Fourth-quarter non-cash operating expenses, including depreciation, intangible asset amortization, and stock compensation expenses, amounted to $1.4 million prior to the impairment charge, and $15.2 million including the charge, versus $1.8 million for the year-earlier period.

We incurred an operating loss of $11.9 million in the fourth quarter, resulting from the $13.8 million non-cash impairment charge. Excluding this charge, operating income would have been $1.9 million versus $1.6 million reported for the fourth quarter of 2009. This year-over-year improvement reflects the higher gross margins for our Battery and Energy Products and Communications Systems segments.

Net interest expense for the quarter was $0.2 million versus $0.5 million last year, reflecting lower levels of borrowing. Our average outstanding revolver balance was $6.9 million for the fourth quarter of 2010 versus $18.3 million for the year-earlier period. We realized a foreign currency loss of $0.2 million in the fourth quarter of 2010, due to the strengthening of the US dollar to the British pound late in the quarter.

Our fourth-quarter tax provision amounted to a credit of $1.2 million versus a $0.1 million provision for 2009. The credit resulted from a refund pertaining to our 2008 tax return, enabled by subsequent retroactive legislation and the recognition of the current-year deferred tax benefit resulting from the impairment charge.

Our net loss for the fourth quarter was $11 million or $0.64 per share. Excluding the non-cash impairment charge and the related tax benefits, our net income would have been $2.2 million or $0.13 per share, as compared to $0.8 million or $0.05 per share for the same period last year. And adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, amounted to $3.1 million in the fourth quarter. For the full year, adjusted EBITDA was $14.5 million, an increase of almost $15 million over 2009.

With continued cash flow generated from operations and the favorable improvements made to our balance sheet, the outstanding balance on our new credit facility was $8.5 million, and our net borrowings were reduced to $3.4 million at year-end.

During the fourth quarter, we paid the remaining balance of $3.3 million on a convertible note, thereby reducing our debt load to our revolver and a nominal amount of capital lease obligations. By comparison, at the end of 2009, our outstanding debt was approximately $19 million and net borrowings were $13 million.

During my comments to you on last year's fourth-quarter call, I stated that, quote, "During 2010, we intend to continue to focus on improving gross margins across all segments and controlling our operating expenses to leverage them as we grow in the future." -- end quote.

We accomplished those objectives. During 2010, gross margins have exceeded 25% in each of the four quarters of 2010. Knowing that the timing and mix of our revenues vary from quarter to quarter, we continue to ring operating efficiencies out of the organization and introduce higher margin new products. Although our operating expenses have been significantly reduced, we continue our everyday focus to ensure the critical balance between providing the necessary funds for product development and revenue generation, and keeping our business model right-sized to deliver value for our shareholders.

We now focus our attention on leveraging the improvements we have made over last year and those being introduced in 2011, to generate strong incremental returns on revenue growth.

I will now turn it back to Mike.

Thanks, Phil. As I said at the beginning of my remarks, Ultralife possesses talented people and an exciting array of products. The elements are there to achieve significant growth by applying a disciplined focused execution and a more deliberate approach to new product development and sales. My approach is to engage the teams for constructive debate, and to establish a clear and finite set of priorities, around which we will align our precious financial and human resources to deliver timely completion and achievement of our objectives.

Some of our key priorities for 2011 are as follows. First and foremost, we want to optimize the Company's profitability. Whereas we have made good progress in keeping operating expenses in check, we still have more to do to reduce operating expenses as a percent of sales. We also plan to continue to improve gross margins. To that end, we recently concluded an independent plant assessment of our Newark, New York manufacturing operations, and launched a major lean implementation program focused on eliminating waste and decreasing cycle times to improve productivity, while reducing inventory to further deleverage our balance sheet.

Specific internal targets are in place for inventory turn improvement, gross margin expansion, labor level loading, and capacity creation without new brick and mortar. We have also appointed a dedicated Vice President, directly reporting to me, to ensure execution.

Secondly, we will develop and execute a robust game plan for growth and redouble our efforts to diversify our revenue beyond our core US government and defense business. Already for 2011, we see good growth opportunities internationally, including China, and are planning to expand our commercial business. We will continue to develop new products for renewable energy applications and are looking into other energy-related fields. As our global participation increases, we will develop a global manufacturing strategy to align our fulfillment capability with customer requirements and to reduce costs.

The third priority that I'd like to mention today is that we plan to take a close look at all the products and business segments in our portfolio, and make an assessment of each of their potential mid- and long-term contributions to the sustainable growth and profitability of the Company. We will measure each against other new technology and growth opportunities that come cross our screen.

We know that there are potentially very attractive opportunities spanning the global energy, communication, and military defense markets, to name a few. While this broad range of possibilities makes us very optimistic about the future for Ultralife, it also drives home the importance of pursuing new products and businesses, that line up well with our core competencies and our ability to create a clear value proposition with a sustainable, competitive advantage. If we were to make any major decisions in this area, we would communicate them promptly.

Lastly, our fourth priority for 2011 is to more fully leverage our established China operations to accelerate global growth and manufacturing cost competitiveness. Initially acquired in 2006, this facility in Shenzhen will likely play an integral part of growing our global sales. I plan to work closely with our talented team in Ultralife China, and build off of almost two decades of my own personal Asia experience to make sure they're getting the full support and attention that they need to be successful.

In terms of the financial outlook for 2011, based on my reviews of the various businesses since arriving, I expect to see overall year-over-year revenue growth of between 4% and 5% in 2011, despite lower expected shipments of SATCOM units. Operating income growth is expected to significantly outpace revenue growth, driven by the leverage of cost initiatives taken previously, combined with the initial contributions from our 2011 lean implementation.

I also wanted to emphasize that the timing of orders and shipments may cause variability in quarterly results. Potential budgetary and appropriation delays at the Department of Defense could impact the timing of sales in the first half of 2011.

Looking at the Battery and Energy Products segment, I expect organic growth in the high-single digit range, not taking into account the resumption of shipments of 5390 batteries to DLA. This growth will primarily occur in commercial markets and through greater international penetration of our military products.

In our Communications Systems segment, I expect a much higher level of organic growth, driven by the introduction of new and refreshed McDowell products, and a greater focus on our amplifier business in international markets, for manned portable solutions for handheld radios. For the Energy Services segment, I approach 2011 with caution, as we continue to look for signs signaling increased spending for large capital projects.

Our goal for 2011 is straightforward -- we will work hard to refine our business model to fully leverage the strength of our people, products, and technical expertise, and combine these strengths with more dynamic and deliberate plans for future product development and sales growth. I look forward to reporting the success of our efforts with you in future calls.

Operator, this concludes my prepared remarks and we'd be happy to open up the call for questions.

(Operator Instructions). Zack Larkin, Stephens Inc.

Thanks for taking the questions. First thing I had to ask was, looking at the expectations going forward for the second -- for 2011, when we look at the Communications business, going off of the mentioned weakness in SATCOM, should we look at the growth to be off of the 4Q revenue base? Or how should we think about that going into 2011?

We should look at that off of the fourth-quarter revenue base. Yes. You're spot-on, Zack.

Okay. That helps a lot. With the Energy Services business, on the margins, should we expect similar types of slightly negative margins in that business, as we go through the weakened environment that we're looking at? Or how should we think about that going forward as well?

Zack, we're evaluating each of the different businesses and looking at, as I mentioned in my prepared remarks, how it fits into our overall portfolio. We have a terrific team. They're working very aggressively to turn that situation around. But I just think it's way too early to give any definitive advice on what we're looking for in the first quarter in that business.

Okay. Okay, that makes sense. Do you have a sense of the tax rate and overall margins we should look for? I mean, building off of the 25.2%, I would assume on gross margins going forward -- but what's the tax situation going forward? How should we think about that?

Well, as you're going to see when we issue our 10-K, Zack, that we still have net operating losses that will benefit the tax -- our tax situation going forward into the foreseeable future. So that will be fully disclosed, consistent with prior years.

Okay. Okay, great. And then I wondered if you could talk a little bit about some of the additional end markets, give a little bit more color on where you think you'll be most focused going forward. In the last call, we talked about some of the RFID tracking and other new commercial/consumer types of applications. Could you give us an update on any progress there?

Zack, at this point, as we look to the individual market segments we're going to pursue, we talked about the desire to try to align with our core competencies and the value proposition and competitive advantage. When we look at where we're currently very successful, whether it be the safety of our troops, law enforcement, or our families, we think there is an opportunity to go in a couple of different directions that would demographically make sense.

Now, commercially speaking, clearly, we're seeing some good opportunities that we'll continue to build on in China, but we also like to look at other energy-related markets and perhaps even in medical healthcare. We're starting to see some initial traction in those areas, but that would seem to be a place where we could continue to grow and expand.

Okay. Thanks very much.

Walter Nasdeo, Ardour Capital.

Continuing on the theme of where we're looking for some revenues, what's going on, on the -- or what's your vision of the contracting environment for things like SATCOM and some of the other defense-related types of products that you're working on?

Well, the entire area is overshadowed by the delays of the Defense Department budgets. And we have an upcoming expiration of the continuing resolution, I believe that's March 4. A lot of the existing business that we have is working under 2010 budget levels. As a result of the delays in these budgets being approved, a lot of the new products and new initiatives have been somewhat on hold. So, generally speaking, in terms of specific contracting activity, those have slowed down a little bit.

Okay. So extending that out, then assuming this 4% to 5% increase in revenue is assuming no forward movement on the contract front. And then if these things do break loose, we can look for a more significant revenue growth over the course of the year?

We would expect that, Walter. Now, remember, we're also taking into account when we say the 4% to 5%, as Mike had mentioned in his comments, the impact of SATCOM. So once we take that into account, 4% to 5% is off of the total revenues that were reported for 2010.

Right, understood. Understood. I'm just trying to see -- I mean, obviously, we had the big contract a year -- a little over a year ago, that kind of fell apart. And then the process of attracting and acquiring smaller ones to try to get to bulk is obviously a challenging process. And I'm just trying to get a feel for what you're seeing out there and what that expectation may be going forward, understanding the constraints of the government budgeting process.

Right. I think if you look at it in terms of what would be the SATCOM hole fillers, for lack of a better word, we're seeing increased on-soldier versus on-vehicle soldier monetization product sales. We're seeing growth in our international military business for handheld radio applications. We're seeing growth in our China commercial area. Collectively, we're expecting to have that net out in the 4% to 5% topline growth that we mentioned in our earnings release.

Okay. Alright, thank you. I appreciate it.

(Operator Instructions). Sam Bergman, Bayberry Asset Management.

Morning, Mike and Phil. Congratulations, Mike, on your CEO position at Ultralife. A couple of questions. Energy Services, can you tell me what that revenue amount was for this quarter?

Yes, Sam, Energy Services contributed $3.9 million of revenue for Q4.

I know on prior conference calls there was some discussion on Energy Services. I know you did that write-off, but it seems like that's a very weak number compared to the last quarter, which was, I think, $5.3 million. I'm just wondering, there is very little activity going on in that particular division and in terms of large contracts, and it hasn't come back to where it was back a year and a half, two years ago. Is there any other reason, macro reason, or product designs that are causing the Energy Services division to have that performance?

Sam, let me -- this is Phil -- let me start off by saying, on a sequential basis, Q3 was $2.5 million. So it went from $2.5 million to $3.9 million. As we said in our prepared remarks, that we saw an uptick because of greater involvement in the wireless area, which does bring some synergies to our abilities. But again, it's still waiting for the turn-on of the large capital projects, which is a key factor in the standby power industry.

Are you seeing -- I know, again, back on the third quarter, there was increased quote activity. So I'm just wondering what happened to that in terms of turning into actual orders?

As far as increased quote activities, that still is the case. We are seeing some increased quoting, but generally, it's not necessarily for the immediate next quarter. It could be out two quarters; it could be out three quarters. For anything substantial in dollars, it takes a lot of preparation to do the necessary work -- in some cases, a shutdown of major operating systems. So it's not something that happens right -- generally right when you get the order.

Okay. Can you talk a little bit about the SUNY Canton wind turbine project? Is that on schedule at this point?

Yes, we have, as you may recall from the press release of last year, this is a very exciting project we have at NYSERDA, which demonstrates the viability of the system integrating lithium and batteries, and ultra capacitors, and wind and solar generation sources. The contracts are in place. And I believe that the off-grid demonstrations are estimated to occur by late 2012 and the on-grid portion in late 2013.

Have you gotten any other requests for that type of lithium battery because of -- I mean, it's not a reference point yet, but in terms of getting that contract, have you had any other success with wind turbines (multiple speakers) -- that you could talk about?

(multiple speakers) You know, I'm not personally aware -- yes, I'm not personally aware of those at this point, but I believe that this project will give us a direct opportunity to analyze what the real business case is for the commercialization of the system, which I think is the biggest benefit of the whole project.

Okay. And regarding again comments made on the last conference call, with international business perhaps coming on the SATCOM product, there hasn't -- there was one, I guess, contract announced. What's the pipeline still look like in the international arena? And should we expect some awards in the first quarter?

Sam, the pipeline looks strong. It looks strong primarily because of the predominance of handheld radios that we see in international allied militaries, which is an ideal application for our soldier modernization, which would include direct SATCOM links to the soldiers in addition to vehicles. The timing of these, again, is subject to lumpiness, but the initiatives are certainly well underway.

Can you give us any dollar value of what's out there for proposals in the international area?

We would rather not disclose them at this time.

Okay. Okay, thank you very much.

Thank you, Sam.

And it appears there are no further questions at this time. Mr. Popielec, I'd like to turn the conference back over to you for any additional or closing remarks.

Good. Thank you very much. Once again, thank you all for joining us for our fourth-quarter earnings call. Over the next several months, I plan to try to meet many of Ultralife's shareholders and analysts. I truly look forward to meeting with all of you, and also to sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much for participating today.

That concludes today's conference. Thank you for your participation.