Ultralife Corp (ULBI) 2014 Q1 法說會逐字稿

Good day and welcome to this Ultralife Corporation first-quarter 2014 earnings release conference call. It is time for opening remarks and introductions. I would 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 Ultralife Corporation's earnings conference call for the first 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 release was issued earlier this morning and if anyone has not yet received a copy I invite you to visit the Company's website at www.ultralifecorp.com where you will find the release under the 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 potential reductions in US military spending, uncertain global economic conditions and acceptance of the Company's new products on a global basis. The Company cautions investors not to place undue reliance on forward-looking statements which 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 factors and other factors that could affect Ultralife's financial results is included in the Company's filings with the Securities and Exchange Commission including the latest annual report on Form 10-K.

In addition on today's call management will refer to certain non-GAAP financial measures 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.

Good morning, Jody, and thank you everyone for joining the call this morning. Today I will start by making some overall comments about our first-quarter 2014 operating performance then I will turn the call over to Phil who will take you through the detailed financial results. After Phil is finished, I will take the call back to provide 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 first quarter of 2014, we were very pleased to see our Battery & Energy Products business post revenues of $13.9 million, a 7% growth rate over the prior year's first quarter and take the next step in its revenue recovery efforts by building on the revenue stability established last year. Gross margin for the B&E business was 27.3%, up 360 basis points driven by productivity gains and slight volume leverage.

For our Communications Systems business, revenue was $1.4 million, a $6.6 million decline over a tough prior year comparable however also reflecting the continued impact of the slowness in the US government defense project contracting. Gross margin for our Communications Systems business was 39.2%, down 200 basis points driven by mix and reduced volume.

Despite the favorable first quarter revenue and financial performance of the Battery & Engine Products business and total Company operating expense reduction of 10%m the lower revenue and gross profit generation by the Communications Systems business led to a total Company operating loss of $1.1 million.

In our Battery & Engine Products business, the 7% revenue growth was driven primarily by some key international projects and continuing shipments of our new hot swappable battery and intelligent power management system for the medical cart industry with our channel partner under the previously announced $6.7 million agreement. We were also encouraged by our ability to obtain some variable cost operating leverage with the additional volume due to the efforts over the last few years to get our costs in line with our stated business model. We know several more points of operating leverage are available as we continue to increase revenues.

For the Communications Systems business, lower Q1 revenue was driven primarily by the delay of two key forecasted projects. In one case, the military end-user customer's first-quarter funds allocated to our project were switched to another project and in the other case a late change was made to the specified equipment model which is extending the cycle time to complete the transaction.

Regarding the first of these projects, which was for our MRC universal vehicle adapter, once the end-user customer received new second-quarter funds we received the contract on April 22. The purchase order is valued at $1.9 million and the units will ship within this quarter. The second delayed project was approved and is awaiting final funding.

These examples highlight the current US government defense funding dynamics we are seeing and the impact it can have on our quarterly results. It appears to us that given the budget constraints, [even one] in approved projects for specific requirements are getting funded more and more by piecemeal which makes predicting timelines more difficult.

Since almost every new customer opportunity for our Communication Systems business requires some type of technology development to maintain our competitive advantage, we are pragmatically evaluating internally and with our external prime partners the new product development spend against revenue magnitude in timing. In fact, given the upfront engineering expense and long gestation cycles, every new product development expenditure is under heightened scrutiny during this current slow period of US government defense spending with the priority given to projects that represent the best mid-and long-term revenue and profitability growth prospects.

We are fortunate to have a strong balance sheet and cash management which provide the liquidity and flexibility derived through the ups and downs of what remains a somewhat lumpy revenue business.

In a few minutes I will talk more about our 2014 revenue initiatives and outlook but first I'd like to ask Ultralife's CFO, Phil Fain to take you through additional details of the first quarter 2014 financial results. Phil?

Thank you, Mike. Good morning, everyone. Earlier this morning we released our first-quarter results for the period ended March 30, 2014. Consolidated revenues for the fourth quarter totaled $15.3 million, representing a $5.7 million or 27% decline from the (technical difficulty) for the first quarter of 2013. Revenues from our Battery & Energy Products segment were $13.9 million, an increase of $0.9 million or 7% from last year.

Commercial sales increased 29% over the first quarter of 2013 and included shipments of our new medical cart power systems which we launched in the fourth quarter. The increase over 2013 also reflects higher shipments of charger systems to an allied country.

Driven by the launch of our medical batteries and our focus on commercial markets, the mix of our battery sales for the first quarter of 2014 was 60/40 commercial to government and defense versus 50/50 for the first 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-international split for our battery sales was 45/55 in the first quarter of 2014 versus 50/50 for the first quarter of 2013. The split for the 2013 full-year was 59% domestic and 41% international. Sales classified as domestic improved shipments to US-based primes which in some cases serve international projects.

Communications Systems sales of $1.4 million decreased by $6.6 million or 83% from the prior year. The decrease reflects continued slowness in closing new orders from the US government as well as the fulfillment of large orders in the first quarter of 2013 for amplifiers and accessories from international defense customers for soldier modernization programs.

Similar to the trend experienced last year starting in the second quarter of 2013, we continue to see delays in the final signoff and purchase order issuance of several large high-margin projects which impacted our first-quarter sales. The underlying programs are all active and we continue to expect to fulfill these orders. In fact since the first quarter closed, we have received a signed purchase order for one of these programs in the amount of $1.9 million.

Our consolidated gross profit was $4.3 million compared to $6.4 million for the 2013 period reflecting the lower sales for 2014. As a percentage of total revenue, consolidated gross margin was 28.4% versus 30.3% for last year's first quarter. The primary driver of the 190 basis point decline is the overall mix of Communications Systems revenues to total revenues which declined from 38% in the first quarter of 2013 to 9% in 2014.

Gross margin for our Battery & Energy Products segment was 27.3%, a 360 basis point increase from the 23.7% reported last year. The year-over-year increase was due primarily to ongoing productivity improvements resulting in the elimination of most labor and material manufacturing variances and higher production volumes due to the increased revenues resulting in higher factory throughput. At the same time, the segment further reduced inventory levels by 3% since year-end.

For our Communications Systems segment, gross margin was 39.2% compared to 41.2% last year. The decrease of 200 basis points resulted from the higher volume of shipments in 2013 and the resulting higher factory throughput and absorption for that period.

The lean improvements undertaken in earlier periods and continuing in 2014 protected our base margin for the quarter despite the lower volume.

Operating expenses totaled $5.4 million, a reduction of $0.6 million or 10% from the $6.0 million reported for the first quarter of 2013. This reduction highlights our continued tight control and close monitoring of all discretionary spending. As a percentage of revenue, operating expenses represented 35.5% compare to 28.6% for the year earlier period. The higher percentage for 2014 is driven by the Communications Systems sales decline partially offset by lower G&A spending.

Despite our reduction in operating expenses, the lower gross profit resulted in an operating loss of $1.1 million compared to operating income of $0.4 million for the 2013 first quarter.

First-quarter noncash operating expenses including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.0 million versus $1.1 million for the year earlier period. This brings us to adjusted EBITDA defined as EBITDA including noncash stock-based compensation expense of negative $0.1 million versus $1.5 million for the first quarter of 2013.

Other expenses primarily comprised of foreign currency translation and interest expense netted to $63,000 versus $113,000 in 2013. Interest expense continues to be favorable due to the unused line terms of our new PNC Bank credit agreement and our tax provision was $60,000 primarily reflecting the timing of deferred taxes. Our tax provision was $98,000 for the 2013 first quarter.

Net loss from continuing operations was $1.2 million or $0.07 per share compared to a net income of $0.2 million or $0.01 per share for the same period last year.

The Company's liquidity remains solid with cash on hand of $18.9 million, no debt, working capital of over $46 million and a current ratio of 5.1. The Company's cash position was the highest ever reported at the end of the fiscal quarter. By comparison the cash on hand at the end of the first quarter of 2013 was $8.9 million and the current ratio was 4.1.

Our accounts receivable days sales outstanding metric continue at a very favorable level. However, inventory increased by 2% from 2013 year-end to help service Communications Systems shipments now scheduled for the second quarter.

Our significantly strengthened balance sheet has provided us with enhanced flexibility in executing our strategic capital allocation plans. Regarding this point, our Board of Directors has authorized the repurchase of up to 1.8 million shares of our common stock over the next 12 months. This repurchase program is intended to balance our continued investment in revenue growth including new product development and acquisitions while returning capital to our shareholders. Balance is the key word here as we remain committed to making synergistic acquisitions that will provide scale while further leveraging our business model.

In summary, the actions we have taken to improve our business model, grow our opportunity pipeline and build our cash for key investments are demonstrated in the growth and the improved profitability of our Battery & Energy Products business in the first quarter. We expect these actions and those in process to provide further leverage to our business model to drive increased profitability when the results of our efforts to grow the business in the Communications Systems segment are also realized.

I will now turn it back to Mike.

Thanks, Phil. Over the last few years, the teams have created value propositions that result in gross margin rates capable of supporting profitability while funding continuous new product development and sales force revenue growth and diversification initiatives. We have also utilized our 35/5/5/10 equals 10 business model to guide operating expense spending levels and to ensure business sustainment through strong liquidity and balance sheet. As such, we enter a period of operational stability wherein all of our efforts are focused on our number one priority for 2014, returning to revenue growth.

Whereas we have a clear appreciation for the business and economic challenges still facing our customers, our goal is to get the most out of the revenue growth available to us and deliver leveraged earnings growth.

Regarding revenue growth initiatives, our focus remains on three core elements, expanding or market sales reach, new product development, and pursuing acquisitions.

Communications Systems is actively pursuing opportunities in Latin and South America as well as in Asia-Pacific to outfit a large contingent of both Army and Special Forces vehicles with our amplifiers, vehicle mounts and integrated systems. These programs continue to mature through both testing and evaluation processes as well as within the procurement agencies. As we have been successful within the US throughout the US SOCOM vehicle fleet, we see a future for these products globally and fully expect these programs to come to fruition this year.

Our focus on US SOCOM has created large program opportunities in all areas of the battlefield communication architecture from soldier systems to vehicles and as far reaching as unmanned aerial vehicles. As our amplifier technology advances and our radio ancillary portfolio expands, we find ourselves in an increasing range of platforms, systems, and usages throughout all branches of Special Forces domestically. With a world-class engineering team, we are staying current with the latest radio waveforms in our amplifier line and are preparing to upgrade a large contingency of Special Forces equipment with the most modern waveforms.

Looking at new product development, as mentioned earlier, Comm Systems recently received a $1.9 million award for our new MRC Universal Vehicle Adapter for SOCOM through a major prime. The UVA is a small lightweight cost-effective method for installation of primary handheld radios into vehicles of all sizes maximizing the handheld radio operational potential for the end user. Since its initial introduction in August of 2013, we have now received orders for over 893 UVAs which at list price is approximately $3500 per unit.

Regarding the A320, A321 amplifier series with all of its variants, we currently are pursuing several upgrade opportunities within the US Special Forces representing close to 1,000 units. Depending on whether or not they upgraded the modification to an existing unit or a complete new unit, the list price can range anywhere from $3,300 to $6,500 per unit.

Lastly, our integrated radio amplifier accessory and vehicle new products solution for the Rifleman radio called the VIPER system is currently participating in the US Military National Integration Evaluation, NIE 14.2 at Fort Bliss with a major US Army prime contractor. Our VIPER system enables the operator to use the same radio in the vehicle or during dismounted operations and was launched in March of 2013. Recently this prime contractor with whom we collaborated with on the VIPER development issued a press release stating that they were one of four prime recipients on a 10-year $988 million US Army IDIQ award for soldier-radio waveform vehicle applique systems. Under this contract ultimately several thousands of VIPER units could be potentially purchased. At list price, the VIPER is approximately $13,000 per unit.

Representing over 33% of total sales on a quarterly basis, new product development as defined as products less than or equal to three years old continues to be a vital component of Communications Systems revenue engine.

To expand our market and sales reach in our Battery & Energy Products business and to account for weaker demand in the US government defense market, we have redirected a large portion of our sales effort towards a commercial and international market. Leveraging the proven military grade reliability of our products, we are targeting a new revenue stream from niche applications where their operational demand also require the highest level of performance and reliability.

As an update from last quarter in February we debuted our new medical cart battery system with our channel partner at the Healthcare Information and Management Systems Society show in Orlando, Florida and the response was overwhelmingly positive. In 2014, we are targeting to ship 2,000 of these systems. Depending on the product option specified, a two-battery and intelligent power management system has an ASP of around $2,000 for low volume quantities.

Besides the medical cart market, we are also targeting the mobile computer cart market and adjacent applications like material handling, power lift carts and others where mobile hot-swappable power is critical.

Another new product recently launched into both the safety and security and energy storage markets was our new family of ruggedized portable power solutions. We continue to ship initial units to end-users and channel partners serving the tactical government, disaster relief, emergency response, military and other segments for reliable robust mission-critical and silent power as needed and we are now in the process of evaluating custom configurations for various other market uses such as for international remote medical teams, water purification and the industrial market for contractors in the trades.

The key benefits of a lithium battery ultralight power portable power solution as compared to similar lead acid battery solutions are that the units have a higher quantity of operating cycles during life of the battery, are smaller in size, and lower in weight for capacity.

Our strategic decision to diversify our B&E revenue stream is paying dividends. In Q1, approximately 70% of our revenue came from non-US Government defense customers. Our US Government defense business was predictably down 9% year-over-year but this was more than offset with the 29% growth in our commercial business fueled by the new product introductions gaining traction over the last two years. We plan to continue to focus on growing our commercial business while refreshing and uplifting our G&D portfolio with the latest technology.

Looking at a quantitative update on some of the new products the Battery & Energy Products business has launched over the last three years, for the multi-kilowatt module large-format battery we now have 25 different customers to which we have shipped 155 units including those used in our new portable power system by a disaster response team for which 10 customers have purchased or are evaluating 19 units.

Regarding our new high-capacity 5390 and 2590 series also known as Land Warrior batteries and advanced lithium hybrid batteries [and styles] we have now shipped over 4,500 units to 114 customers including 1,200 units to International Allied Defense forces. The launch of our new version of our very successful 2590 rechargeable battery which meets the most current recently updated military specification, has both domestic and international customers interested. And as a side note, we also recently received the first purchase order placement over two years under our five-year IDIQ DLA contract for our legacy BA-5390 batteries for delivery in Q2 and Q3.

We have also launched a new line of lithium power rechargeable 12-volt products to the market this quarter which are drop-in replacement batteries for various sealed lead acid battery applications offering a longer life and lighter weight. We will look to add this product line over the next six months.

The markets and applications we are targeting are building centric alarm panels and security systems, fire and sprinkler systems and other building management backup power applications.

And lastly, nonrechargeable primary cells and batteries remain a core competency for us and we are actively engaging customers with specialty applications where literally no other cell type will work. We continue to introduce a high capacity manganese carbon mono-fluoride blend cathode in various cell sizes now offering four distinct sizes. These cells allow us to provide what we believe are the highest capacity solid cathode cells available in production.

In the first quarter of 2014, revenue from B&E new products that were less than or equal to three years old represented over 40% of the total B&E revenue and was up 8% from the prior year's first quarter, once again showing a slow but steady impact new product development is having on growing our revenue stream.

Regarding the financial outlook for 2014, we are maintaining our total year guidance and expect mid single-digit organic revenue growth despite continued constraints on government spending. Based on this outlook for revenue growth and the improvements made to the business model in 2013, we expect to increase operating profit year-over-year and generate a mid single-digit operating margin.

In terms of Communications Systems revenue expectations for 2014 after a slow start, we are expecting improving results as we move through the year. We are encouraged by the recent UVA contract and looking at our pending business pipeline, we are expecting several other similar sized contracts over the next few quarters and when combined with our daily flow business still at this time expect to see total year mid single-digit revenue growth in our Communications Systems business.

Predicting the timing of converting any of the US Government Defense opportunities into contracts and sales revenue remains our biggest challenge given the uncertainty and complexity of funding sources. Looked at as a whole, our Communications Systems business is currently involved more deeply and widely in global projects and program opportunities than it has ever been.

Our value proposition to gross margins are strong and we are very confident in our technology development capability and our sales force end-user expertise. As customer funding has become tighter, we have become much closer to our customers and smarter about how we acquire precious financial and human resources. Given the technological advancement of our product, the continual need to upgrade existing employee customer assets, our broad involvement across special operations groups and military branches and current world events, we remain very optimistic about the long-term revenue growth prospect of Communications Systems.

For the Battery & Energy Products business, as we've stated before, our pipeline of opportunities continues to deepen and mature and we are starting to see tangible traction in our new commercial products as well as in our international activities. We are excited about the new commercial revenue stream potential that the medical cart battery system represent to layer on top of the other new battery product revenue streams that are growing slowly but steadily.

Through a combination of new products, new market segments and new customers, we are expecting 2014 total year B&E revenue growth in the mid single-digit range. The case for B&E revenue growth in 2014 is based on achieving sales force productivity gains while laying on several new revenue streams driven both by new products and market reach expansion.

This includes new higher capacity core rechargeable battery and charger products sold to US and global customers, broadening the sales reach of our new primary batteries, the new medical cart battery stream, and the various portable and standby power solution stream. As I said on the Q4 call, we look forward to 2014 being the year that B&E returns to total year revenue growth.

In closing, we were very pleased in Q1 2014 to deliver 7% organic revenue growth and solid gross margin improvement in our Battery & Energy Products business due to the diversification into international commercial markets, new product development and productivity gains.

In Communications Systems, we continue to be excited about the new contracts and growth potential for our new product development traction. And for the total Company based on a continued execution against our proven business model and both teams' demonstrated ability to achieve favorable productivity gains in the face of constrained revenue. Our strengthening balance sheet and liquidity gives us the flexibility to simultaneously pursue organic revenue growth and new product development, aggressively seek out bolt-on acquisitions, and return value to our shareholders through stock repurchases.

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

(Operator Instructions). Matthew Paul, Sidoti.

Hi guys, good morning. Thanks for having me. For the B&E segment and the organic growth we are looking at for the year, how much more margin can you capture as a result of increased throughput?

Matthew, good to hear from you. I would certainly believe that there are 150 basis points to 200 basis points readily available potentially even more depending on the mix of the product that quite frankly would fall right to the bottom line with the higher factory throughput.

Thanks, Phil. And is that off of the first quarter margin in the segment?

Yes.

Great. And switching to the Communications Systems in your prepared remarks you spoke about expansion into the different markets highlighting Asia-Pacific and Latin America. Is that limited to organic growth or is that something you are kind of tipping your hat saying we are looking to expand through aggressively pursuing acquisitions?

This is Mike. And thanks for joining the call this morning, Matt. In our acquisition strategy for Comm Systems, we are really looking at trying to widen our lane and we think we have a very strong position in our current phase we are trying to widen our lane with adjacent products. That isn't necessarily driven by any specific need to grow more international or domestically. We are looking more at the best company we can find.

All right. Thanks, guys.

(Operator Instructions). There appear to be no other questions at this time. I will turn the call back over to Michael Popielec for any closing remarks.

Great, well thank you once again for joining us for our first-quarter 2014 earnings call. I look forward to meeting up with several of you personally over the next few weeks or so and sharing with you on our future calls, our future quarterly results. Thank you very much for joining us today.

That concludes today's conference call. We appreciate your participation.