Ultralife Corp (ULBI) 2014 Q3 法說會逐字稿

Good day and welcome to this Ultralife Corporation third-quarter 2014 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, Jennifer, and good morning, everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter of fiscal 2014. With us on today's call are Mike Popielec, Ultralife's President and CEO, and Phil Fain, Ultralife's Chief Financial Officer.

The earnings press release was issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the Company's website, www.ultralifecorp.com, where you will find the release under Investor News in the Investor Relations section.

Before I turn 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 potential reductions in US military spending, uncertain global economic conditions, and acceptance of the Company's new products on a global basis. The Company cautious 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 about these factors and other factors that could cause 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 third-quarter 2014 financial 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 provide a review of our Q3 operating performance and 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.

In the third quarter of 2014, commercial revenue in our battery and energy products business was up 36% year over year, fully offsetting the decline in the B&E government defense revenue and leading to a 3% year-over-year growth for the total B&E business.

For the quarter, the B&E business represents approximately 87% of total Company's sales. Approximately 61% of that B&E revenue comes from commercial customers. As a result of the increased higher-margin commercial revenue and continuing execution of our business model, battery and energy products was profitable in the third quarter.

In our communication systems business, continuing sluggishness in the government defense tactical communications contracting drove revenues down 69% year over year, which led to a total Company revenue decline of 21%. However, based on the operating leverage achieved by increasing B&E revenue by approximately 14% sequentially from the second quarter of 2014 and overall Company cost adjustments from actions taken in the first half, we were able to improve our profitability from the $1 million plus quarterly losses in each of the first two quarters of this year to deliver roughly breakeven operating profit performance in Q3.

Now, I'd like to ask Ultralife CFO Phil Fain to take you through additional details of the third-quarter 2014 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning we released our third-quarter results for the period ended September 28, 2014. Consolidated revenues for the third quarter totaled $16.1 million, representing a $4.3 million or 21% decline from the $20.4 million for the third quarter of 2013.

Revenues from our battery and energy products segment were $13.9 million, an increase of $0.4 million or 3% from last year. The year-over-year growth was fully attributable to an increase in commercial sales, which exceeded the decrease in government and defense sales. Commercial sales increased $2.2 million or 36% over the third quarter of 2013, primarily driven by shipments of new products, including those specifically designed for medical devices in our multi-kilowatt module battery systems.

This marks the third consecutive quarter of double-digit commercial sales gains and brings the increase on a year-to-year basis to 27%. Sales to government and defense customers declined $1.8 million or 25% from the third quarter of 2013. As a result, the mix of commercial sales increased from 46% to 61%, and government and defense sales fell from 54% to 39% versus last year.

For the third quarter of 2014, international sales accounted for 48% of battery and energy products revenue, up from 39% last year. Communication system sales of $2.2 million decreased by $4.7 million or 69% from the prior year. Continuing the trend that started in the second quarter of 2013, we experienced slowness impacting our daily flow business in the final signoff and purchase order issuance of several large projects. The large programs are all active, none have been canceled, and we remain in close contact with the contracting officers about the status of these orders.

Our consolidated gross profit was $4.5 million compared to $6.1 million for the 2013 period, reflecting the lower sales for 2014. As a percentage of total revenues, consolidated gross margin was 27.9% versus 30.1% for last year's third quarter. The primary driver of the 220 basis point decrease is the overall mix of the higher-margin communications systems revenues to total revenues, which decreased from 34% in the third quarter of 2013 to 14% in 2014. Gross margin for our battery and energy products segment was 27.4%, a 70 basis point increase from the 26.7% reported last year and a 380 basis point improvement over the 23.6% reported in our second quarter. The year-over-year increase reflects the more favorable gross margins associated with the commercial sales.

For our communication systems segment, gross margin was 31.3%, representing a 560 basis point decline from the 36.9% reported last year. The decrease is both mix and volume related. Operating expenses totaled $4.5 million, a reduction of $0.9 million or 17% from the $5.5 million reported for the third quarter of 2013. The decrease reflects both our continued efforts to reduce discretionary spending and the timing of certain expenses related to new product development and testing, which tends to vary by up to a few hundred thousand dollars per quarter. As a percentage of revenue, operating expenses represented 28.3% compared to 26.9% for the year earlier period.

We reported an operating loss of $55,000, reflecting the improved and more optimized profitability for our battery and energy products business, offset by the loss generated by the communications systems business. Third-quarter non-cash operating expenses -- including depreciation, intangible asset amortization, and stock compensation expenses -- amounted to $1.1 million, consistent with the year earlier period. This brings us to adjusted EBITDA -- defined as EBITDA, including non-cash stock-based compensation expense of $0.9 million versus $1.8 million for the third quarter of 2013.

Other expenses, primarily comprised of foreign currency translation and interest expense, netted to $208,000 versus $61,000 in 2013, primarily reflecting fluctuations between the US dollar and pound sterling. And our tax provision was $60,000, primarily reflecting the timing of deferred taxes.

Our tax provision was a $16,000 credit for the 2013 third quarter, reflecting a retroactive adjustment for the classification of Ultralife China as a high technology national company, thereby reducing our local tax rate. Net loss from continuing operations was $0.9 million, or $0.02 per share, compared to a net income of $0.6 million or $0.04 per share for the same period last year.

The Company's liquidity remains solid, with cash on hand of $15.6 million, no debt, working capital of $44.6 million, and a current ratio of 4.7. By comparison, the cash on hand at the end of the third quarter of 2013 was $10.8 million. Our strong balance sheet continues to provide us with flexibility in evaluating and executing our strategic capital allocation plans.

As disclosed during our first-quarter earnings release and investors' call, our Board of Directors have authorized the repurchase of up to 1.8 million shares of our common stock by May 1, 2015. During the third quarter, we repurchased 160,557 shares. We remain committed to the share repurchase program as a key element of our capital allocation policy, in which we are balancing long-term investments in revenue growth, including new product development and acquisitions, with enhancing shareholder returns in the near term.

While we are never satisfied reporting an operating loss, regardless of its magnitude, we are pleased with the continued growth in commercial sales for our battery and energy products business and the resulting profitability now generated by that segment. We continue to focus on growth and productivity initiatives to optimize our gross margin while maintaining strict controls over discretionary spending. This will help ensure greater leverage to our business model and profitability when the results of our efforts to grow the top line, both organic and through acquisitions, are more fully realized.

I will now turn it back to Mike.

Thanks, Phil. In 2014 we have continued to launch new products and value propositions that result in gross margin rates to support improved profitability and to fund both new product development and end market diversification. This combination gives us the best shot at controlling our own destiny in the face of decreased government defense spending.

To expand our market and sales reach in our battery and energy products business, the primary approach has been to diversify outside of our core US government defense market by growing our commercial and international revenue. A key driver has been the new product introductions in the medical field where our revenues increased by over 80% versus the prior year's third quarter.

For our international business, in Q3 we received key certifications for our new version of our medical cart battery system covering the 200 to 240 volt range, which is expected to be released in the fourth quarter and give us access to more global medical card opportunities.

In addition, in Q3 we secured two contracts from international government defense customers for battery charging systems that totaled in excess of $2.5 million. These systems will be delivered over the next two quarters and have options for additional quantities in 2015.

Total B&E international revenues were up 25% year over year in Q3 2014 and represented 48% of total B&E sales. Lastly, in our core US government defense business, additional orders under our five-year IDIQ DLA contract for legacy 5390 batteries have generated a backlog in excess of $2 million.

Investment in new product development to expand our addressable market also remains a core strategic plank for battery and energy products, and revenues derived from products introduced less than or equal to three years ago represented more than 60% of our sales in Q3.

As an update from our second-quarter's call regarding our new high-capacity CFX blend cathode sales, we have received word that the US DLA anticipates issuing shortly an RFP for a five-year, firm fixed price IDIQ contract.

Separately, we have also received a follow-on order from a GND prime contractor as part of their evaluation process to use this technology in large battery systems.

And finally, we have launched our new rechargeable 2590 battery design to meet the US Army mil-spec earlier this month and have already received positive feedback in orders for several hundred units from customers evaluating preproduction samples.

In other news, our battery and energy products business has been awarded a small initial development subcontract from the US Army CERDEC for a lithium-ion, CFx/MnO2 hybrid prismatic cells to be used in a conformal battery and battery management system. The use of conformal batteries by the US military is growing and is key to the next generation of soldier-wearable power. We have experience with conformable batteries to the development of our conformal lithium-ion rechargeable battery, which can provide power for a 24-hour mission, and we will develop the CFx/Mn02 hybrid prismatic cells with high-capacity to deliver a nonrechargeable conformable battery which will provide capacity and energy to meet the Army's 72-hour mission requirements.

At communications systems, we continue to solidify our opportunity pipeline with a heavy focus on US SOCOM and our OEM customers. While government contracting continues to be slow, even in the case of critical purchases, our top customers remain active in their interest of our full line of communications products. We continue to maintain our position as the market leader of 20-watt amplifiers and are working on the next generation of products. Not only are our core amplifier and vehicle adapter products receiving a strong interest in our tactical communications markets, but our business development team is also uncovering opportunities for integrated solutions based on our core products in a variety of adjacent areas, such as for ISR applications.

Another emerging trend for us is the increasing engagement in industry strategic partnerships where, at the request of our DoD customers, we work together, each at its own expense, to address needs identified by the DoD entity and to develop more integrated C4I solutions.

Communications systems' international opportunities also continue to grow as the customer base expands. OEM customers in multiple countries are working closely with our engineers and sales team to integrate our amplifiers within their full product line of handheld and manpack radios.

In some cases, we are asked to enhance capabilities to provide more robust legacy communications systems, while in other cases we are supporting a new network architecture. We find that in most cases, due to our product's design and radio-agnostic flexibility, we are compatible with nearly all radios that we encounter with minimal additional engineering effort.

With a high level of customer engagement and new product development opportunities, our pipeline for business continues to grow and expand into new areas of growth for the organization, with project maturities ranging anywhere from a few months to several years.

Consistent with the last several quarters, communications systems revenue continues to be driven by new products less than or equal to three years, and in Q3 they represented 40% of sales. In Q3 we participated in the US Army's NIE 14.2 at Fort Bliss with our Rifleman Radio applique known as the VIPER system, which integrates a radio amplifier and accessories with a vehicle adapter, enabling the operator to use the same radio in the vehicle or during dismounted operations.

We are also currently working with a major U.S. Army prime contractor with our VIPER solutions supporting NIE 15.1, and are partnered with one of the four prime contractors who were recent recipients of a 10-year, $988 million U.S. Army IDIQ award for a soldier radio waveform vehicle applique system.

Regarding the financial outlook for 2014, despite the Company's commercial sales momentum, we now expect revenue for the year to be below last year by up to 20%, given the reduction in global government and defense spending and exacerbated by the continuing timing uncertainties of several communication systems' projects. As a result, we expect an operating loss of approximately 3% to 4% of sales for the year.

For battery and energy products, our growing commercial sales point to the success of our diversification and new product-driven organic growth strategy, including the new medical card battery system, our new higher capacity core rechargeable battery and charger products, new primary batteries, and the various portable and standby power battery solutions.

We continue to make progress against the goal of returning to total year B&E sales growth, and our expectations are that in 2014 our B&E revenues will be within 3% of 4% of prior year's revenue.

Exiting 2014 and entering 2015, we expect to continue to grow our B&E commercial business, and the recent uplifts of our GND product portfolio with its latest technologies position us well for when more favorable GND market conditions return.

Regarding our communications systems business revenue expectations for the remainder of 2014, although we are continuing to pursue a wide range of special operations group and military branch-driven programs and global opportunities, the current government defense budgets and slow pace of conversions from opportunities to contracts continues to weigh on our result. Current projections show that our communications systems 2014 revenue could be down by more than half year over year, which has caused us to change our total year Company revenue guidance.

Despite the present downward cycle of government spending, we continue to invest both in our people and new product development, given the high level of customer interest in project activity for our communications systems products, allocating our limited resources to projects with our strongest customer relationships and our best opportunities for near-term revenue captures. We cannot predict what or when specific worldwide events will drive the next spending cycle, yet we remain closely engaged with our key customers in launching the latest technology and new products, such that when that upward cycle begins we are best positioned to serve our customers' future needs for tactical communications, amplifiers, and ancillary products.

As our current customer interest and activity levels are disproportionate to recent revenues, we remain optimistic about the long-term revenue growth prospects at communications systems.

In closing, in the third quarter of 2014, battery and energy products achieved a key revenue milestone, as our three and a half year efforts to overcome the government defense revenue decline via a commercial revenue diversification strategy led to a 3% year-over-year organic revenue growth. That said, we also continue to bolster our global government defense, OEM, and end-user relationships by working closely with them to develop new products.

Since we now have both sustainable commercial and global government defense components to our B&E revenue stream, we have more flexibility in the ability to control our own future than when we were so heavily dependent on the US government defense business alone.

At communications systems, we are well positioned with advanced technology products serving numerous projects that continue to incubate, and we have the strong balance sheet and improving portfolio contribution of the battery and energy products business to help us ride out this challenging cycle for communications systems until capture of some of their key pending projects resulting in more positive impact to the P&L.

As each of the business teams continue to sharpen their operational skills, improve gross margins, lower operating costs, and the Company maintains its solid balance sheet and liquidity, we have the flexibility to create organic revenue growth opportunities through new product development, seek out and integrate bolt-on acquisitions, and enhance returns to our shareholders through stock repurchases.

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

(Operator Instructions). William Jones, Morgan Stanley.

Gentlemen, can you tell me the average price you paid for that stock or the dollar amount?

Yes, $3.30. A full disclosure on a month by month basis will be made available in our 10-Q, which will be issued in the next week or so.

Okay. And I don't know if you can answer this, but some of these new product initiatives, are you going for revenue potential of $2 million to $5 million or $10 million, or can you say anything there?

It certainly differs by business. The new products initiatives in the B&E business tend to be lower per unit dollar values, but much higher volumes, where the communications systems new products can range more -- smaller volumes, but can be in the thousands of dollars per products.

So when we look at overall contribution to a whole product line, when we put forth our new product development strategy, we set a sort of internal goal for ourselves of having a revenue stream of at least $3 million a year within three years. And that's how we make those decisions about what products we invest in verses products we don't invest in.

Okay. I guess that's it. Thank you.

(Operator Instructions). And there are no further questions in the queue at this time.

Okay. Well, thank you once again for joining us for our third quarter of 2014 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. Thanks very much and have a nice day.

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