Ultralife Corp (ULBI) 2017 Q3 法說會逐字稿

Good day, everyone. Welcome to this Ultralife Corporation Third Quarter 2017 Earnings 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, Schalan, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter fiscal 2017. 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'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 potential reductions in U.S. 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 measures -- metrics rather, that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures.

With those housekeeping items out of the way, 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'll start by making some overall comments about our Q3 2017 operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2017 revenue initiatives then open it up for questions.

For Q3 of 2017, we were pleased to deliver a solid quarter of year-over-year revenue and operating profit growth, generating an operating profit of $1.3 million on revenues of $21 million for an operating margin of 6%. Revenue was up organically 7% year-over-year, driven by an 8% increase in commercial revenue and a 6% increase in Government/Defense revenue, while operating profit was up 11% due to the leverage of the revenue increase on prudent cost containment.

Third quarter revenue for the Battery & Energy Products business increased sharply and was at the highest level in 19 quarters. Medical market revenues were up 14% while domestic and international Government/Defense B&E revenues were up 58% and 56% respectively.

For the Communication Systems business, while base revenues were essentially flat year-over-year, total revenues were down, reflecting a $2.2 million difference in present year VIPER shipments versus the prior year third quarter. That said, shipments under a new $4.7 million VIPER contract announced this summer have already begun and will continue through the end of this year and into 2018.

As we continue to gain new revenue streams from diversification into commercial and international markets, the earnings leverage achievable from the disciplined execution of our business model is apparent. Also encouraging, other early signs of improvement in the domestic G&D market.

In a few minutes, I'll talk more about our revenue initiatives for 2017, but first I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the third quarter 2017 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the period ended October 1, 2017. We also filed our Form 10-Q with the SEC this morning and have updated our investor presentation in the Ultralife website. I'd like to thank all of those that made this happen.

For the third quarter, consolidated revenues totaled $21.0 million, representing a $1.4 million or 7.2% increase from the $19.6 million reported for the third quarter of 2016. Revenues from our Battery & Energy Products segment were $18.6 million, an increase of $3.7 million or 24.6% from last year. The year-over-year increase was attributable to higher commercial and government and defense sales, domestically and internationally.

Commercial revenues for the third quarter of 2017 grew 8.3%, driven by a 14.2% increase in shipments to medical customers. Sales to our medical customers represented 57% of our commercial sales or 33% of total revenues for the segment.

Government and defense sales increased 57.5% over the 2016 period due to higher demand from our U.S. and international defense customers. After 4 quarters of year-over-year sales decline from this sector in 2016, this year, we have posted 3 consecutive quarters of growth in government and defense sales, with third quarter G&D sales reaching the highest level since the fourth quarter of 2015.

As a result, the Battery & Energy Product sales split between commercial and government and defense was 58-42 compared to 67-33 for the 2016 period. The geographic distribution of our Battery & Energy Product sales was impacted by the higher U.S. government sales with an international to domestic split of 51-49 compared to 55-45 for the 2016 third quarter.

Communication system sales of $2.4 million decreased by $2.3 million or 48.2% from the prior year when we had $2.3 million of VIPER unit shipments. VIPER shipments will increase in the fourth quarter following the $4.7 million follow on award we received in August. The segment's core products including 20-watt amplifiers, universal vehicle adapters and power supplies were essentially flat with the year earlier period.

Sales on a consolidated basis split 51-49 between commercial and government and defense sectors, identical to the mix for the year earlier period reflecting the solid overall growth in both sectors. Our consolidated gross profit was $6.3 million compared to $6.0 million for the 2016 period, an increase of 4.3%.

As a percentage of total revenues, consolidated gross margin was 29.7% versus 30.5% for last year's third quarter. The 80 basis point decline in gross margin primarily resulted from the sales mix of products, including the smaller contribution of Communication System sales to total sales and supply chain variances.

Gross profit for our Battery & Energy Products business segment increased 14.7% from $4.5 million in 2016 to $5.2 million, reflecting higher sales, partially offset by sales mix, incremental supply chain and logistics fees, and manufacturing variances incurred on the startup of certain new products incurred during the quarter. As a result, gross margin was 27.9%, 240 basis points lower than the 30.3% reported last year.

For our Communication System segment, gross profit was $1.1 million, a decrease of $0.4 million or 27.5% from the year-earlier period. Gross margin was 44.0%, a significant basis point gain over the 31.4% reported for last year's third quarter. The 2017 gross margin demonstrates the high value proposition associated with our core amplifier and Integrated Solutions products.

Operating expenses totaled $5.0 million compared to $4.9 million last year, an increase of $0.1 million or 2.7%. As a percentage of revenues, operating expenses represented 23.7%, an improvement of 110 basis points from the 24.8% reported for the third quarter of 2016. The improvement reflects our continued control over discretionary spending, augmented by the leverage of our business model.

Operating income for the third quarter of 2017 was $1.3 million compared to $1.1 million for the 2016 period, an 11.3% gain. Our year-to-date operating income of $4.4 million has more than doubled from the year-earlier period and now exceeds the $3.8 million reported for the full 2016 year by 18%.

Operating margin was 6.0% for the 2017 period, an increase of 20 basis points over the 5.8% for the third quarter of 2016. The 20 basis point increase reflects the 110 basis point reduction in the operating expense to sales ratio, partially offset by the decline in gross margin.

Third quarter noncash operating expenses, including depreciation and tangible asset amortization and stock compensation expenses, amounted to $0.8 million compared to $0.9 million for the year earlier period. This brings us to adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense of $2.0 million or 9.5% of sales versus $2.0 million or 10.4% for the third quarter of 2016.

Accordingly, adjusted EBITDA for the trailing 12-month period is now $9.3 million, representing 11% of revenues. Other expenses, primarily comprised of interest expense and foreign currency transactions, totaled $58,000 versus $30,000 in 2016. And our tax provision was $104,000 primarily reflecting the amounts and geographic mix of earnings. Our tax provision was $92,000 for the 2016 third quarter.

Driven by this solid operating performance, net income was $1.1 million or $0.07 per share, 8.7% higher than the $1.0 million or $0.07 per share reported for the same period last year. On a trailing 12-month basis, earnings per share are $0.36, representing a 57% increase over the $0.23 reported at year end.

Also driven by the solid operating performance, the company's liquidity remains strong, with cash on hand of $14.7 million, no debt, working capital of $44.9 million and a current ratio of 4.4. The increase in our cash on hand from $10.7 million at year end demonstrates our highly efficient cash conversion, as our operating cash flow is at a level approximating 1.3x our operating profit.

In summary, the actions we are taking to drive profitable growth are demonstrated with our solid year-to-date results. Our intent remains on driving volume and sales through further organic and synergistic initiatives to unleash the full leverage potential of our business model.

I will now turn it back to Mike.

Thanks, Phil. For 2017, we are keenly focused on revenue growth through 3 avenues: Expanding our market and sales reach, new product development and pursuing acquisitions.

Regarding market and sales reach expansion in the Battery & Energy Products business, the revenue growth achieved from diversification into more global commercial and international Government/Defense markets has enabled us to improve our overall financial performance despite sluggishness the last several years in our historical U.S. Government/Defense market.

As evidence of our success in this diversification, while B&E registered growth across all of our major served markets in the third quarter, the global commercial and international Government/Defense markets represented in aggregate, approximately 70% of the total B&E sales.

Looking more closely at the commercial revenue, the largest component is medical, representing approximately 33% of total B&E revenue. Since 2011, the year we initially launched our commercial diversification strategy, the total medical business has grown at a compounded annual growth rate of over 60%. In Q3, medical market sales were up 14%, with applications served by our battery and charger products, including but not limited to, breathing devices, infusion pumps, medical carts and automated external defibrillators.

While we continue to pursue many new medical devices opportunities, we are also actively penetrating further into a multiple of other commercial end markets, expanding our sales reach and channel access and leveraging our global platforms to drive revenue growth.

Example of development activities during the third quarter included battery and charger applications for: industrial equipment, safety and security, metering and sensors, asset tracking, in-transport entertainment and the Internet of Things.

With respect to the Battery & Energy Products international Government/Defense business, noteworthy activity in the quarter included key shipments of both primary and rechargeable battery products to several international prime contractors.

We also continue to pursue other new international projects and cross-selling activities, including participating this past September with our Accutronics team in displaying a variety of our products at the Defense and Security Equipment International, or DSEI, show in London, an exhibition focused on the global defense and security sectors.

As happy as we are with the positive top line impact, our strategy to diversify more aggressively into commercial and international defense markets, we are also excited about the positive indicators of future growth opportunities that we have seen throughout 2017 in the Battery & Energy Products U.S. Government/Defense business.

As a quick recap, in March of this year, we received from the Defense Logistics Agency, a new firm fixed price IDIQ contract for purchases not to exceed $21.4 million for our lithium manganese dioxide non-rechargeable 5390 batteries. The award consists of a 3-year base contract with 2 1-year option periods, and the amounts of timing of deliveries under this contract are at the discretion of the DOA.

This new contract also includes a revised product specification and prerequisite first article testing as well as other qualification and individual lot testing, and as such, extends out the timing of the potential initial deliveries generally by about a year or so. That said, during the interim period, we've continued to receive frequent meaningful purchase orders of our Legacy batteries.

Through three quarters of 2017, total Battery & Energy Products DLA revenue from all of our military battery products purchased year-to-date is up 49% versus the prior year. Furthermore, at the end of this past September, we received another firm fixed price IDIQ contract from DLA, this time for purchases not to exceed $49.8 million and for our new hybrid lithium manganese dioxide carbon monofluoride or CFX non-rechargeable 5790 and 5795 batteries.

Building on a success of our existing lithium manganese dioxide family of primary batteries, our new CFX batteries deliver 1/2x the energy in the same size and weight as our legacy batteries, making them ideal for longer duration missions, while maintaining our prudent safety, performance and reliability under the toughest of conditions.

The award is for 5 years, with the amounts and timing of deliveries at the discretion of DLA. With the required first article and other qualification testing, we expect to begin initial deliveries under this contract in early 2019.

In addition to the awards received directly from DoD contracting entities, in Q3, we also saw a noticeable year-over-year increase in ongoing activity in purchases from our U.S. Government/Defense OEM channels. This includes applications of our military battery and charger products for tactical communications as well as remote energy storage. And in some cases, the revenue stream is more than double the prior years' levels.

We are also closely engaged in the ongoing collaborative development of battery and charger solutions that form integral parts of the next generation tactical communication products being fielded by our global radio OEM customers.

All in all, we're seeing increasing activity levels, from both the various DoD contracting offices and the Government/Defense OEMs, meaning more inquiries, RFQs and IDIQs that point to future growth opportunities.

In terms of B&E new product development, Q3 2017 revenue from products introduced less than or equal to 3 years ago was 34% of total B&E revenue. We continue to collaborate with our customers to develop new products and evolve existing products through multigenerational product plans, many of which are critical components of driving the market and sales reach expansion just noted.

In addition to product development activity supporting our legacy Government/Defense customers, we are also pursuing new product projects with both medical and industrial customers.

Also, as we continue the process of developing our next generation 3-volt lithium metal product lines to support numerous wireless applications for the rapidly growing Internet of Things applications, as well as the next generation smoke alarms, asset tracking devices and metering. We also remain on track with a strategic CapEx investment project to modernize our manufacturing capability at a facility in New York, New York for making a premium 3-volt primary battery product line.

We are leveraging the external industry leaders in lean and automation best practices with our own product development and manufacturing technology expertise to produce a differentiated product with clear competitive advantage in terms of product performance, volume, safety and price value propositions.

We're also moving forward in the product advancement of our existing thionyl chloride cells produced in our China facility to better tailor their attractive performance characteristics for serving newly identified commercial and industrial application revenue growth opportunities.

Simply said, our new product development goal is to produce the highest value proposition, best quality and safest products, in which every one of our global locations that best serves the supply chain of our end market and OEM customers.

Regarding Communication Systems, in Q3 2017, new product development revenue from products less than or equal to 3 years old represented approximately 75% of sales, with continued shipments of universal vehicle adapters in support of the various family of special operation vehicles programs as well as our latest 21 amplifiers.

The high percentage of new product development sales per quarter demonstrates the continued relevance and acceptance of products designed and developed over the last few years to meet critical communications requirements.

Also during the third quarter, in August, we were very pleased that Communication Systems was awarded a third VIPER contract from a major OEM prime and valued at approximately $4.7 million. The VIPER product supports ongoing U.S. Army radio programs by providing enhanced range of digital voice and data communications and operational flexibility for the soldier. This contract follows the VIPER awards received and shipped in 2015 and 2016 totaling $10.5 million.

Shipments under this latest $4.7 million contract began in Q3 of 2017 and will continue through the end of 2017 and into 2018. This award illustrates the benefits of our ongoing strategy of investing product development and engineering resources in close collaboration with strategic partners and provides a building block for future new product development initiatives to address the increasingly complex secure integrated communications requirements for soldier modernization.

Going forward, the primary activities of the Communication Systems business development team involve continued marketing expansion and targeted OEM engagement for their major radio programs. The current OEM collaboration development initiatives include: various amplifiers, power supplies and integrated systems for both dismounted and vehicle platforms domestically and internationally.

Domestic radio programs such as Rifleman, Leader, HMS Manpack and STC are fielding new radios with improved waveforms, multiple channels and increased overall radio performance, which drives our innovation and new product development focus on a daily basis.

For the remainder of 2017, Communication Systems is focused on driving growth in revenue from its core business products and simultaneously capturing larger program opportunities critical to leveraging the Communication Systems business model and profitability.

In closing, in Q3 2017, we saw strength in many of our commercial and Government/Defense revenue streams combined for solid top line revenue growth and bottom line leveraged earnings. Having more than doubled both operating profit and EPS year-over-year for the first 9 months of the year we are poised to deliver another year of profitable growth in 2017.

Looking forward, with continued investments in market and sales reach expansion, new product development and strategic CapEx, we will continue to expand our revenue growth prospects in both the commercial and international Government/Defense markets.

In our U.S. Government/Defense market, we are well positioned to capitalize on any increased spending as a result of the recently approved 2018 federal budget. We also remain very active in the hunt for the next acquisition and are pursuing strategic accretive business editions, whether they be in existing core or adjacent products or markets, and/or vertical integrations.

Potential end markets of high interest include, but are not limited to: medical, Internet of Things, motive power, safety and security, industrial marine and oil and gas. Our clean balance sheet, efficient cash generation and access to capital give us the flexibility to aggressively pursue both organic and inorganic growth opportunities.

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

(Operator Instructions) We'll have our first question from Gary Siperstein with Eliot Rose Wealth.

My first question is just to get a little more color, Mike, on the 3 contracts won this year. So you mentioned that, there's a year of testing once you get the IDIQ. So does that mean there's the possibility that the $21.4 million contract you've got in March could see some 2018 revenue or do you to expect it all to be 2019?

You know, there's a possibility it would be the end of 2018, but it's more likely to be the early part of 2019. And as I said in my prepared remarks, we still continue to see a lot of delivery orders for our legacy products in the meantime.

Okay. And the -- would that mean the larger contract, the $49.8 million, would see revenue in 2019, but towards the latter half because of the delay from the March contract?

No, I don't think that I would look at those as being sequential. I mean, the $21.4 million IDIQ for our -- the next, sort of, step of our existing 5390 batteries is a separate activity from the CFX lithium manganese dioxide blended product. So I don't view those as being one after the other as somewhat a little bit overlapping, although they're probably about a year apart in terms of when initial deliveries would start.

Okay, that's fair. And on the $4.7 million VIPER that's already started shipping, you talked about further shipments in Q4 and Q1 of 2018. What's the cadence on that? Would maybe 40% be in 2018 and you'd get 60% out between Q3 and Q4 this year or is it 50-50?

You know it's probably best to think about 50-50, but we're going to always try to do the most amount that we can as soon as we can.

Gary, I'm going to clarify -- this is Phil -- one point, it's disclosed in the Form 10-Q. We shipped $133,000 in Q3 of VIPER shipments, you'll see that again in the 10-Q.

Okay, okay. So the majority of the contract is Q4-Q1 roughly 50-50. And if I recollect correctly, and I might have this wrong, so point it out to me, but when we started shipping the original contract on the previous VIPER win that was $10 million.

I believe the early quarters, we didn't have any margin on it. And as you got the logistics ready and you bought the stuff and before you got into fine tuning the manufacturing, because of that learning curve previously, will this have better margins going -- for Q4 and Q1?

I mean, following that logic, that's true. There were some startup costs associated with it. And I would say the margins are pretty stable at this point.

Okay, super. That's what I was expecting. And Phil, in your comments, you talked about the margin declining on B&E due to -- besides mix -- in addition you highlighted incremental supply chain costs and logistics fees. Can you give us some color on that and is that a permanent thing going forward or is that just something that hit in the quarter and it's temporary?

We look at that as just specific to the quarter. Regardless of the quarter, things generally happen in a quarter, especially when you're introducing numerous new products, whether you call it an R&D incremental spending for development testing or if it's relating to manufacturing variances to get up to higher volume production levels for new product, it hits your P&L. So it's -- in the cases that I mentioned, it's specific to the quarter.

Okay, super. And then I know you don't like to talk about customers, but I saw that Harris won a $750 million IDIQ on radios. And I think it was a 3- to 5-year kind of deal, similar to the ones you guys won that you've highlighted.

But my -- when I read through the contract, it seemed to talk about a certain amount of 2018 revenue in the immediate 12 months since its award. Can you give us any color on that? If you've heard anything in terms of how it can benefit us in the next 12 months?

Gary, you'd have to ask them more specific questions about the ins and outs of their contract. But just generally speaking, it's just good to see the overall flow of DoD dollars going into markets that potentially represent opportunities for either our battery or amplifier products.

Okay. And we do supply battery and amplifiers to Harris?

We don't comment about specific customers where we provide those -- but we provide battery and amplifiers into the telecommunciations segment.

Okay. And Mike, I know it's hard on the M&A side. You call it out each quarter and obviously, no one wants you to make a bad acquisition so you have to be careful. But that being said, what has held us back so far from closing a deal? Has it been more a dearth of good-quality companies or is it there's a bunch of good ones but the price is too high?

I would say it's been -- in terms of overall activity level, it's certainly been steady but increasing. And as our results get better I think we're more attractive acquirer. But we're extremely methodical about in our space, looking at acquisitions that really make sense for us.

And so we want to be able to see that there's a clearer strategic fit. It's not just we do the acquisition, we get the benefit of the revenue and then it doesn't go anywhere. We want to do an acquisition that results in an immediate revenue benefit and some cost energies but then an ongoing organic growth in revenue stream. For instance, Accutronics grew 15% in Q3. I mean, that's -- we'd like to find more of those types of acquisitions.

We also look for, because of the upfront purchase costs and the write up of inventory and intangible asset amortization, all the wonkish kind of stuff. We look for companies that there's a clear roadmap to get back to at least parity and hopefully better overall quality of our earnings, because we know that our investors view our quality earnings as one of the key components to determine what a PO ratio is.

We look for, from an EPS standpoint, which is the other key element our investors look for, to be not dilutive that first year in EPS. We want to be accretive. You may recall, Accutronics was $0.03 accretive in the first year; they're on track to beat that this year. And last but not least, obviously, a decent return on our capital expenditure.

So they're pretty rigorous metrics, they're not meant to be so rigorous that there's no suitable candidates. But when we look at trying to bring a team onto our team and join together and deliver shareholder value, we go through that very methodical process. And in our industry, there's been some companies that are -- may be attractive on the revenue side but their balance sheet isn't so attractive and so we look deeply under the covers.

And so I know it's a long winded answer to your short question, but I would see that our activity is overall improving. We've seen a lot more interest from people that we go in to talk to about the potential ability someday. But in many time, we're talking to people that's their life's work that we are going to be taking over and they want to make sure it's a soft landing for their people. And so that takes a little bit of time.

That's great, thanks for the color. And lastly, Phil, in terms of IR, now that we are going to be finishing our third year in a row of increased profitability. So I guess, almost 12 quarters now, and the fact that earnings should be up 50% plus this year. Liquidity seems a little better in the stock.

But can you give us some color on either one-on-one meetings you guys have been having or if you're at the point where you can start going to conferences and the efforts to get sell-side coverage?

Absolutely, Gary. We look at our approach to IR with an eye towards ROI, similar to any dollars that we spend or how we carve out our time. We found that for us, it's a much higher ROI when we do one-on-one prearranged potential investor meetings. And we have a very good track record for that.

And this is an ongoing effort, just as Mike is out there seeing at least 10 customers a month, we have certain -- I'm sorry, a quarter -- we have certain metrics that we follow with the IR. And when I see the form 13s, it has brought a smile to my face with the progress that we've made and that will continue.

(Operator Instructions) And it appears we've exhausted all questions. We'll turn the conference back over to Mr. Michael Popielec for any additional or closing remarks.

Thank you, operator, and thank you, everybody, for once again joining the call for our third quarter 2017 Earnings Call. I look forward to sharing with you our quarterly progress on each quarter's conference call in the future.

As Phil mentioned earlier, I'd also like to mention that if we've updated our trailing 12-months financial information as well as some other slides in our investor presentation on the website, so please check that out. Have a great day.

That does conclude today's conference. Thank you for your participation. You may now disconnect.