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Edited Transcript of ULBI earnings conference call or presentation 6-Feb-20 1:30pm GMT

Q4 2019 Ultralife Corp Earnings Call

Newark Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Ultralife Corp earnings conference call or presentation Thursday, February 6, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael D. Popielec

Ultralife Corporation - CEO, President & Director

* Philip A. Fain

Ultralife Corporation - CFO, Treasurer & Corporate Secretary

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Conference Call Participants

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* Jody Burfening

Lippert/Heilshorn & Associates, Inc. - MD and Principal

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Ultralife Corporation Fourth Quarter 2019 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, ma'am.

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Jody Burfening, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, James, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's Earnings Conference Call for the Fourth Quarter of Fiscal 2019. 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. Since 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 the Investor Relations -- 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 contains 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 revenues from key customers, uncertain global economic conditions and acceptance of 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 and other factors that could affect Ultralife's financial results is included in Ultralife'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.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [3]

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Good morning, Jody, and thank you, everyone, for joining the call. Today, I'll start by making some overall comments about our Q4 and total year 2019 operating performance, after which 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 2019 revenue initiatives, including the acquisition of Southwest Electronic Energy Corporation, referred to as SWE, then I'll talk about the focus areas for 2020 before opening it up for questions.

For the fourth quarter of 2019, total company revenue increased 48% year-over-year, driving leveraged operating profit up 132% and GAAP earnings per share up 49%. Both Battery & Energy Products and Communication Systems' core businesses achieved quarterly revenue increases, leading to a total company Q4 organic revenue growth of 16%. At Communication Systems, fourth quarter revenues were up 113% year-over-year, resulting from solid shipments under existing contracts for the U.S. Army's Network Modernization Initiatives. At B&E, total fourth quarter revenue was up 38% year-over-year, with the core business revenue growth again boosted by a strong SWE acquisition contribution.

For the total year of 2019, we were pleased to deliver our fifth consecutive year of profitable growth with operating profit increasing 12%, and total company revenue increasing 22%. The business teams finished the year strong, offsetting early in the year increased cost to ramp up production of new products, investment in additional head count to support future revenue streams, and completion of the acquisition and integration of SWE, all while achieving a total year increase in EPS.

In a few minutes, I'll give you further updates on our revenue initiatives, but first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the fourth quarter 2019 financial performance. Phil?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [4]

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Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter ended December 31, 2019. We also filed our Form 10-K with the SEC and have updated our investor presentation, which you can find in the Investor Relations section of our website. I would like to thank all those that help make this happen.

For the fourth quarter, consolidated revenues totaled $31.0 million, representing a $10.1 million or 48.2% increase over the $20.9 million reported for the fourth quarter of 2018. Overall, commercial sales increased 53.6%, boosted by Southwest Electronic Energy Corporation or SWE, which we acquired on May 1. Government and defense sales increased 43.1%, unfavorable performances by both businesses. Revenues from our Battery & Energy Products segment were $25.1 million, an increase of 38.4% over last year primarily attributable to a $6.8 million revenue contribution from SWE.

Sales for our core business was at the highest quarterly level in over 2 years, driven by a 14.9% increase in government and defense sales. Including SWE, the sales split between commercial and government and defense was 67-33 compared to 61-39 for the 2018 fourth quarter, and the domestic to international split remained fairly constant at 49-51 compared to 47-53 last year.

Revenues from our Communications Systems segment were $5.9 million, an increase of $3.1 million, more than doubling over last year. The increase primarily reflects shipments of vehicle amplifier-adaptor systems to support the U.S. Army's Network Modernization and other initiatives under the delivery orders announced in October 2018 and shipments of vehicle communication kits under an IDIQ contract with a major defense contractor also announced in October 2018.

On a consolidated basis, the commercial to government and defense sales split was 55-45 versus 53-47 for the year earlier period, demonstrating the continued success of our revenue diversification strategy. Our consolidated gross profit was $9.4 million compared to $5.7 million for the 2018 period, an increase of 63.8%. As a percentage of total revenues, consolidated gross margin was 30.2% versus 27.3% for last year's fourth quarter, an increase of 290 basis points.

Gross profit for our Battery & Energy Products business increased 35.1% to $6.6 million from $4.9 million. Gross margin was 26.4%, a decrease of 60 basis points from 27.0% reported last year due primarily to incremental costs associated with transitioning several new products, both commercial and government and defense to higher volume production.

For our Communication Systems segment, gross profit was $2.7 million, an increase of $1.9 million compared to $0.8 million for the year earlier period. With the transition of vehicle amplifier-adaptor systems for the U.S. Army to higher volume production and the costly rework due to late cycle product changes now behind us, and aided by favorable sales mix, gross margin grew to 46.1% compared to 28.8% last year.

Operating expenses totaled $6.9 million compared to $4.6 million last year, an increase of $2.2 million or 48.2%. The increase was primarily attributable to the addition of $1.4 million related to the acquisition of SWE and $0.5 million or 49.5% increase in core engineering and technology spending, split evenly between the businesses for the high-volume of new product development and testing. As a percentage of revenues, operating expenses were 22.2% for both the current and year earlier periods.

Operating income for the fourth quarter of 2020 was $2.5 million compared to $1.1 million for the 2018 period, representing an increase of $1.4 million or 131.8%. And operating margin was 8.0% for the 2019 period versus 5.1% last year, driven by the 290 basis point improvement in gross margin.

Adjusted EBITDA, defined as EBITDA including noncash stock-based compensation expense, was $3.4 million or 11.0% of sales, an increase of 77.7% over the $1.9 million or 9.2% for the fourth quarter of 2018. On a trailing 12-month basis, adjusted EBITDA is $11.0 million or 10.3% of sales.

Our tax provision for the fourth quarter was $515,000 compared to $47,000 for the 2018 period prior to the income tax benefit of $18.7 million recorded last year to release the valuation allowance on our U.S. deferred tax assets.

As a result of reversing the valuation allowance at year-end 2018, we are acquired by generally accepted accounting principles to utilize the U.S. statutory rate on the domestic portion of our income to report our tax provision for 2019. Accordingly, our reported tax provision for the fourth quarter is based on an effective rate of 23.7%, while utilization of our deferred tax assets will drive this rate down to approximately 6.5% when we pay our taxes. We expect that the net operating losses and tax credits included in our deferred tax assets will offset U.S. taxes for the foreseeable future.

Including the interest expense on debt incurred to fund our recent SWE acquisition and using the 23.7% effective tax rate, net income was $1.7 million or $0.10 per share on a diluted basis for the 2019 fourth quarter. This compares to net income of $19.7 million or $1.21 per share on a diluted basis for 2018. The tax benefit adjustment accounts for $18.7 million or $1.15 per share of the reported 2018 results.

For a more consistent comparison of EPS between periods, we utilized adjusted EPS to reflect actual taxes paid or to be paid. We define adjusted EPS as EPS excluding the provision for noncash U.S. taxes expected to be fully offset by our net operating loss carryforwards and other tax credits. As noted in the supplementary table in our earnings release, adjusted EPS on a diluted basis was $0.13 per share for the 2019 fourth quarter and $0.40 per share for the year compared to $0.06 for the 2018 fourth quarter and $0.38 for the 2018 year.

The company's liquidity remains solid, with cash on hand of $7.4 million, working capital of $53.2 million and a current ratio of 4.1. We will continue to carefully manage our liquidity to fund organic new product development, strategic capital expenditures in M&A, while substantially reducing our acquisition debt in 2020.

In summary, the actions we are taking to drive profitable growth remain our highest priority. Our intent remains on driving volume and sales through further organic and synergistic initiatives, supplemented with accretive M&A to release the full leverage potential of our business model. I will now turn it back to Mike.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [5]

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Thank you, Phil. As was the case for 2019, continuing in 2020, we are focused on increasing our revenue growth opportunities through diversification, expansion of markets and sales reach, new product development and strategic CapEx and potential acquisitions. For the Battery & Energy Products business, this has meant expanding our participation and penetration in the worldwide commercial markets and international government/defense markets, while continuing to bolster our existing position in the U.S. government/defense market.

B&E's 2019 SWE acquisition was another step in diversifying our end markets and mitigating the lumpiness and long revenue realization cycle times associated with some of our U.S. government/defense revenue streams. In Q4, its second complete quarter as part of the Ultralife portfolio, the acquisition provided 27% of total B&E sales. SWE met our internal revenue target and was again EPS accretive, net of our acquisition, amortization, interest, taxes and pro forma corporate allocation expenses.

Considering the addition of SWE, our diversification into global commercial and international government/defense revenues has further lessened our historical dependence on the U.S. government/defense market, now representing below 25% of our total B&E sales.

Taking a closer look inside commercial revenue and our medical revenue, in Q4 2019, global medical sales represented 20% of total B&E sales, and were slightly down as compared to last year's fourth quarter due to timing as well as nonrecurring revenue from 2 particular customers. In general, key medical device battery and charger product shipments we made in Q4 2019 for a wide range of applications, including breathing devices, infusion pumps, digital X-ray and surgical robots. New delivery orders also continued for existing customer blanket and/or multiyear agreements, and in Q4 2019, totaled over $4.2 million.

Looking at the other non-medical commercial and international government/defense end markets, some examples of specific transactions in Q4 2019 included $1 million in orders from an international oil and gas customer from a -- for customer primary batteries for logging while drilling applications; an international customer order for thionyl chloride batteries for a toll pass application; an international government/defense order for chargers and Land Warrior batteries; a domestic order for batteries used in an asset tracking application; and an international customer order for pipeline inspection gauge batteries.

To drive expansion and revenue growth in our commercial business, in addition to medical and now oil and gas, we continue to target other end markets such as asset tracking, industrial equipment, the Internet of Things, metering and sensors and safety and security.

Lastly, for B&E's U.S. government/defense customers, we were delighted to see Q4 2019 revenues increased 18% year-over-year, driven by a steady demand of many core products and a large increase in shipments of advanced handheld radio batteries. In Q4 2019, we also announced a $4.9 million delivery contract award from DLA for a spot buy of our legacy 5390 primary batteries. These are expected to ship throughout the first 3 quarters of 2020. The actual timing pending the usual lab testing and approval to ship by the customer.

Regarding B&E new product development. During the fourth quarter of 2019, activity continued on numerous projects, including a new digital X-ray battery, a new military communications backup battery, multiple public safety radio batteries, a ThinCell product for a smart label market, and at SWE their DRILL-DATA gauge new product development.

Regarding B&E strategic CapEx project at our Newark, New York, USA facility, low volume production of the new premium 3-volt product is now underway. In Q4, we continued some design for manufacturing activities and adjusting of equipment to achieve more reliable, higher volume production and to prepare for ramp-up activities in 2020. This new product will serve a rapidly growing IoT wireless devices market, next-gen 3-volt smoke alarms, asset tracking devices and metering. It will provide customers with world-class product performance, safety and a competitive price value proposition as well as supply chain proximity of a U.S.-made product. Separately, in China, we also have a new locally manufactured lithium manganese dioxide 3-volt cell, which is now available for customer sampling and is seeing some initial small quantity sales. And we continue to make progress on our thionyl chloride cell upgrade project in China, involving numerous process improvements, which will help us expand our total available market with newly identified commercial and industrial applications.

Overall, our new product development goal is to produce the highest value proposition, best quality and safest products, in close collaboration with our end market and OEM customers, whichever one of our global locations best serves their supply chain.

Regarding Communication Systems, in Q4 2019, new product development revenue from products less than or equal to 3 years old represented approximately 89% of Communication Systems revenues. Key shipments included additional vehicle amplifier-adaptors and mounted power amplifier systems for the U.S. Army's Network Modernization initiatives. The U.S. Army's Handheld, Manpack and Small Form Fit and Leader Radio programs, continue operational test and evaluation with follow-on contract opportunities anticipated in 2020. Communication Systems has multiple ongoing initiatives underway with the major tactical communication OEM Prime contractors supporting new product development, ongoing product support and new business development.

Also noteworthy, in January this year, Ultralife was presented with a strategic partnership award from a global provider of mission-critical servers and data storage solutions for our work in system integration and initial field trials of cutting-edge server technology. Small initial sample purchase have started, and we are excited about the potential for revenue growth and the business opportunity expansion as this relationship and the program progresses through 2020.

Going forward, Communication Systems will continue to make new product development investment in technological advances to our core amplifier, power supply and other ancillary components to meet the ongoing demands of the state-of-the-art radios being manufactured by our OEM partners. Just as importantly, we will continue to be their trusted system solution integrator, whether it be in the form of vehicle amplifier-adaptors using several of our components in concert with an OEM's handheld radio, taxable operations centers, tightly incorporating our components with an OEM's manpack radio or an integrated mission-critical service solution by others protected from forward deployed field conditions to provide AI compute capability at the edge. Each of these solutions help provide today's soldier with highly improved communication range, enhanced digital voice and data connectivity and/or computing capability for improved operational flexibility and readiness.

In closing, for the fourth quarter of 2019, we were very pleased to deliver organic revenue growth in both of our core business units and achieved EPS accretion in the SWE acquisition, which capped off a solid year and yielded another consecutive year of profitable growth. Heading into 2020, our B&E core business begins the year with a backlog roughly 17% higher than a year ago without including any of the potential from the DLA IDIQs. As you would recall from last quarter's call, we have approximately $84 million in presently untapped U.S. government/defense DLA IDIQ contracts, including the $21.4 million 5390 IDIQ, the $49.8 million 5790 IDIQ and the $14.4 million 5368 IDIQ.

We continue to make progress towards the first article testing and production readiness for these opportunities, and whereas the amount and timing of deliveries under IDIQ contracts are at the discretion of DLA, we are hopeful some initial revenue will start in 2020.

Overall, activity levels from the various defense department contracting channels and global OEM Primes remain high. In addition, at Battery & Energy Products, we are targeting project completion and revenue realization from several multiyear projects currently underway. These include, but are not limited to, new public safety radio battery packs, the new 3-volt product line, the new ER product line, new smart U1 batteries and several other new ThinCell, medical and subsea electrification application battery packs.

At SWE, 2020 will be the first full year as part of Ultralife, and we intend to continue to expand wallet share with new and existing customers in the core oil and gas space, while also pursuing new revenue growth opportunities in subsea electrification, a small yet growing new market. We are watching the oil and gas market dynamics closely and are confident in our position to ride through the expected ups and downs as we're serving mission-critical niche applications with competitive differentiation based on superior service, quality and reliability, which has resulted in a durable customer base of high-value proposition relationships.

For 2020, Communications Systems starts the year with about 25% remaining on the leader contracts and backlog with follow-on contracts and several other new product development and integrated system-driven program opportunities in pursuit.

In summary, for 2020, we are expecting to deliver another year of profitable growth as new revenue streams and an increased start-of-the-year backlog at Battery & Energy Products, combined with the revenue from a full year of the SWE acquisition, offset a potentially soft year at Communications Systems, as shipments under our current U.S. Army program contracts near completion, and before any follow on, our new program awards kick in.

We are excited about the investments made in new team members and a talented staff during 2019, both organically and through the acquisition of SWE to help us achieve continued financial success in 2020. As a total company, our strong balance sheet, solid cash flow from operations and the disciplined execution of our business model by our management team afford us the opportunities to simultaneously pursue organic revenue growth through new product development, invest in strategic CapEx for competitive advantage and seek out bolt-on acquisitions.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Mr. [Brett Davidson].

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Unidentified Analyst, [2]

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I just got a quick question regarding the R&D expenses. The run rate in the fourth quarter was considerably higher than the rate of the prior 3 quarters. I was wondering if you can give an idea. Is that just a fourth quarter thing? Or is that representative of a new rate going forward?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [3]

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Brett, this is Phil Fain. I believe there's really 2 ways to look at the increase in R&D expense in the fourth quarter. There is the development testing resulting from the timing of the introduction of certain new products, and then there's the increased investment that we're making in bringing in what I consider -- what we consider to be world-class engineering talent. And I believe the split between the 2 is probably 60-40, meaning that perhaps 40% of the increase that we're seeing in Q4 could likely be ongoing.

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Unidentified Analyst, [4]

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40% of the total? Or 40% of the increase?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [5]

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A 40% of the increase.

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Unidentified Analyst, [6]

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Got it. And can you just give me some color as to how much of the R&D is related to new products? And how much is targeted to new -- to customer development, so developing a product for a specific customer? And how much of it is just new products in general?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [7]

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Yes. I would say that we work in very close collaboration with our customers in developing most of our new products. So my guess would be 80% of it is -- at this time, 80% is working with specific customers and 20% overall. The 20% being certain things like the new 3-volt line or the improvements in thionyl chloride. The other applications that we work with in customers does absorb quite a bit of our time, but it results in very sticky relationships going forward.

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Unidentified Analyst, [8]

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So for the most part then, when you guys are generating R&D expenses, it's to produce a new product or update a product for a particular customer then?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [9]

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Yes, absolutely.

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Operator [10]

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(Operator Instructions) There are currently no questions on the phone line.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [11]

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Okay. Operator, I'll close then. Well, thank you very much for joining us again for our fourth quarter 2019 earnings call. I look forward to sharing with you our quarterly progress on each quarter's conference call in the future.

We'd also like to note, as Phil mentioned, that the Investor Presentation has been updated and it's on the website. So please check it out.

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Operator [12]

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Ladies and gentlemen, that will conclude our conference call for today. Thank you very much for your participation, and you may now disconnect.