Ultralife Corporation (NASDAQ:ULBI) Q4 2023 Earnings Call Transcript
Ultralife Corporation (NASDAQ:ULBI) Q4 2023 Earnings Call Transcript February 15, 2024
Ultralife Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to Ultralife Corporation's Fourth Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. At this time, I'd like to turn the call over to your host, Jody Burfening. Please go ahead.
Jody Burfening: Thank you, Valerie, 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 2023. With us on today's call are Mike Manna, 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. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 related supply chain disruptions, potential reductions in revenue from key customers, acceptance of new products on a global basis and uncertain global economic conditions. 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 the management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.
Mike Manna: Thank you. Good morning, everyone. Welcome to our call on Ultralife's Q4 and full year 2023 operating results. Earlier this morning, we reported Q4 sales of $44.5 million and operating income of $3.6 million, delivering $0.18 EPS, which included a great end to a tumultuous year. We started the 2023 year with a cyber attack that shut down operations for weeks in two of our sites, then rallied throughout the year to post the highest full year revenue and profit level in over 10 years, a result of great teamwork throughout the business and supply chain. For the full year, we reported $158.6 million in sales with an operating income of $9.5 million, resulting in $0.44 of GAAP and $0.52 adjusted EPS for the year. We improved gross margin for the business throughout the year, which was a key priority as we started 2023.
I am pleased to say we were able to finish out the year with an initial paydown on our acquisition debt and increased our overall backlog sequentially from Q3. will turn it over to Phil to talk through the detailed numbers.
Phil Fain: Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter ended December 31, 2023. We also updated our investor presentation, which you can find in the Investor Relations section of our website and plan on filing our Form 10-K with the SEC in early March. Consolidated revenues totaled $44.5 million compared to $36.1 million for the fourth quarter of 2022, an increase of 23.4%. Government defense sales increased 28.8% and commercial sales increased 20.2%. Revenues from our Battery & Energy Products segment were $35.7 million, the highest sales quarter in our history for this segment compared to $32.1 million last year, an increase of 11.1%. This growth was driven by the highest medical sales quarter since we entered this business in 2012 and increased 118% year-over-year.
Medical sales in the fourth quarter represented 33.8% of total segment sales compared to 17.3% for the year earlier quarter. The increase in medical was partially offset by declines in government defense and oil and gas sales of 11.4% and 11.3%, respectively. The sales split between commercial and government defense for our battery business was 78-22 compared to 71-29 reported for the 2022 quarter, and the domestic to international split was 48-52 compared to 55-45 last year, demonstrating the continued success of our global revenue diversification strategy. Revenues from our Communications Systems segment of $8.8 million more than doubled the $4.0 million we reported last year, primarily attributable to fulfilling long lead time orders of vehicle amplifier adapters to a global defense contractor for the US Army in integrated systems of amplifiers and radio vehicle amounts to a major international defense contractor under an ongoing allied country government defense modernization program.
On a consolidated basis, the commercial to government defense sales split was 62-38 versus 71-29 reported for the 2022 full year. Our total backlog exiting the fourth quarter was $103.5 million, representing a 2.4% sequential increase and remain diverse in nature across our commercial and government defense customer base. The replenishment rate remains high and the backlog represents a very healthy 65% of TTM sales. Our consolidated gross profit was $11.4 million, up 4.1% over the 2022 period. As a percentage of total revenues, consolidated gross margin was 25.6% versus 22.4% for last year's fourth quarter, a 320 basis point improvement and increased 80 basis points sequentially over the third quarter. Gross profit for our Battery & Energy Products business was $9.0 million compared to $6.9 million last year, an increase of 29.6%.
Gross margin was 25.2%, an increase of 360 basis points over 21.6% reported for last year's fourth quarter and an increase of 100 basis points over the 24.2% reported for this year's third quarter. The year-over-year and sequential increases were primarily due to improved price realization as well as a concerted effort to level load production more evenly throughout the quarter, resulting in labor utilization efficiencies and higher cost absorption. For our Communications Systems segment, gross profit was $2.4 million compared to $1.1 million for the year earlier period. Gross margin was 27.2% compared to 28.7% last year, primarily due to inefficiencies caused by delays experienced in the receipt of certain components, partially offset by higher factory volume.
Operating expenses were $7.8 million, an increase of $0.1 million over the year earlier period. As a percentage of revenues, operating expenses were 17.4% compared to 21.8% for last year's fourth quarter, a 440 basis point improvement, reflecting the sales leverage of our business model. The combined leverage of our 320 basis point gross margin improvement and our 440 basis point operating expense to sales ratio resulted in an 8.2% operating margin. On an absolute dollar basis, operating profit improved $3.4 million over the 2022 fourth quarter to $3.6 million. The business interruption insurance claim pertaining to our Q1 cyber attack still remains in review and is not included in our 2023 results. Our tax provision for the third quarter -- for the fourth quarter was $0.3 million versus $0.2 million benefit reported for the 2022 quarter computed on a GAAP basis, including the impact of interest expense to help finance the Excell acquisition and foreign currency gains and losses, net income was $2.8 million or $0.17 per share on a GAAP fully diluted basis.
This compares to a loss of $0.2 million or a loss of $0.01 per share for the 2022 quarter. Excluding the provision for noncash US taxes expected to be fully offset by our net operating loss carryforwards and other tax credits, adjusted fully diluted EPS was $0.18 per share for the fourth quarter of 2023 compared to a loss of $0.03 for the 2022 period. Adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense was $4.7 million or 10.7% of sales compared to $2.0 million or 5.6% for the prior year quarter. For the full year, adjusted EBITDA is $15.7 million or 9.9% of sales compared to $6.6 million or 5% of sales for the 2022 year. This represents the highest TTM level that we have achieved in the last 15 years. Turning to our balance sheet.
We ended 2023 with working capital of $66.5 million and a current ratio of 3.8% compared to $50.1 million and $2.7 million for 2022 year-end. The major components of the $15.4 million increase in working capital include a $4.6 million increase in cash, a $4 million increase in accounts receivable, a $1 million increase in inventory and a $5.2 million decrease in payables and accruals. With the strengthening of our balance sheet, we are positioned to continue the paydown of our debt, thereby reducing the costly interest expense, which represents almost $0.12 per share on a TTM basis. Going forward, our backlog, diversified end markets, growth initiatives and ongoing actions to improve our gross margins and further strengthen our balance sheet, position us well to optimize the leverage potential of our business model.
I will now turn it back to Mike.
Mike Manna: Thank you, Phil, for the detailed review of the Q4 and full year 2023 results. To review where we were when we entered the year in my initial assessment of the 2023 priorities, number one, price realization. We have completed the pricing corrections we had scheduled with some long-term IDIQ contracts still active and price challenged. We are working material win projects to improve gross margin on those specific products and will reprice future opportunities. Two, extend the time horizon of the S&OP planning process and part procurement. We have a framework established. We'll continue to refine this process throughout 2024 and have upgraded supply chain resources that we expect to have impact this year. And three, improve the process of launching our new projects.
We've identified a few challenges in our processes in some system imposed waste. We are working on refined processes to improve that flow currently. I stated increase in gross margin was a key focus across the business, and we accomplished a positive gross -- positive trends throughout 2023. Remember, a great deal of our valuable resources were allocated to the recovery from the cyber event for much of the first half of the 2023 year, putting us two full quarters behind my expected timetable. As we enter 2024, the operational priorities are continued gross margin improvement through material cost deflation and lean productivity projects in both the Battery and Energy and Communications businesses. Our sales priorities are to increase our engagement resources and grow the opportunity funnel of our major projects, including thionyl chloride cells, EL8000 cases, 123A cells in packs and ThinCell related designs.
On the material side, supply chain is improving, but we are still far from pre-COVID lead times for components. So extending order visibility and forecasting is key in our S&OP process to mitigate part shortages and maintain revenue levels. Switching over, I will provide a brief update on the organic growth projects for the businesses. On the Communications Systems side, we have shipped our first substantial orders of EL8000 server cases to several customers. We continue to get small orders from various partners. We've developed a new DC power supply that will allow the server to be used in vehicular applications, both military and commercial in nature. We have systems in test with a DoD customer currently and expect that option to be available for midyear production orders.
To reiterate, this system developed with our strategic partner allows high-end computing power to be used in difficult environments on the edge and industrial 5G and AI applications, truly bringing server-level computational power to the point of use. We expect this product line to grow as new customers adopt it for their system use. Secondly, on the Battery & Energy side of the business, several projects continue to advance. We have production equipment in place for our ThinCell to support customers in the medical wearable space and several applications in item tracking. Our partner in the medical wearable space is currently on FDA testing, which is a gating factor for production ramp. We will be attending the HIMSS show in Orlando next month, where we will continue to showcase our X5 Power System for powered medical carts and launch the new X5-Lite variant for USB-C powered devices.
The 123A product line, supporting IoT and illumination market opportunity sales funnel is growing. With our XR123A cell offering over 30% more energy in the same footprint, now available for sampling and production. Several night vision customers are reporting significant increases in usable run time over competitor's CR123As using this new cell. Our improved thionyl chloride product line targeting monitoring and telemetry applications is in qualification and field testing with several customers. These qualification cycles are extremely lengthy, but we anticipate some initial production orders later this year. Our development work on the conformal wearable battery continues, and we have successfully completed UN DOT shipment testing, a major milestone, which allows us now to ship batteries to customers for initial testing and functional feedback.
We are working on completing the rest of the validation testing to enter US government first article testing, which is currently scheduled to start later this year. We have been informed by the US government, they expect significantly lower production volumes of this product due to delays in the Integrated Visual Augmentation System known as IVAS, currently under development by Microsoft. Nevertheless, we are in a strong position to bring this product to market for the US government and other customers. We continue to work on advanced projects and business cases for items that accelerate the growth of both businesses. We have a development partner working with us in Newark on advanced rechargeable cell designs with promising early results. As we progressively have more tangible items in the future, I'll provide updates in future earnings calls.
With a great ending to 2023 and a strong Q4 finish strong backlog position and a positive trend of gross margin improvements, we are focused on continuing these efforts throughout 2024. With continued strong focus on lean and material deflation initiatives, we are targeting further sustainable gross margin improvements for both businesses, which will further improve generation of cash and allow us to continue to pay down our acquisition debt. Sales funnel and commercial opportunity pipeline growth is key for 2024 and beyond to keep our strong organic growth trajectory going as we have yet to fully utilize and realize the return from all our new product investments. Thanks, everyone, for the attention. That concludes the prepared remarks for today.
We'll go back to the operator for questions.
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