Ultralife Corporation (ULBI) Q3 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Ultralife Corporation Third Quarter 2012 Earnings Conference Call. At this time, for opening remarks and introductions, it's my pleasure to turn the call over to Ms. Jody Burfening. Please go ahead ma’am.

Thank you, operator, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the third quarter of fiscal 2012. 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, anyone who has not yet received a copy, I invite you to visit the company's website at www.ultralifecorp.com, where you will find the release under Investor News in the Investor Relations section. Before turning the call over to management, I’d like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include uncertain global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring actions and order delays. 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 cause Ultralife's financial results, to differ materially is included in Ultralife's filings with the Securities and Exchange Commission, including our 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 that 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.

Thank you, Jody, and thank you, everyone, for joining the call this morning. Today, I will start by making some overall comments about our third quarter, 2012 operating performance. Then I will turn the call over to Phil who would take you through the detailed financial results for the quarter. After Phil has finished, I will provide a progress report on our top 2012 priorities, and gives some final thoughts on the full-year financial outlook for 2012, before opening up for questions. The third quarter 2012, was a fairly clean quarter for us and we were able to see the impact of our variable and base cost productivity initiatives, implemented throughout the first half of the year, starting to hit the ledger. Also, we were able to convert some Communication Systems orders into Q3 sales that were originally expected in Q2, as referred to in our last call. Our Communication Systems revenue was further boosted by the shipment of $3.4 million of SATCOM products, which provided additional operating P&L leverage, and contributed to a Q3 Communication Systems gross margin of 36.1%, versus the 22.1% reported in Q2. Revenues in Communication Systems were up 200% from the second quarter and 50% year-over-year. For the Battery & Energy products business, where revenue is still behind last year by 38% year-to-date by aggressively addressing our manufacturing overhead costs, and focusing on higher margin product lines, we achieved a Q3 gross margin of 28.7% which is 450 basis points improvement over Q2, and a 910 basis points improvement over Q1. We are pleased to see this favorable productivity trend continue in the face of lower revenue. As one would expect due to the continued market uncertainties in U.S. government budget constraints were pragmatically looking at present revenue levels containing costs while improving variable cost productivity and seeking favorable margin opportunities all in an effort to remain profitable during this challenging period. In terms of base cost productivity, operating expenses in Q3 were 12%, lower than the previous quarter, and 17% lower than one year ago, due to the aggressive right sizing of the business operating infrastructure and our cost control efforts. Year-to-date we've reduced run rate operating expenses by $3 million. And lastly in terms of cash in Q3 we ended the quarter with zero long-term debt, positive cash on hand of $5.4 million, reflecting the continued focus on working capital management, as well as the cash infusion from the recent sale of RedBlack. In summary, we're pleased with our lean driven manufacturing productivity trends, operating expense control, and cash management discipline and are encouraged by the recent revenue growth, shown by Communication Systems which near-term is helping us to navigate the current uncertain market conditions and achieve profitability, while positioning ourselves for favorable operating leverage, as we return the total company to top line revenue growth. Now before going into where we stand on our top priorities for 2012, I'd like to ask Ultralife's CFO Phil Fain, to take you through the details of our third quarter 2012 financial results. Phil

Thank you, Mike, and good morning, everyone. Earlier this morning we released our third quarter results for the period ended September 30, 2012. As noted in our recently filed Form 8-K, the Company completed the sale of RedBlack Communications on September 28. The purchase price was $2,533,000 plus a post closing working capital adjustment which we expect to be completed by year-end. The results of RedBlack, and the divestiture costs are reported in discontinued operations. Accordingly, I will provide you revenue, gross profit, operating expenses and operating results, from continuing operations for the 2012 third quarter, compared to the 2011 third quarter. Consolidated revenues for the third quarter totaled $26.2 million, a 26% decline from the $35.2 million we reported for the third quarter of 2011. Revenues from our Battery & Energy Products segment were $16.6 million, a decrease of $12.2 million, or 42% from last year. This decrease is primarily attributable to the continued slowdown in the U.S. government, and defense order rate for rechargeable and non-rechargeable batteries and charger systems. Partially offsetting this decline was an order for our M1 battery products to service an allied Country’s Department of Defense. Communication Systems sales of $9.6 million, increased by $3.2 million or 50% from the prior year. This increase was attributable partly to shipments of SATCOM units to a large prime, which services the U.S. Department of Defense, and partly to continued solid global demand for our 20-watt amplifier products. We also fulfilled several of the amplifier orders, which we told you last quarter had been delayed. Our consolidated gross profit was $8.2 million, compared to $9.4 million for the third quarter of 2011. As a percentage of total revenues, consolidated gross margin was 31.4% versus 26.6% for last year’s third quarter, an increase of 480 basis points. The 31.4% represents the highest quarterly gross margin ever posted by the company. The year-over-year comparison is impacted by the $1.1 million, non-cash charge recorded in the third quarter of 2011 to write-off discontinued legacy amplifiers, which equated to approximately 300 basis points of gross margin. Gross margin for our Battery & Energy Products segment was 28.7%, a 120 basis point improvement over the 27.5% reported last year and a 450 basis point sequential improvement over the 24.2% reported in the second quarter. During the third quarter of 2012, we continued to take measures to reduce scrap and improve productivity to our lean initiatives. The business also benefited from improvements in 9-Volt gross margins due to the cost advantages of the production transition to China and continued focus on increasing the average selling price of our newly designed product. Where our Communication Systems segment, gross margin was 36.1% compared to 22.5% last year, which was impacted by the $1.1 million inventory charge. Excluding this adjustment, the gross margin for the third quarter of 2011 would have been 38.4%, reflecting a higher proportion of amplifier sales. The significant sequential improvement over the second quarter gross margin of 22.1% resulted from a stronger sales mix of amplifiers and radio accessories that were somewhat excluded by the SATCOM shipment. Operating expenses totaled $6.5 million, a reduction of $1.4 million or 17% from the $7.8 million for the 2011 period. The overall decrease from 2011 was a result of the reductions in force completed in the first half of 2012, general and administrative discretionary spending cuts, lower sales commissions and more focus R&D and new products pending. Operating expenses for the quarter were back to 2006 levels. As a percentage of revenue, operating expenses represented 24.7% compared to 22.2% a year ago. Third quarter, non-cash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses amounted to $1.3 million, the same as the year earlier period. Operating profit was $1.8 million representing an opening margin of 6.7%, compared to $1.5 million or an operating margin of 4.4% for the year earlier period. And adjusted EBITDA defined as EBITDA, including non-cash stock-based compensation expense amounted to $3.1 million versus $2.9 million for the third quarter of 2011. Other expenses primarily comprised of foreign currency transactions, and interest expense amounted to $0.1 million, which was consistent with the year earlier period. Interest expense continues to be favorable as the outstanding revolver has been substantially reduced in 2012. And our third quarter tax provision was $0.2 million reflecting income taxes for our profitable China operation slightly higher than the $0.1 million reported last year. Net income from continuing operations was $1.5 million or $0.09 per share, compared to net income of $1.3 million or $0.08 per share for the same period last year. The Company’s liquidity remains solid with cash of $5.4 million, no debt working capital of $42 million and a current ratio of $3.1 million. By comparison to outstanding balance and our revolver at the end of the third quarter of 2011 was $2.5 million and the current ratio was $2.6 million. At present, the outstanding draw on our revolver remains at zero. While pleased with the business model improvements noted in our third quarter results, we are persistent in our drive to execute our top priorities. We believe that the improvements recently made and those to follow will generate further leverage on revenue growth, and it will allow us to make progress towards achieving our interim goal of a 10% operating margin. I will now turn it back to Mike.

Thanks, Phil. For 2012, our top 3 priorities have been number 1, optimizing the Company’s profitability; number 2, executing on our growth game plan; and number 3, leveraging our China operations for global growth and improved cost competitiveness. To improve our profitability, over the last 1.5 years, we have made several adjustments to our portfolio, our moving pieces not viewed to be compatible with our 30, 5, 5, 10, 10 business model. The model we are working towards shows that if we can achieve 30% gross margins while spending 5% of sales on R&D and new product development, 5% of sales on selling expense and cap G&A expense at 10%, we will deliver an operating margin of 10%, our interim goal. To-date, we have exited our Energy Services business, discontinued some legacy product lines and just recently completed the divestiture of the RedBlack business. Each of these actions when combined with our ongoing company-wide Lean implementation have led to the improvements we are seeing in both variable and base cost productivity. Looking specifically at the results reported today, you can see solid progress towards 30% gross margin metric and we are getting closer to our overall operating expense goal 20% whereas we did reduce our year-over-year operating expenses by 17% from the prior year third quarter. We are still deliberately spending more on selling expense and new product development, which will increase slightly in Q4 and an effort to drive our growth game plan, which I’ll comment on shortly. Getting into gross margins a little deeper, the return to the higher margin rates that we expect from our Communication Systems business helps swing our overall company margins over the 30% level. We will continue to seek incremental margin gains in our Communication Systems highly differentiated product line by improving our manufacturing process and supply chain. Looking at the Battery & Energy Products business gross margins, the positive trend is primarily driven by recent adjustments made to lean our manufacturing infrastructure consistent with current revenue levels, the improving product gross margins in our 9-Volt business and favorable mix. As revenue levels started to improve, more overhead leverage will lead to continued Battery & Energy Products margin expansion. Looking at our next priority of executing on our growth game plan, we are making progress on several fronts. In terms of sales force retooling, our new corporate Executive Vice President of global sales has been working very closely with our business teams to help drive sales force productivity improvement processes and discipline, as well as helping to bring on board, additional proven sales veterans. This will help us drive growth in our commercial, as well as government and defense market segments. Specifically, over the last quarter, he has hired 5 new people to our B&E sales team with a combined battery and energy experience of 54 years, and overall, total selling experience of 136 years. We will see some additional selling expense for these people in Q4, which will be gradually offset in subsequent quarters, as our sales efforts bring in new revenue. We also recently completed the outside consulting project, I mentioned during the last conference call, which was focused on accelerating new product innovation impact for our revenue stream by more efficiently targeting our value propositions to the most attractive, and receptive end-user customers. Generally speaking, the priority targets fall within the medical, off-grid standby power and some non-automotive motor power segments, markets, which we’ve been pursuing for some time, but now for which we are better focused by sub-vertical, given our existing capabilities and near-term growth aspirations. Separately, we have also gained a better accretion of our competitive benchmarking. In an environment, which was taken its toll on a number of companies in our space, these efforts will allow us to better allocate our precious financial and human resources for faster and more impactful results. As a quick update on the status of the numerous new products we have introduced in the last year, for our Battery & Energy Products business, the Ultralife GenSet Eliminator is currently on demonstration at the U.S. Military Network Integration Evaluation, 13.1 at Fort Bliss, Texas, through November 16. Besides the fuel savings being realized, the soldiers are telling us they also like the GSE’s silent operational capability throughout the night. Another news, we received a contract for our GSE for a customer demo test in a remote forest provider application, which is scheduled to ship this month and just in the last few days, received a contract for a GSE to be used in an air filled application evaluation that was shipped early next year. Whereas that GSE has completed and passed all of its required military, safety custom releases, these demonstrations provide in valuable, real-time, verification feedback and we are pleased to see the initial orders starting. With respect to the MKM large format battery itself, separate to the GSE activity. We have received small quantity orders from approximately 5 different customers, we're seeing interest from various providers of UPS systems for both military and commercial customers as well as packagers of generators and emergency response equipment. Regarding our new half size 5390, full size 5390 and half size 2590 batteries often being deployed at the current NIE and to date we have received small quantity orders from roughly a dozen different customers for a demonstration evaluation. For our new thin to body conformal battery, we shipped small testing quantities to one international customer in Q3, with another international customer requesting units for test before year end. Lastly, our new Thin Cell based 9-volt product is doing very well and we have transitioned all of our existing customers to the new design. Given the long life, and high-performance capability of the product in harsh environment, our 9-volt product is sold primarily customers with critical applications such as in the smoke and CO detector, and portable medical device markets. Currently, our global OEM and distributor customers are selling almost equal volumes to end users in both Europe and in North America. Updating on the 3 Communications Systems new product developments we have been focused on over the last year, our new Lightweight Portable Amplification System or LPAS system, which utilize their very successful A-320 amplifier in an integrated rechargeable power supply for either dismounted or vehicle operations. The product is currently undergoing testing and demonstration for major international customers. The final configuration of system power supplies in discussion and upgrades to previous sales of LPAS-320 are being reviewed. As the project proceeds it would likely result in a shipment of several thousand LPAS units starting in 2013 and lasting through 2015 with each unit having a list price of approximately $10,000. Regarding our new A-320 Handheld Vehicle Adapter or HVA, which enables the operator to use the same radio in the vehicle, or during dismounted operations. Late in 2013, we are anticipating to be in formal discussions with an international customer for a multi-year delivery contract for several thousand A-320 HVA systems with shipments beginning late 2013 and early 2014. In another project with the U.S. Special Forces, a need has been identified for the A-320 HVA to be fitted to a fleet of tactical vehicles. As the final requirements are still being defined we have already provided some equipment to validate assumptions with the expectation of continuing deliveries through 2013 and 2014. Lastly, other demos and trials are currently underway in several European countries with more to come. Our new A-301-150 satellite radio combiner product, which enables simultaneous transmission reception of any 2 military UHF satellite radio channels, is under formal demonstration testing with 1 military branch and that could support application of product to several other service branches. It has also been applied by a major OEM prime in support of one of their air platforms. Initial smart families of the satellite radio combiner product, which carry a list price of approximately $20,000 per unit have been shipped to date with higher quantities expected to be ordered once the lengthy evaluation processes are completed in 2013 and 2014, if successful contracts could total up to several million dollars over the next 2 to 3 years. As we look at our third 2012 priority and that is to leverage our China operations for global commercial business growth and improve cost competiveness, China performed well again in the third quarter and a its’ operating margin of 10% increased by 115 basis points year-over-year. Also now as the sole manufacturing location for a new 9-volt battery, the leverage gain through the additional inter-company volume going through our China operations is helping us grow our overall company margins. Year-to-date, the China operations have increased volume throughput by 35% with Q3 output up 58%, which helps us improve our overall company gross margins by approximately 110 basis points in the third quarter. We also completed a small investment in our facility in Shenzhen to significantly improve the manufacturing capability for our thionyl chloride lithium battery used by electric metering customers, which has led to a 39% increase in labor productivity decreasing our costs and as well as providing less variation in the tested battery capacity. Next steps will be to apply our lessons learned from the thionyl chloride project to our new high capacity 9-volt product now also manufactured by Ultralife China. With regard to the overall financial outlook for 2012, we are reaffirming the guidance provided in the previous conference call. Our pending business opportunity funnels remained strong in the Communication Systems and in China. And the pipeline of future market opportunities from our new products in our B&E business continues to grow. For Communication Systems, which is still somewhat of a lumpy sales revenue business, the maturing opportunity funnel and continued high activity level, particularly in international funding projects leaves us to expect their total 2012 revenue to increase by a high single, to low double-digit rate over 2011. We experienced a very nice revenue and our operating profit boost in Q3 from the SATCOM shipment, yet that won’t recur in Q4. However though still 100% a government and defense focused business; we are pleased with their continuing diversification of revenue sources from both direct and indirect channels, and domestic and international customers, which we will continue to build on. In Ultralife China where we have improving production rates and tightening manufacturing tolerances in country competition remains fierce, however, based on their projected upcoming order flow and recent track record, we expect to achieve a mid-to-high single-digit 2012 annual revenue growth rate. For Battery & Energy Products, where revenue is down $0.38 year-to-date, it has obviously been a challenging year and we don’t expect any major upward shift in revenue trajectory through the end of the year. Given the size relative to the overall company, this decline when combined with the other business units would lead to an overall company total year revenue decline of between 20% and 30% as we discussed in our prior call. However, as was the case with our Communication Systems business team who experienced a difficult 2011 and used that time to retool their business front-end, leading to the positive result they’re achieving in 2012. We are pleased with the progress that the B&E has made this year in not only rebuilding their team, but by significantly refreshing their new product portfolio in 2012, which will position us well for future organic growth opportunities. Finally, with respect to operating profits, as we said after last quarter, we expect to return to profitability for the last half of the year, though not at the magnitude required to offset the operating losses in the first 2 quarters of the year. We estimate an operating margin for the second half of the year to be in low to mid-single-digit range. In closing, we were pleased to return to total company profitability in the third quarter, despite current market conditions. The adjustments that we have made to our portfolio and cost infrastructure, as well as the keen focus on operational productivity improvements and a higher margin opportunities position us well for the remainder of the year. With our new sales leadership driving upgrades to our sales processes and teams, better intelligence allowing us to target the most attractive markets, and our recently introduced new products gaining maturity and customer acceptance, we feel we are approaching the year-end, on a strong footing, for also returning to overall company's total organic revenue growth in the future. Operator, this concludes my prepared remarks, and we’d be happy to open up the call for questions.

[Operating Instructions] And at this time, we have no questions. I’ll turn the conference back over to Mr. Popielec for any additional comments or closing remarks.

Great, well, thank you all for joining us for our third quarter conference earnings call. We know it’s a very busy week given recent events. Once again, we look forward to meeting up with several of you in personal over the next week or so, and to sharing with you our quarterly progress on each quarter’s conference call in the future. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect.