Ultralife Corporation (ULBI) Q4 2016 Earnings Report, Transcript and Summary

Good day and welcome to this Ultralife Corporation Fourth Quarter 2016 Earnings Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Lauren and good morning everyone and thank for joining us this morning for Ultralife Corporation’s earnings conference call for the fourth quarter of fiscal 2016. With us on today’s call are Mike Popielec, Ultralife’s President and Chief Executive Officer and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning, and if anyone has not yet received a copy, I invite you to visit the company’s website, www.ultralifecorp.com, where you will find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call will 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 reflects 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 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.

Good morning, Jody and thank you everyone for joining the call this morning. Today, I will start by making some overall comments about our Q4 and total year 2016 operating performance. Then, I will turn the call over to Phil who will take you through the detailed financial results. After Phil is finished, I will provide an update on the progress against our 2016 revenue initiatives, talk about some focus areas for 2017, then open it up for questions. For Q4 of 2016, we were pleased to deliver our ninth consecutive quarter of total company profitability and positive EPS, generating an operating profit of $1.6 million and revenues of $21.6 million for an operating margin of 7.6%. Revenue increased 12% year-over-year driven by Accutronics acquisitions and the Communications Systems business. And when leveraged by a 270 basis point improvement in gross margins and a 220 basis point decrease in operating expense, fourth quarter operating profit tripled year-over-year. And net of our one-time and other customary acquisition costs, Accutronics hit its target of being first year EPS accretive in 2016 and contributed $10.4 million in revenue. Closing out 2016, we were delighted to deliver, total year top line revenue growth and bottom line probability for the second consecutive year. Total year 2016 revenue was $82.5 million, up 8% year-over-year, operating profit was $3.8 million, up 13% year-over-year and EPS came in at $0.23, up 28% year-over-year. The teams made prudent adjustments to operating expenses while successfully executing our major customer contracts and the new Accutronics acquisition integration to drive leveraged earnings growth in 2016 despite some legacy government defense market revenue headwinds. In a few minutes, I will give you an update on our revenue initiatives for 2016 and focus areas for 2017. But first, I would like to ask Ultralife’s CFO, Phil Fain to take you through additional of the fourth quarter and total year 2016 financial performance. Phil?

Thank you, Mike and good morning everyone. I sure hope that everyone is staying warm and avoiding the battering of the snowstorm that I am looking at right now. Earlier this morning, we released our fourth quarter and total year results for the year ended December 31, 2016. We are also in the process of filing our Form 10-K with the SEC and it should be available in the next couple of hours. And we have also updated our investor presentation in the Ultralife website. I want to thank those who helped make these filing – timelines possible and you know who you are. For the fourth quarter, consolidated revenues totaled $21.6 million, representing a $2.4 million or 12.3% increase from the $19.3 million for the fourth quarter of 2015. Revenues from our Battery and Energy Products segment were $17.6 million, an increase of $1 million or 5.9% from last year. For the fourth quarter, a $2.8 million revenue contribution from Accutronics and a 131% increase in shipments to medical customers were offset by lower U.S. government and defense sales in the absence of last year’s spike in 9-volt battery sales to large global smoke detector OEMs in response to legislation passed in an EU country. Commercial revenues for the fourth quarter of 2016 increased 55.2% over the prior year reflecting an increase in sales to medical customers, including the contribution of Accutronics. Absent Accutronics, Battery and Energy Products commercial revenues were up 19% with gains across several market segments, including medical and asset tracking. Government and defense sale has decreased 37.1% from the 2015 period due to lower battery and charger sales to a large U.S. Defense supplier, lower sales of primary batteries to the U.S. Department of Defense, and a large charger shipment to a non-U.S. defense contractor in 2015. As a result, the Battery and Energy Product sales split between commercial and government/defense was s68:32 compared to 47:53 for the 2015 period. Communication Systems sales of $4.0 million increased by $1.4 million or 53.4% from the prior year. This increase is attributable to shipments of light persistence to fulfill an additional order received in the fourth quarter. On a consolidated basis, the commercial to government and defense split was 56:44 versus 40:60 for the year early period, reflecting the growth of our medical business and the lower battery shipments to government and defense customers. Our consolidated gross profit was $6.8 million compared to $5.6 million for the 2015 period, an increase of 22.6%. As a percentage of total revenues, consolidated gross margin was 31.5% versus 28.8% for last year’s fourth quarter. The 270 basis point increase in gross margin resulted from the favorable sales mix of products in both of our business segments. Gross profit for our Battery and Energy Products business increased 12.5% from $4.6 million in 2015 to $5.2 million reflecting the favorable mix and volume of medical sales. Gross margin was 29.4%, a 180 basis points increase from the 27.6% reported last year, due primarily to the contribution of the Accutronics and other medical sales. For our Communications Systems segment, gross profit was $1.6 million, $0.7 million or 71.2% increase from the year earlier period. Gross margin was 40.6%, a 420 basis points increase from the 36.4% reported for last year’s fourth quarter due to sales mix and manufacturing efficiencies, primarily associated with the Viper shipments. Operating expenses totaled $5.16 million compared to $5.03 million last year, an increase of approximately $0.1 million or 2.6%. The increase reflects the acquisition of Accutronics, which added operating expenses of $0.5 million including $0.1 million of intangible asset amortization. Excluding Accutronics, operating expenses decreased $0.4 million or 7%, reflecting the cost reduction actions completed earlier in the year and continued strict control over discretionary spending. The operating expenses associated with the Accutronics have now been virtually offset on a consolidated basis by the cost reduction actions taken throughout the company in line with our acquisitions integration strategy. As a percentage of revenue, operating expenses represented 23.9%, a 220 basis points improvement to the 26.1% reported for the fourth quarter of 2015. Operating income for the fourth quarter of 2016 was $1.6 million compared to $0.5 million for the 2015 period, representing a 3x improvement on sales growth of 12%. The operating profit generated in the fourth quarter, the highest reported in any quarter in 4 years, is a solid demonstration of the leverage of our business model. Operating margin was 7.6% for the 2016 period, an increase of 490 basis points over the 2.7% for the fourth quarter of 2015. The 490 basis points increase reflects the 270 basis points improvement in gross margin and the 220 basis points reduction in the operating expense to sales ratio. Fourth quarter non-cash operating expenses including depreciation, tangible assets amortization and stock compensation expenses amounted to $0.8 million compared to $1.0 million for the year earlier period. The decrease primarily reflects lower depreciation expense for the 2016 period and the intangible asset impairment charge taken in 2015. This brings us to adjusted EBITDA, defined as EBITDA, including non-cash stock based compensation expense of $2.5 million or 11.5% of sales versus $1.6 million or 8.6% for the fourth quarter of 2015. Operating expenses primarily comprised of interest expense in foreign currency transactions totaled $16,000 versus $24,000 in 2015. For both periods, we generated favorable foreign currency income, which offset most of our interest expense. In our tax provision, was a credit of $115,000, primarily reflecting the amounts in geographic mix of earnings in a favorable adjustment to tie the 2015 tax payable amount to the tax returns subsequently filed. For the fourth quarter of 2015, we reported a tax credit of $2,000, reflecting the tax benefit associated with the intangible asset impairment charge. Driven by the solid operating performance, net income was a $1.7 million or $0.11 per share compared to $0.5 million or $0.03 per share for the same period last year. The company’s liquidity remains solid. With cash on hand of $10.7 million, no debt, working capital of $38 million in a current ratio of 4.4 reflecting strong operating performance in working capital management. By comparison, cash for the third quarter was $6.7 million and the cash on hand at year end was $14.5 million. During the fourth quarter of 2016, we generated $2.5 million of operating cash flow through our operating results in a $1.4 million or 5.6% reduction in inventory. The use of cash since year end 2015 primarily reflects the acquisition of Accutronics, the repurchase of shares and strategic capital spending to automate certain of our production lines, consistent with our capital allocation plan of balancing longer term investments in revenue growth, including new product development and acquisitions with enhancing shareholder returns in the near-term. In summary, the actions we have taken in 2016 to further strengthen our business model, while executing our capital allocation plan through our strategic investments are demonstrated with our ninth consecutive profitable quarter, our replenished cash position and strong liquidity. Our intent remains on driving volume and sales through organic and synergistic initiatives to unleash the full leverage potential of our business model. I will now turn it back to Mike.

Thanks Phil. As has been the case for last several years, in 2017 our focus on revenue growth will continue to be in third key areas; expanding our market sales reach, new product development and pursuing acquisitions. The idea behind the market and sales reach expansion in the battery and products business is to diversify more into the global commercial markets, international government defense markets, broaden our revenue opportunity set and develop several sticky new revenue streams, thereby reducing the dependence on U.S. government defense market, which has generally been slow if not in outright decline. During the fourth quarter of 2016, we continue to make progress in this regard as total commercial revenue was up 55% year-over-year, representing 68% of total B&E sales as compared to 47% in Q4 2015. In addition to the Accutronics acquisition, a big driver of this commercial revenue increase in Q4 was the core medical market, which more than doubled year-over-year. For the total year, the core medical business grew by 47% year-over-year. And since 2011, the first year we launched our commercial diversification strategy, the core medical business has grown at a compounded annual growth rate of 36%. We are adding the core medical revenue to the new Accutronics platform revenue, in 2016 our total medical market revenues represented approximately 34% of total B&E revenues versus 12% in 2015. Looking more closely at the Accutronics acquisitions, the integration went very smoothly and our global teams are working with their new Accutronics teammates to drive ongoing organic revenue growth from existing Accutronics and new B&E customers in Europe and to leverage new multinational OEM relationships to more fully penetrate the U.S. They are also closely coordinating our global product development and supply chain for our full range of products, whether they are produced in our UK, U.S. or China facilities. Some recent Accutronics related progress includes a 12-month extension of an existing supplier development agreement valued at $4 million with a key medical OEM customer, winning a development contract for a new commercial aviation device and fielding over $1 million worth of new increase for B&E products being sold into Europe as well as for Accutronics products being sold into United States. Regarding our core medical business, in Q4 2016 we continue to grow shipments of batteries and chargers to a group of medical customers, with transactions valued from hundred of thousands of dollars to several million dollars and for use in products such as AEDs, breathing devices, infusion pumps and medical carts to name just a few. Also, as part of our new business development efforts, we have recently extended our sales reach with the addition of several proven manufacturing representative companies and are currently engaged in new potential products with multiple medical device companies. Other commercial international activity included the continuation of shipments for Thin Cell products from our China facility for asset tracking applications, chargers for an international defense customer and primary batteries for an international defense contractor. In Q4 2016, total B&E international revenue consisting of both commercial and government defense business and including the Accutronics acquisition, was $10.4 million or 59% of total B&E sales, the highest amount in 5 years. Although, sales from government defense customers were down in aggregate, we did receive orders from a DOA totaling $1.4 million for a range of different primary rechargeable products and a small follow-on order from another U.S. government defense contractor for our Multi-Kilowatt Module large format batteries with more orders expected in 2017. Again, our efforts to expand our markets and sales reach through diversification and more penetration of commercial markets, international government defense markets and from a broader range of U.S. government defense customers helps us lessen the impact of fluctuations that can occur in this business. In 2017, we will continue to focus on the medical, safety, security, Internet of Things and asset tracking markets, further expand our sales region and channel access and utilize our global platforms to drive revenue growth. New product development also remains a primary revenue growth initiative. In Q4 2016, revenue from products introduced less than or equal to 3 years ago and including Accutronics was 28% or $5 million of total B&E revenue. We continued to collaborate with our key customers to develop new products and evolve existing products to multigenerational product plans to help them achieve their performance goals and expand competitive advantage. This close customer interaction continues to be one of our best opportunities to provide value and develop long-term customer relationships. Some ongoing customer collaboration products include a new sealed lead acid replacement U1 smart battery for general medical cart and uninterruptible power supplies applications, customized medical cart batteries and charger system to support specific OEM cart manufacturers, evolving our existing large-format MKM battery for remote energy storage applications and developing initial prototypes of a new large-format modular battery systems, updating, testing and certifying various new cells for medical and asset tracking applications, next generation 3-bolt lithium metal product lines to support numerous wireless device applications as well as next-generation smoke alarms, asset tracking devices and metering and expanding the range of our thionyl chloride cell product line for serving newly identified commercial and industrial applications. New product development also remains a key focus area for the Communications Systems business, with special emphasis on emerging radio technical requirements and new lean forward technologies to not only comply with emerging sophisticated waveforms, but also support legacy platforms globally in the known tact requirements of our core customer base. In Q4 2016, Communications Systems new product development provided 70% of sales, more than doubling the mix of the prior year Q4 new product development sales. A major driver of this new product development came from the Q4 2016 follow-on contract for Viper. Going forward, we anticipate additional orders for Viper in support of currently fielded lithium radios. Also driving volume are other Comm Systems products such as the MRC-UVA vehicle adapter, MRC-82A power supply and A-320 20-watt amplifier, which have been integrated over last few years on various family of special operation vehicle platforms with additional vehicles program to receive them as well. These products remain relevant and increasingly vital to the U.S. Department of Defense fielding strategy throughout 2017 and beyond with increased potential for uses in the global special operation forces on their various vehicle platforms. In other news, in Q4 2016, Comm Systems received a new $2 million contract from a U.S. government defense OEM prime for power supplies, which were shipped in early 2017. In general, the overall OEM business showed an increase in activity for Communication Systems in 2016 due to the radio agnostic capabilities of our products and the current fielding in major domestic programs. For 2017, new product development activity will again be associated with integrated tech for communication systems, including but not limited to, next generation amplifier and vehicle adapter products. Multiple domestic and international OEMs and program offices are evaluating existing products were in discussions for new capabilities to support radio programs with more complex waveforms and system integration requirements. The overall key for Communications Systems in 2017 in addition to the opportunities outlined above, is to continue to grow revenues and its core amplifier and everyday ancillary equipment products business by navigating the various U.S. government defense spending and contract and channel realities for tech communications equipment by simultaneously capturing a larger program opportunities critical to leveraging the communications systems business model being mindful of the need of upfront development cost and technical resources. In closing, the fourth quarter 2016, double-digit year-over-year revenue increase, driven by Communications Systems in Accutronics and solid execution of our business model resulted in a multifold year-over-year increase in quarterly operating profit and helped us achieve our stated goal of generating total year profitable growth. As we look forward in 2017 and improving shippable backlog, disciplined execution of our business model and continued investment in market, sales reach expansion and new product development position us well to realize additional operating leverage, further diversified beyond our core U.S. government defense business and achieve another year of profitable growth. We will also continue to pursue accretive acquisitions and strategic partnership opportunities to more quickly gain scale, particular market access or technology, new products, and/or skilled resource as the case maybe, while adhering to our disciplined approach. And finally – whereas commercial diversity has strengthened our company, driving revenue growth and improving profitability, our core military product expertise remains intact, with continued investment in new product development and multigenerational plans, uniquely positioning us for taking advantage of any additional revenue and operating leverage opportunities should there be an increase in U.S. government defense spending. Operator, this concludes my prepared remarks and we would be happy to open up the call for questions.

Thank you, sir. [Operator Instructions] Our first question comes from Gary Siperstein with Eliot Rose Wealth Management.

Hey, guys. Good morning. Congratulations on a superb Q4 and a solid year.

Thank you, Gary.

Thank you.

I was surprised to see the cash go over $10 million from $6 million at the end of the third quarter. Phil, I know you ran through the different statistics, but I might have missed it. Well, what was the total cash flow for the year and/or EBITDA for the year? And then what was CapEx for the year? And do you expect the same CapEx going forward?

Yes, Gary, EBITDA for the year – adjusted EBITDA was $7.5 million. Our total CapEx for the year was $1.3 million. You can see that the EBITDA margin 11.6% and you can see that the CapEx was a bit lower than what we have reported in previous years. It certainly doesn’t mean that we are slowing down our strategic CapEx. We actually see an increase in our strategic CapEx to increase our competitive advantage.

Okay, super. And I think a week or two ago when there were a bunch of executive orders from Trump. I think one of them was to rebuild the military and I think the language included some reference to rebuilding Special Forces. Do you expect that to if it gets put into effect? And I understand Congress has to fund it, but should that help us with the Communications Systems with Special Forces?

You know, I think, Gary, I think it’s a little bit too early to tell, but certainly it wouldn’t hurt us. And we think our cost position and our product development cycles are well in line with taking advantage of any additional opportunities that should come about.

Okay. And then Mike on the whole Brexit situation, it seems like I think everything that’s expected at the end of the year despite the volatility caused by Brexit. I know it hasn’t been implemented yet, but what do you see the implications [indiscernible] going forward?

You know, Gary, you broke up a little bit, but I think you asked the question about, are we seeing any impact one way or the other for Brexit? And at this point, the answer is no. We haven’t seen any real material negative impact one way or the other.

Okay. And you guys have also highlighted in different calls and on your investor presentation, the $300 million of potential orders by the general contractors on Comm Systems. Has there – I know we got over a year ago that $6.2 million contract that you’ve been shipping. Has there been any movement on any of the other contracts?

We haven’t had anything that would be announcable yet. And certainly if there was any major contract that we secure, we would do that. We are doing some development activity in a number of different platforms supporting the major radio prime companies and we just try to keep close attention to what’s going on with the overall tactical communications, expenditures by DoD, try to support all the global OEM primes. And at this point, you know, we still feel good about the potential for long-term capture of these larger contracts, but nothing has been specifically identified at this present time.

Okay. And Mike, have any of them gone away or been awarded to competitors or they discontinued all be in the pipeline in terms of development?

They haven’t gone away at all, no matter where if any that we have lost. And as I mentioned in my prepared remarks, it just seems like the decision process is slow, slow. So if anything, it will be interesting to see if the process of which some of these things are done and the timeframes start to speed up with maybe a change and look at how the government defense spending is occurring.

Okay. And I think you touched on it, but the – I guess as the year ago or so, there was – I think there was $1.8 billion radio contract to consortium with three different companies. And I believe Ultralife is a supplier to all three of them, is that what you talked about in terms of the development work or if it’s not, has there been any early indications on that in terms of shipping?

That’s still a process that’s underway. There is, I know development activity for some handheld contracts with Special Forces. There is some man-pack activity with the Army. It does seems like there is a number of different programs we are trying to prudently allocate financial and human resources as part of support the primes with our ancillary equipment. So best to our knowledge, those programs are going ahead and we are trying to position ourselves to take advantage of those contracts when they should be finalized.

The news release [Technical Difficulty] year-over-year?

I am sorry. Gary, we didn’t hear any of that. You broke out completely.

I am sorry. I am on cell phone. I don’t have the landline here. Can you hear me now?

Yes.

I was asking, in your prepared remarks, in the news release you talked about an increase in backlog, can you sort of tell us where the year is beginning in terms of backlog and how that compares to the prior year?

Yes. I would say Gary, the primary difference – and you are going to see the details when the 10-K is filed in the next couple of hours here. But you are going to see that the primary difference between this year and last year is that the backlog that we identify in the 10-K, which is $26.2 million. We believe that it is all shippable in the current year, in 2017, which was not the case with what we had disclosed last year. So there is certainly an increase in this what we consider to be the shippable in the current year backlog.

And you also mentioned in your – there were some follow-on Viper shipments in Q4 and you talked about the potential for additional Viper orders this year, can you give us a little more color on that?

Yes. Gary, we had announced an $8.2 million Viper award that is, as we had disclosed in other investor calls that we had fulfilled in Q1 through Q3, I think you are well aware of that. We did receive an additional award not to say it was somewhat unexpected that was an immediate need that was fulfilled all in Q4.

Okay. And is there any color on any additional potential Viper business for 2017?

We think there is a tail to additional fielding of the Viper product to serve existing field at Rifleman Radios. But we don’t have any specific visibility to quantities or timing, though we are optimistic there could be some things in 2017. It’s just too early to comment on anything further.

And the Viper shipments to-date, were they to – were they all to one customer or there are additional customers?

No, they are all going ultimately to the U.S. Army.

Okay. And how many general contractors, is it one or two?

It stood at one channel at this time.

Okay. And then in terms of M&A, can you give us a little more color on what you have seen over the last year and I think you said in the last conference call, you are putting I think you pulled one employee on that full-time, can you – I know, nothing has been announceable yet, but can you give us any color on the kind of things you are seeing and which way you are leading – you are leaning towards military or commercial?

Certainly, the 2016, most of our time was occupied with the acquisition and integration of Accutronics, which we think came up very successfully. We basically doubled our techno capability, but extended our market reach and we regenerated the cash. We went to go forth and by the acquisition, we have eliminated almost 100% of their operating expenses between both sides of the Atlantic. And instead of just having it to be a penny accretive, we actually were about $0.03 accretive. So we like to use the same methodology that you know it seems to be slow at the time. But to make sure we get some of the right targets and acquire companies that are good and make sense for us strategically, we continue to look across the board, all of us are involved in it on a regular basis. We are looking for adjacent businesses in our core markets, medical obviously, some in government defense, but with a sort of leaning towards commercial opportunities. We are also looking for some vertical integration place where if our product in conjunction with the vertical integration play could improve the overall competitive advantage. We are looking for opportunities like those. And it’s just a lot of farming. We have got to end up having to clean a lot of oysters to find the pearl Gary. And we think that Accutronics was a terrific acquisition and we hope to find the next Accutronics as soon as possible, but nothing to announce yet.

Okay. Thank you for the clarity. Last two questions, Mike in your prepared remarks, you talked about the various opportunities in medical and you mentioned from opportunities from hundreds of thousands and then I believe you said $7 million, can you – is that correct first of all and what would that entail?

We had – I said several million, I apologize that I came out referring the script.

That was good, several million.

Yes. I mean those are ongoing customer relationships. So if we have something that’s ongoing contract, it just gets renewed for the next time period. We don’t usually make a separate announcement about it. But it’s encouraging to know that you got those ongoing contracts in the form of fundamental part of our base revenue stream. At the same time, we continue to pursue development activities, with multiple different medical device manufacturers, battery could serve their products. So a lot of activity, it takes a long time qualifying and testing, especially in the medical field. But once we are successful, those relationships tend to be quite sticky. So we are trying to develop as many as we possibly can.

Okay. And last question, so now with 2.5 years of profitability and completing another year where you grew revenues and you grew profits significantly, despite the headwind, are you guys in a position now for 2017, to possibly do some IRR for the first time, maybe go to conferences, maybe try to get some analyst coverage to improve the liquidity and the stock?

Yes. Certainly, we put out and we will put out today an update to our investor presentation. We will be heading out to the field to do 1-on-1. We are just trying to allocate our time between those 1-on-1 visits. Quite honestly, we have spent a lot of time with customers than we do it with investors. But we do know that there’s a benefit in going out and hearing perspectives from potential investors. So we tend to do that in 2017.

Okay, thanks very much and congratulations.

Thank you, Gary.

[Operator Instructions] It appears there are no further questions at this time. Mr. Popielec, I would like to turn the conference back over to you for any additional or closing remarks, sir.

Terrific. Well, thank you once again, everyone for joining us for our fourth quarter 2016 earnings call. We look forward to continuing to share with you on a quarterly basis, each quarter’s performance in the future. I would also like to mention that we did update the annual financial information in investor presentation on our website. So please check it out at your convenience. Have a great day, everybody. Thank you.

This concludes today’s conference. Thank you for your participation. You may now disconnect.