Ultralife Corporation (ULBI) Q4 2023 Earnings Report, Transcript and Summary

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.

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.

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.

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.

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.

[Operator Instructions] Our first question comes from the line of Josh Sullivan of The Benchmark Company. Your line is open.

Hey, good morning, Mike, Phil. Congratulations on the quarter here.

Good morning. Thank you.

With the momentum here coming out of ‘23, and you're pointing to double-digit revenue growth and operating margins for '24 and onward in the presentation, how should we think of that walk or cadence, particularly on the margin profile side here looking ahead? What are the major hurdles maybe getting to that? Or I mean, you're obviously already on a good trajectory here. But do we need to see any of these specific development projects work out? Or is this just kind of naturally going to work out?

Well, there's always an organic growth funnel that's -- we're somewhat [host to our] (ph) customers. I mean there's very few products that we're bringing to market directly. So we're somewhat tied to their development cycle and launch cycle. So there's always some risk there. But we have pretty good visibility to a lot of things going on. We have a good strong backlog currently and feel pretty good about the position we're in.

And then maybe just on the price realization you're seeing here that you mentioned in the comments. Can you just expand on the contract negotiations and what we might expect to see this year?

Well, as I stated, there's still some IDIQs for both businesses that were negotiated two, three years ago that are still active in out years of the IDIQs, but price challenge because of when they were negotiated. In some cases, we've been able to just cancel, in other cases, the government is taking a harder stance and now didn't really allowed much to happen there. So we're doing our best to make sure that we're profitable on all those cases and continue to move forward and provide the products that our war fighter needs to survive.

And then maybe on the supply chain improvements you're seeing, where were the biggest improvements in the quarter? Maybe where are some of the bottlenecks as we head into '24? I know you talked about lead times there. And then I think you also -- you talked about maybe a certain component that was delayed in the quarter.

Yeah. The biggest real improvement was really when we started our S&OP process. After the cyber event, we kind of got hit in the mouth and we were kind of flat footed going into the year. But our S&OP process really started to flourish in midyear. So as you get into Q4, you've now had a good strong six months of strong forecasting and forecasting not only from our customers all the way through to our supply chain, it just really eases the burden of visibility, you can get ahead of some of the orders, and you're not expediting parts because you were ordering them within the normal lead time of the parts.

And maybe -- go ahead.

The specific example I called out, and I'll just give you -- this happens, but maybe infrequently, but it still happens during the course of a quarter, where you're waiting on a long time -- a long, long time lead items, that's months and months and months, that used to be weeks, you finally get the part, and it doesn't pass incoming inspection and you just want to rip your hair out when that happens. And that does happen. It happened several times during the quarter. And those are -- they're not day-to-day issues that we're fighting, but they happen every couple of weeks. So that is -- it forces our S&OP process to go deeper into the supply chain and to be much more interactive, much more face-to-face contact with our vendors.

Got it. And then maybe just switching over to some of the products. On the EL server cases. How are those small orders developing? And then do you think they lead into larger orders? Or are those different customers? And maybe what the time line is?

Well, the answer is yes. I mean, there's kind of a groundswell. We just got through some of the qualification early last year. It takes a little bit of time for the customers to get it through. Our strategic partner actually has a pretty lengthy server backlog right now. So I think right now, if you were to order a server, it's going to be about four to six months before you actually get the blade from them. So there's a little bit of inherent lead time built into the case need because of the server timing, but we expect it to continue to grow and be a significant piece of our business going forward.

Right. And then the option that's coming available midyear or so, how do you think that will drive sales? Or what is the key incremental there?

I think that's probably initially going to be more on the military side of the business. There's just a lot of need for computational power on the battlefield, forward field, especially now that there's a lot of electronic jamming and communications, give away position and et cetera, et cetera. They want to do a lot more local to the events and operations that are going on and really the DC power supply enables them to put it in a normal Humvee or track vehicle and operate forward field.

And then just one last one, just on the ThinCell, the medical wearable partner that's working through the FDA testing, what do you think the timeline on that looks like?

Well, we were hoping we were going to be in production last year. So obviously, we're not showing a huge revenue spike in ThinCell or really announcing anything. So the FDA is a fickle process. We've been through it with a lot of our customers. Sometimes you get through it in six months, sometimes it takes four years. Unfortunately, it's another one of those processes that I stated earlier, we're kind of hostage to our customers' time line and their successes in that regard. But we're poised and ready to go.

Yeah. The automated equipment is in place, and we're ready when the orders come in.

Okay. Well, thank you for the time.

Sure.

Thank you. One moment, please. Our next question comes from the line of Brett Davidson of Investletter. Your line is open.

Good morning. I got just a couple of quick questions. One of them is, where are you guys in regards to production capacity right now?

Well, production capacity, we're still pretty low. I mean, as far as our overall ability to serve, we're pretty much a first shift operation worldwide. And we have a lot of open capacity as far as footprint and building space. So if I had to guess, we could easily add another 30% capacity just on first shift, maybe even more than that. And then we still have the option of going to alternate shifts, additional shifts to probably triple our capacity if we needed to.

And I know you guys have gone through some growing pains introducing some of those new products regarding operating efficiency. Where are you guys in that process right now? If you could put like kind of a percentage number on it, if you were at 50% before, are you guys at like 85% now? Or what does that look like?

It's a little hard to nail down because there are so many different products and projects going on. But if I had to guess, we're in that 80% range probably, but some projects are probably closer to 95%, and some are probably still closer to 20% at this point. So a lot of things going on, and we're trying to prioritize obviously the highest revenue, more resource-intensive projects first, so we can see the maximum benefit.

And on some of those, like maybe some of the things more like the 20% level, I mean, do you guys still have some low-hanging fruit that you can easily address to ramp up the efficiencies?

Well, absolutely. I mean the real challenge now that we've become a lot more medical involved in some of our other customers, I mean, the medical process to just change either process or product is just a lot more lengthy than some of just the industrial and other projects that you deal with. There's just a really long qual and supplier approval process to really go through any type of change. So even though we have the best intention, sometimes what you think is a simple change that should take a quarter might take three just because you have to get resources from the customer to actually prove it and actually give you the green light to implement it.

All right. Thank you. I appreciate the time.

Sure. Thank you.

[Operator Instructions] Our next question comes from the line of John Deysher of Pinnacle. Your line is open.

Hi, good morning. Thanks for taking my question. Looks like a solid quarter and a nice way to wrap up the year. Just a couple of quick questions. One, what is driving the medical sales? Obviously, that helped you a lot in the last quarter. And I'm just curious, were there any specific items that really help boost the sales in that segment?

Well, we have some recurring products that under FDA and other things are under a battery replacement cycle. Obviously, we had a lot of sales in medical during COVID. So you have some of that coming due where you get a little bit of a bump because there's a replacement being used. But in a lot of cases, our main customers have had, their competitors have footfalls in some cases, recalls and other things that have really driven their businesses to grow a lot faster than I think even they thought, which we are a beneficiary of.

Okay. What's the cycle time for the ones that you put into place during COVID. Is it four years or so? Or how does that work?

Typically, the ventilation devices are three-year cycle typically.

Okay. And that's the key product line, is the ventilation products?

It's one of our more prevalent lines, yeah, I would say. But we do a lot with infusion pumps and other medical power. So it's spread across a bunch of different devices.

Great. What percentage of the backlog would you say is medical right now, roughly?

I would say, probably 30% just off the top of my head, but I don't actually have the number right in front of me, but.

That's helpful. You mentioned business interruption claim is under review. What's the approximate amount of that claim right now?

Well, we haven't disclosed that, but you can look at our quarterly results, and you can use intuition on determining what that is because if you look at the last three quarters -- well, we'll start with Q1. Q1, we had $32 million in sales. The last three quarters, we averaged, call it, $43 million. And over -- and in Q1, whereas we were breakeven on the bottom, we averaged $3 million on an average per quarter over the last three quarters. So without giving you an absolute number of what our insurance coverage is and all that, it's in that range.

Okay. I got you. When do you expect to have that resolved?

That is a great question.

Six months, I hope.

I would say, hopefully soon. It's been information-intensive providing as much detail as we possibly can, which we look at as a top priority because it's certainly cash that we would love to see along with our ERC claim that would go directly towards the paydown of our debt.

Okay. Fine. ERC claim, which claim is that?

The ERC claim is a claim that we filed in June with the IRS and we disclosed the amount, the amount was approximately $1.5 million that we recognized in Q2 and similar to the business interruption claim, along with everybody else, we're waiting for the refund check to come from the IRS.

I got you. That makes sense. And finally, you've done a good job at paying down the debt from the acquisition. I'm just curious how much availability do you have on the credit facility now as of year-end?

Well, we have actually quite a bit, and let me define that. We have an accordion feature that we can call into play if we needed $15 million, which we don't because we're generating some very good EBITDA. We could certainly work with the bank to use the accordion feature that's in our revolver credit loan.

So you have the $15 million accordion, but nothing beyond that?

We have an accordion that could get us to that level, provided that there was a really great reason, an underlying strong business reason that we could -- that we see. But then again, we would compare that to other financing alternatives as we go through our normal due diligence, whether it's CapEx, whether it's acquisitions, whatever it may be. One of the -- and I'll just have to mention this because I preach this all the time, the cheapest financing that we have is working down our inventory, which we very successfully did in Q3 -- in Q4 versus Q3, working down inventory by approximately $4.7 million from Q3.

Okay. So ignoring the accordion, which it sounds like a special circumstance facility, is it fair to say that there's no availability under the current term loan or the credit...

No, we certainly have availability. We're not by any means capped out.

Okay. What is that availability, both on the term loan and the revolver?

Yeah. The availability before we would use accordion feature if we decided to, is over $5 million.

$5 million availability, and that's primarily on the revolver?

Yes.

Okay. So you've got $5 million on the revolver availability.

Yes.

Right now. Okay. Great. Thank you very much.

Okay. Thank you.

Thank you. One moment please. Our next question comes from the line of Albert Rocco of [indiscernible]. Your line is open.

Hi, good morning. This is Al Rocco. I'm just wondering if you've ever looked at providing battery cells to the auto industry?

Well, we provide a lot of battery packs into that industry currently. We are partnered with cell providers that actually we use in that marketplace. We thought about it. It's a very long cycle. Typically, you're at least three or four years of cell development and another two or three years of downhole testing before you really get what I would call approved, and you really have to have a partner that's willing to put the product downhole to do all the testing and qualification. So it's always being thought about, I'll say that.

Okay. I wish you luck in finding a partner who needs a domestic provider. I would assume you're well positioned there.

Sure.

Thank you.

Great quarter.

Thanks. Thanks so much.

[Operator Instructions] Our next question comes from the line of [Stuart Citron of the Citron Company] (ph). Your line is open.

Good morning, gentlemen. Nice presentation and a good quarter. My question has to do with your conformable wearable battery. How significant a percentage contributed into your bottom line is the conformable wearable battery? And secondly, how significant is the Microsoft delay?

Well, right now, it's zero contribution to our bottom line. We saw...

I'm talking potential.

Well, potential, I mean, we had a very large award. It's an IDIQ, so there's a potential very large number out there. But ultimately, with any IDIQ and we've lived them in and out of this building for -- and all the businesses. It's basically a hunting license to actually get business. It doesn't actually guarantee you're ever going to see one order, let alone revenues. So I mean we've kind of always put it off as to -- it's going to be a good opportunity. We have other commercial and other government customers that would love us to be in a production capability mode with that product. And we believe we're going to bring it to market successfully, and it will be a contributor to our bottom line.

Are there still, I believe, four companies competing for this?

There were four awards. We're not really privy to where the others actually are. The only thing we've been told is no one else is through fab. So no one else is actually qualified at this point. That's the only thing -- the only tell I have.

No timetable on expectations, obviously.

No. I mean there's been some rhetoric around when the IVAS system is going to be out in field trials and other things, and I'll leave that for you to look up on your own. There's also another couple of government projects, Nett Warrior and some other advanced weapons and night vision systems that are scheduled to use the conformal product, but just not in the volumes of IVAS obviously, would be using.

Thanks a bunch. Have a great day.

Thank you, Stuart.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mike Manna, CEO, for any closing remarks.

All right. Thanks, everyone, for listening to today's call. We look forward to talking to you next time during the Q1 2024 earnings call. Everyone, have a great day and be safe. Bye now.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.