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Ultralife Corporation (NASDAQ:ULBI)

Q1 2014 Earnings Conference Call

May 1, 2014 10:00 AM ET

Executives

Jody Burfening - IR

Mike Popielec - President and CEO

Phil Fain - CFO

Analysts

Mathew Paul - Sidoti

Operator

Good day, and welcome to this Ultralife Corporation First Quarter 2014 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the call over to Jody Burfening. Please go ahead.

Jody Burfening

Thank you and good morning everyone. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the first quarter of fiscal 2014.

With us on today’s call are Mike Popielec, Ultralife’s President and CEO; and Phil Fain, Ultralife’s Chief Financial Officer. The earnings release was issued earlier this morning and anyone who has not yet received a copy, I invite you to visit the company’s Web site 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 contains forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include potential reductions in US 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 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 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.

Mike Popielec

Good morning Jody and thank you everyone for joining the call this morning. Today, I will start by making some overall comments about our first quarter 2014 operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I will take the call back to provide a recap of our progress against our 2014 revenue initiatives and then talk about our full year expectation and financial outlook for 2014 before opening it up for questions.

For the first quarter of 2014, we were very pleased to see our battery and energy products business post revenues of $13.9 million, a 7% growth rate over the prior year’s first quarter and take the next step in its revenue recovery efforts by building on the revenue stability established last year. Gross margin for B&E business was 27.3% up 360 basis points driven by productivity gains and slight volume leverage.

For our communication systems business, revenue was $1.4 million, a $6.6 million decline over a top prior year comparable. However, also reflecting the continued impact of the slowness in the U.S. government defense project contracting. Gross margin for our communication system business systems business was 39.2% down 200 basis points driven by mix and reduced volume despite the favorable first quarter revenue and financial performance of the battery and energy products business and total company operating expense reduction of 10%, the lower revenue and gross profit generation by the communication systems business led to a total company operating loss of $1.1 million.

In our battery and energy products business, the 7% revenue gross was driven primarily by some key international projects and continuing shipments of our new hot-swappable battery and intelligent power management system for the medical cart industry with our channel partners under the previously announced $6.7 million agreement. We were also encouraged by our ability to obtain some variable cost operating leverage with the additional volume due the efforts over the last few years to get our cost in line with our stated business model. We know several more points of operating leverage are available as we continue to increase revenue.

For our communications systems business, lower Q1 revenue was driven primarily by the delay of two key forecasted projects. In one case, the military end-user customers’ first quarter fund allocated to our project was switched to another project. An in the other case, a late change was made to the specified equipment model which is extending the cycle timing to complete the transaction. Regarding the first these projects, which is for MRC Universal Vehicle Adaptor once the end-user customer received new second quarter funds, we received the contract on April 22. The purchase orders valued at $1.9 million and the unit was shipped within this quarter.

The second late project was approved and awaiting final funding. These examples highlight the current U.S. government defense funding dynamics we’re seeing and the impact we can have on our quarterly results. It appears to us that given the budget constraints even one in approved projects with specific requirements are getting funded more and more by piecemeal which makes predicating timelines more difficult. Since almost every new customer opportunity for our communication systems business requires some type of technology development to maintain our competitive advantage.

We are pragmatically evaluating internally and with our external prime partners the new product development spend against revenue magnitude and timing. In fact, given the upfront engineering expense and long gestation cycles, every new product development expenditure is under heightened scrutiny. During this current SOP period of U.S. government defense spending with the priority given to projects that represents the West-Mid (ph) and long-term revenue and profitability growth prospects. We are fortunate to have a strong balance sheet and cash management which provide the liquidity and flexibility derived through the ups and down and what remains is somewhat lumpy revenue business.

In a few minutes, I’ll talk more about our 2014 revenue initiatives and outlook, but first I’d like to ask Ultralife’s CFO Phil Fain to take you through additional details of the first quarter 2014 financial results. Phil?

Phil Fain

Thank you, Mike. Good morning, everyone. Earlier this morning we released our first quarter results for the period ended March 30, 2014. Consolidated revenues for the fourth quarter totaled $15.3 million, representing a $5.7 million or 27% decline from the $21.0 million for the first quarter of 2013.

Revenues from our battery and energy products segment were $13.9 million, an increase of $0.9 million or 7% from last year. Commercial sales increased 29% over the first quarter of 2013, and included shipments of our new medical cart power systems which we launched in the fourth quarter.

The increase over 2013 also reflects higher shipments of charger systems to a near like (ph) country. Driven by the launch of medical batteries and our focus on commercial markets, the mix of our battery sales for the first quarter of 2014 was 60-40 commercial to government and defense versus 50-50 for the first quarter of 2013.

As a further point of reference, the split for the 2013 full year is 47% commercial and 53% government and defense. The domestic international split for our battery sales was 45-55 in the first quarter of 2014, versus 50-50 for the first quarter of 2013. The split for the 2013 full year was 59% and that’s taken 41% international.

Sales classified its domestic includes shipments to U.S. based primes which in some cases serve international projects. Communication system sales of $1.4 million decreased by $6.6 million or 83% from the prior year, the decrease reflects continued slowness in closing new orders from the U.S. government is well so for fulfillment of large orders in the first quarter of 2013, where amplifiers and accessories from international defense customers for soldier modernization program.

Similar to the trend experienced last year starting in the second quarter of 2013, we continue to see delays in the final sign-off and purchase order issuance of several large high margin projects, which impacted our first quarter sales.

The underlying programs are all active and we continue to expect to fulfill these orders. In fact, since the first quarter closed we have received the signed purchase order for one of this programs in the amount of $1.9 million.

Our consolidated gross profit was $4.3 million compare to $6.4 million for the 2013 period, reflecting the lower sales for 2014. As a percentage of total revenue, consolidated gross margin was 28.4% versus 30.3% for last year’s first quarter.

The primary driver of the 190 basis point decline is the overall mix of communications system revenues to total revenue which decline from a 38% in the first quarter of 2013 to 9% in 2014. Gross margin for our battery and energy product segment was 27.3%, a 360 basis point increase from the 23.7% reported last year.

The year-over-year increase was due primarily the ongoing productivity improvement resulting in the elimination of most labor and material manufacturing variants, and higher production volumes due to the increased revenues resulting in higher factory throughput.

At the same time, the segment further reduced inventories levels by 3% since year end.

For our communication system segment, gross margin was 39.2% compared to 41.2% last year. The decrease of 200 basis points resulted from the higher volume of shipment in 2013 in the resulting higher factory throughput in absorption for that period.

The lean improvements undertaken in earlier periods and continuing in 2014, protected our base margin for the quarter despite the lower volume. Operating expense totaled $5.4 million a reduction of $0.6 million or 10% from the $6.0 million reported for the first quarter of 2013.

This reduction highlights our continued high control and close monitoring of all discretionary spending. As a percentage of revenue operating expense represented 35.5% compare to 28.6% for the year earlier period. The higher percentage for 2014 is driven by the communication system sales decline partially offset by lower G&A spending.

Despite our reduction in our operating expenses the lower gross profit resulted in an operating loss of $1.1 million compared to operating income of $0.4 million for the 2013 first quarter. First quarter non-cash operating expenses including depreciation, intangible asset amortization and stock compensation expenses are now just $1.0 million versus $1.1 million for the year earlier period.

This brings us to adjusted EBITDA the sign that EBITDA including non-cash stock based compensation expense of negative 0.1 million versus 1.5 million for the first quarter of 2013. Other expenses primarily comprised of foreign currency translation and interest expense netted the 63,000 versus 130,000 in 2013. Interest expense continues to be favorable due to the unused line terms of our new PNC Bank credit agreement. And our tax provision was 60,000 primarily reflecting the timing of deferred taxes. Our tax provision was 98,000 for the 2013 first quarter. Net loss from continuing operations was 1.2 million or $0.07 per share compared to a net income of $0.2 million or $0.01 per share for the same period last year.

The company’s liquidity remains solid with cash on hand of $18.9 million no debt working capital of over $46 million and a current ratio of 5.1. The company’s cash position was the highest ever reported at the end of the fiscal quarter. By comparison the cash on hand at the end of the first quarter of 2013 was $8.9 million and the current ratio was 4.1. Our accounts receivable day sales outstanding metric continue with very favorable level however inventory increased by 2% from 2013 year end to help service communication system shipments now scheduled for the second quarter. Our significantly strength in balance sheet has provided us with enhanced flexibility in executing our strategic capital allocation plans. Regarding this point, our board of directors has authorized a repurchase of up to 1.8 million shares of our common stock over the next 12 months. This repurchase program is intended to balance our continued investment in revenue growth including new product development and acquisitions while returning capital to our shareholders. Balance is the keyword here, as we remain committed to making synergistic acquisitions that will provide scale while further leveraging our business model.

In summary, the actions we have taken to improve our business model grow our opportunity pipeline and build our cash for key investments are demonstrated in the growth and the improved profitability of our battery and energy products business in the first quarter. We expect these actions and those in process to provide further leverage to our business model to drive increased profitability when the results of our efforts to grow the business and the communication systems segment are also realized.

I will now turn it back to Mike.

Mike Popielec

Thanks Phil. Over the last few years the teams have created value proposition that resulting gross margin rates capable of supporting profitability while funding continuous new product development and sales force revenue growth and diversification initiatives. We have also utilized 30, 55, 10 equals 10 (ph) business model we guide operating expense spending levels into ensure business payment through strong liquidity and balance sheet. As such we enter a period of operational stability where in all of our efforts are focused on our number one priority for 2014 returning to revenue growth. Whereas we have a clear appreciation for the business and economic challenges still facing our customers our goal to get the most out of the revenue growth to be able to us and deliver leveraged earnings growth.

Regarding revenue growth initiatives our focus remains on three core elements, expanding our market and sales reach, new product development and for us doing acquisitions. Communication systems is actually pursuing opportunities in Latin and South America as well as in Asia Pacific to offer a large contingent of both early and special forces vehicles with our amplifiers, vehicle mounts and integrated system. These programs continue to mature through both testing and evaluation processes as well as within the procurement agency. As we have been successful within the U.S. throughout the U.S. Cellcom (ph) vehicle fleet, we see a future for these products globally and fully expect these programs to come to provision this year. Our focus on U.S. Cellcom (ph) has created large program opportunities in all areas of the battlefield communication architecture from soldier systems to vehicles and as far reaching as unmanned Ariel vehicles. As we’ll amplify our technology advances and our radio ancillary portfolio expand we find ourselves increasing range of platforms systems and usages throughout all branches of Special Forces domestically. With a world class engineering team we are seeing current with the latest radio wave forms in our amplifier line and are preparing to upgrade a large contingency of special force equipment with the most modern way forms.

Looking at new product development, as mentioned earlier com systems recently see the $1.9 million award for our new MRC Universal Vehicle Adaptor for Cellcom (ph) through a major price. The UVA is a small light weight cost effective method for installation of primary handheld radios into vehicles of all sizes maximizing the handheld radio operational potential for the end user. Into the initial introduction in August of 2013 we have now received orders for over 893 UVAs which at list price with approximately $3,500 per unit. Regarding the A-320, 21 amplifier series with all its variance, we currently are pursuing several upgrade opportunities within the U.S. special forces representing close to a 1,000 unit depending on whether or not the upgrade is a modification to an existing unit or a complete new unit the list price can range anywhere from $3,300 to $6,500 per unit.

Lastly, our integration radio amplifier accessory and vehicle new products solution for the Rifleman Radio the VIPER system is currently participating in the U.S. Military National Integration and Evaluation NIE 14.2 at Ft. Bliss with a major U.S. Army prime contractor. Our VIPER system enables the operator to use the same radio in the vehicle or during dismantle operations and was launched in March of 2013. Recently, this prime contractor with whom we collaborate with on the VIPER development issued a press release stating that they were one of four prime recipients of a 10 year $988 million U.S. Army IDIQ award for soldier radio wave for vehicle applications business. Under this contract ultimately several thousands of VIPER units could be potentially purchased. At list price, the VIPER is approximately $13,000 per unit. Representing over 33% of total sales on a quarterly basis new product development as defined as products less than and equals to three years old continues to be vital component of communication systems revenue engine.

Withstand our market and sales reach in our batter and energy products business and to account for weaker demand in U.S. government defense market we have redirected a large portion of our sales efforts towards a commercial and international markets leveraging the proven military grade reliability of our products we are targeting new revenue stream from niche applications where their operational demand also require the highest level of performance on reliability. As an update from last quarter in February we debut our new medical cart battery system with our channel partner at the Healthcare Information and Management Systems Society show in Orlando, Florida and response was overwhelmingly positive. In 2014, we are targeting to ship 2,000 of these systems depending on the product options a specify a two batter and intelligent power management system has an ASP of around $2,000 for low volume quantities.

Besides the medical cart market, we are also targeting the mobile computer cart market and adjacent applications like material handling, power lift cards and others where mobile hot-swappable power is critical. Another new product recently launched in both the safety and security and energy storage markets was our new family ruggedized portable power solution. We continue to ship initial units to end users and channel partners serving their tactical government as that’s relieved emergency response, military and other segment for reliable robust mission critical and silent power is needed and we are now in the process of evaluating custom configurations for various other market uses such as both international remote medical teams, water purification and the industrial market for contractors and the trades. The key benefits of lithium battery oxide (ph) power, portable power solution as compared to similar lead acid battery solutions.

Now that the units have a higher quantity of operating cycles during life of the batter are smaller in size and lower in weight for capacity. Our strategic decision to diversify our new revenue stream is paying dividend. In Q1 approximately 70% of our revenue came from non-U.S. government defense customers. Our U.S. government defense business was predictably down 9% year-over-year but this was more than offset with the 29% growth in our commercial business fueled by the new product introductions gaining traction over the last two years. We plan to continue to focus on growing our commercial business while refreshing uplifting our G&D (ph) portfolio with the latest technology. Looking at a quantitative update on some of the new products for battery energy products business that launched over the last three years for the multi kilowatt module large format battery, we now have 25 different customers from which we shipped 155 unit including those units in our new portable power system by disaster response team for which 10 customers that purchased are evaluating 19 units.

Regarding our new high capacity 5390 and 2590 series also known as Land Warrior (ph) batteries in advanced lithium hybrid batteries themselves we have now shipped over 4,500 units to a 114 customer including 1,200 unit to international Allied Defense Forces. The launch of our new version of our very successful 25 non-rechargeable battery which means the most current recently updated military specification has both domestic and international customers interested. And as a side note we also recently received the first purchase order placement over two years under our five-year IDIQ Delivery contract for our legacy BA-5390 batteries for delivery in Q2 and Q3. We have also launched a new line of lithium power recharge with 12 volt products to the market this quarter which are drop and replacement batteries for various [indiscernible] acid battery applications offering a longer life and lighter weight. We will look at to this product line over the next six months.

The market and applications we are targeting are building centric long panels and security systems fire and sprinkler systems and other building management backup power applications. And lastly, non-rechargeable primary 1,000 batteries remain a core competency for us and we are actively engaging customers with specialty application where literally no there is type of work. We continue to introduce the high capacity manganese carbon mono-fluoride lens cathode in various cell sizes now offering four distinct sizes, these cells allow us to provide what we believe are the highest capacity solid cathode cell available in production.

In the first quarter 2014, revenue from B&E new products that were less than and equal to three years old represented over 40% of the total B&E revenue and was up 8% from the prior year’s first quarter once again showing the slow but steady impact new product about saving and going our revenue stream.

Regarding the financial outlook for 2014, we are maintaining our total year guidance and expect mid-single digit organic revenue growth despite continued constrains on government spending, based on this outlook for revenue growth and the improvement made for business model in 2013, we expect increase operating profit year-over-year and generating mid-single digit operating margin. In terms of communication systems revenue expectation for 2014, after a slow start, we’re expecting proven results as we move through the year. We are encouraged by the recent UVA contract and looking at our pending business pipeline, we are expecting several other similar-sized contracts over the next few quarters and when with combined with our daily flow business though time expected to be total year mid single digit revenue growth in our communication systems business.

Predicting the timing of converting any of the U.S. government defense opportunities into contracts and sales revenue remains our biggest challenge given the uncertainty and complexity of funding sources. Looked at it as a whole, our communication systems business is currently involved more deeply and widely in global projects and program opportunities than it has even been. Our value propositions and gross margins are strong, and we are very confident our technology development capability and our sales force end-user expertise. As customer funding has become tighter, we become much closer to our customers and smarter about how we apply our precious financial and human resources even the technological advancement of our product, the continue need to upgrade existing employee customer assets, our broaden involvement across special operations groups and military branches and current world events, we remain very optimistic about the long-term revenue growth prospects of communications business.

For the battery and energy products business as we’ve stated before, our pipeline of opportunities continues to deep and mature and we’re starting to see tangible traction in our new commercial products as well as in our international activities. We are excited about the new commercial revenue stream potentials that the medical cart battery systems represent to layer on top of the other new battery product revenue streams that are growing slowly but steadily. Through combination of new products, new market segments and new customers, we are expecting 2014 total year B&E revenue growth in the mid-single digit range.

The case for B&E revenue growth in 2014 is based on achieving sales force productivity gains are laying on several new revenue streams driven both by new products and market reach expansion. This includes new higher capacity core rechargeable battery and charger products for the U.S. and global customers, broadening the sales reach by new primary batteries, the new medical cart battery stream and the various portable and standby power solution streams.

As I said on the Q4 call, we look forward to 2014 in the year that B&E returns the total year revenue growth. In closing, we were pleased in Q1 2014 to deliver 7% organic revenue growth and solid gross margin improvement in our battery and energy products business due to the diversification at international and commercial markets, new product development and productivity gain. In communication system, we continue to be excited about the new contracts and growth potentials for our new product development traction and of the total company based on the continued execution against our proven business model and both teams demonstrated ability to achieve favorable productivity gains in a phase of constrained revenue. Our strengthening balance sheet and liquidity gives us the flexibility to simultaneously pursue organic revenue growth and new product development, aggressively seek our growth on acquisitions and return value to our shareholders through stock repurchases.

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

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Mathew Paul with Sidoti.

Mathew Paul - Sidoti

For the B&E segment and the organic growth we’re looking at for year, how much more margin can you capture as a result of increased throughput?

Phil Fain

Mathew, good to hear from you. I would certainly believe that there are 150 to 200 basis points are readily available potentially even more depending on the mix of the product that quite frankly would fall right to the bottom line with the higher factory throughput.

Mathew Paul - Sidoti

Thanks, Phil. And is that offers the first quarter margin in the segment?

Phil Fain

Yes.

Mathew Paul - Sidoti

Great. Okay. And switching to the communications business, in your prepared remarks you’ve spoke about expansion into different markets of highlighting Asia Pacific and Latin America, is that limited the organic growth or is that something [indiscernible] looking to expand through aggressively pursuing acquisition?

Mike Popielec

Our acquisition strategy for comm systems we’re really looking at trying to widen our line, and I think we’re very strong position in our current base and try to widen our lane with adjacent product, that isn’t necessarily driven by any specific need to go for international or domestically looking more at the best company we can buy.

Mathew Paul - Sidoti

All right, thanks guys.

Operator

(Operator Instructions) And there appear to be no other questions at this time; I’ll turn the call back over Michael Popielec for any closing remarks.

Michael Popielec

Well thank you once again for joining us for our first quarter 2014 earnings call, look forward to meeting up with several of you over the next few weeks or so and sharing with you future calls quarterly results, thank you very much, that’s all we have today.

Operator

And that concludes today’s conference call, we appreciate your participation.

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