Q1 2024 Ultralife Corp Earnings Call

Participants

Jody Burfening; Investor Relations; Ultralife Corp

Michael Manna; President, Chief Executive Officer, Director; Ultralife Corp

Philip Fain; Chief Financial Officer, Treasurer; Ultralife Corp

Josh Sullivan; Analyst; The Benchmark Company LLC

Samuel McColgan; Analyst; Breakout Investors

Presentation

Operator

Good day and thank you for standing by, and welcome to the Ultralife Corporation first quarter conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jody Burfening, Managing Director of LHA Investor Relations. Please go ahead.

Jody Burfening

Thank you, Antoine, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the first quarter of fiscal 2024. With us on today's call are Mike Magna, AutoWeb'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, w. w. w. Ultra emcore.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 uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in US and foreign military spending, acceptance of new products on a global basis and disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, whether or other factors not under the Company's control 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 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 that management considers to be useful and differ from GAAP and 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.

Michael Manna

Thanks, Jody. And good morning, everyone. Welcome to our call and Ultra latest Q one operating results. Earlier this morning, we reported Q1 sales of $42 million and operating income of $4.1 million, the second consecutive quarter of 42 million or more in sales, delivering $0.18 EPS for the first quarter following a reported $0.17 EPS in the fourth quarter. I am extremely proud of the team's efforts across the business in Q1 and the positive impact realized from our top priority and objective this year, which is gross margin improvement. The sequential Q1 improvement to 27.4% accelerates our incremental cash flow to further invest in organic growth initiatives and to pay down our acquisition debt.
I'll turn it over to Phil to talk through the detailed numbers.

Philip Fain

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31st, 2024. We also filed our Form 10 Q with the SEC and updated our investor presentation in the Investor Relations section of our website, which now includes a summary and status of our transformational new products.
Consolidated revenues totaled $41.9 million compared to 31.9 million for the first quarter of 2023, an increase of 31.4%. Government Defense sales increased 83.4% and commercial sales increased 8.6%. As a reminder, our results for last year's first quarter were negatively impacted by the January cyber attack. Revenues from our Battery & Energy Products segment were $35 million compared to $28.5 million last year, an increase of 22.9%. This growth was driven by very strong performance in our sales to government, defense and medical markets, which increased 73.6% and 54.7%, respectively. These increases were partially offset by a decline of 13.9% in oil and gas market sales. The sales split between commercial and government defense for a battery business was 69 31 compared to 78 22 reported for the 2023 full year. And the domestic to international split was 56 44 compared to 49 51 for the 2023 full year, demonstrating heightened domestic demand for our core products and the continued success of our global revenue diversification strategy. Revenues from our Communications Systems segment of $6.9 million were double the 3.4 million we reported last year, primarily attributable to shipments of EL. 8,000 server cases to a large multinational information technology company, integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor under an ongoing Allied country. Government defense modernization program and power systems to a US-based global prime. On a consolidated basis, the commercial to government defense sales split was 58 42 versus 64 36 reported for the 2023 full year. Our total backlog exiting the first quarter was $97.4 million and remains diverse in nature across our commercial and government defense customer base. So replenishment rate remains high and the backlog represents almost 60% of TTM sales.
Our consolidated gross profit was $11.5 million, up 54.3% over the 2023 period, far eclipsing the 31.4% increase in revenues. As a percentage of total revenues, consolidated gross margin was 27.4% versus 23.3% for last year's first quarter of 410 basis point improvement and increased 180 basis points sequentially over the fourth quarter.
Gross profit for our Battery & Energy Products business was 9 million compared to $6.5 million last year, an increase of 38%. Gross margin was 25.7%, an increase of 280 basis points over 22.9% reported for last year's first quarter and an increase of 50 basis points on a quarterly sequential basis year-over-year and sequential increases were primarily due to higher cost absorption and more efficiencies resulting from our concerted effort to level load production, more evenly across the 2020 fourth quarter as well as improved price realization for our communication systems segment, gross profit was $2.5 million compared to 0.9 million for the year earlier period. Gross margin was 35.8% compared to 26.8% last year, primarily due to higher factory volume and favorable sales. Product mix on a quarterly sequential basis, gross margin for the segment improved 860 basis points. Operating expenses were $7.4 million, the same as the year earlier quarter as a percentage of revenues, operating expenses were 17.7% compared to 23.2% for last year's first quarter of 550 basis points improvement reflecting pure sales leverage, the combined leverage of our 410 basis point gross margin improvement and our 550 basis point reduction in operating expenses to sales ratio resulted in a 9.7% operating margin on an absolute dollar basis, operating profit improved to $4 million over the 2023 first quarter to 4.1 million, the highest level achieved in at least the last 15 years. Business interruption insurance claim pertaining to our Q1 2023. Cyber-attack still remains in review and is not included in our financial results.
Our tax provision for the fourth quarter was $0.7 million versus 0.1 million benefit reported for the 2023 quarter. Computed on a GAAP basis, including the impact of interest expense to help finance the Accel acquisition and foreign currency gains and losses.
Net income was 2.9 million or $0.18 per share on a GAAP fully diluted basis. This compares to a net loss of $0.3 million or a loss of $0.02 per share for the 2023 quarter, excluding the provision for noncash U.S. taxes expected to be fully offset by our net operating loss carryforwards and other tax credits. Adjusted fully diluted EPS was $0.21 per share for the first quarter of 2024 compared to a loss of $0.05 for the 2023 periods. Adjusted EBITDA defined as EBITDA, including noncash stock-based compensation expense with $5.2 million or 12.5% of sales compared to $1.2 million or 3.6% for the prior year quarter. On a TTM basis, adjusted EBITDA is $19.8 million or 11.7% of sales.
Turning to our balance sheet, we ended the first quarter with working capital of $70.9 million in a current ratio of four compared to $66.5 million and 3.8 for 2023 year end. With the strengthening of our balance sheet, we are positioned to accelerate the paydown of our debt, thereby reducing the costly interest expense, which represents almost $0.12 per share on a TTM basis. We reduced our debt by just over 0.5 million in the first quarter with the expectation to pick up the pace in subsequent quarters 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 further the leverage of our business model.
I will now turn it back to Mike.

Michael Manna

Thank you, Phil, for the detailed review of the Q1 results. As I mentioned in the last call, we refined our 2024 priorities exiting the year with the following being key to continued success.
First, material cost deflation, we need to keep driving material cost initiatives, working with key suppliers to produce realized cost savings. We have hired experienced supply chain resources over the past six months in North Virginia Beach and Vancouver locations to work on vendor rationalization and consolidation, critical part dual sourcing, low-cost region sourcing and streamlining logistics spend across the enterprise.
Secondly, lean productivity continue to reduce waste and inefficiencies in all of our processes, both on production lines, with line balancing projects and automation initiatives. And throughout the support and back office functions, including additional systems integration activities and finally, sales funnel improvement. We have a larger and increasing pipeline of new products with a healthy funnel sales opportunities, which most have yet to close, which is required to continue to drive future growth as the world becomes more portable and critical applications. It is important that UltraLight brand products lead the way on the direct labor and materials side, we have seen conditions improve over the last 12 months, and our S&OP process has kept us mostly within component lead times and allowed us to deliver strong revenue over recent quarters. We continue to refine the S&OP process and expect this to further level production demand and turning allowing more efficient utilization of our direct precious resources as we continue to grow the business.
Next, I'll give updates on the organic growth projects and new development underway for the businesses, which are key to future sales and market expansion on the communication systems side, first, our VREL. 8,000 k. systems, which is a system developed with our strategic partner that allows high end computing power to be used in difficult environments on the edge in industrial, 5G and AI applications, truly bringing server level computational power to the point of use for the EL. 8,000 project. We shipped $1.6 million of revenue in Q1, the highest shipment quarter to date and a key to further diversification in the Comm Systems business.
Next, with the wide-range DC power supply available later this year, we expect to be secular remote DC applications to become part of the EL. 8,000 product line in the future. As this product line grows in defense and commercial applications. Secondly, we received initial orders for a new project win for radio power and an airborne application. We expect this program to ramp over the next year and continue for at least five years.
Finally, we have several projects underway. Next gene amplification products that target both domestic and international customers out there more detailed updates in future calls on the battery and energy side of the business. We are excited about the opportunity funnel growth across the variety of new and existing products and are optimistic we will see incremental orders this year. As previously mentioned, we have production equipment in place for our Thin Cell to support customers in the medical wearable space in several applications in item tracking. The sales funnel is strong with multiple projects in the qualification phase, primarily in medical applications, the one to three product line currently supporting IoT in the illumination markets as seen opportunity funnel growth in medical pack assemblies with several quotes provided underway for multi-cell packs, which is a key initiative for this product. Our improved final core chloride product line targeting monitoring and telemetry application continues qualification and field testing with several customers. These qualification cycles are extremely lengthy. For instance, we have one customer that has been testing the product for over one year with multiple opportunities and qualification. We anticipate initial protection orders later this year.
Our development work on the conformal wearable battery continues. We're working on completing the rest of the validation testing to enter US government for historical testing, which is currently scheduled to start later this year.
Meanwhile, as I mentioned last call, we are shipping samples to other prospective applications and customers to expand sales channels outside the US military to international markets, sales funnel and commercial opportunity pipeline growth is key for 2024 to keep our strong organic growth trajectory going as we have yet to fully realize the return from all our new product investments made over the last three to five years.
In closing, the team is energized and focused on their key objectives of gross margin improvement and sales funnel opportunity growth initiatives started last year, delivering promising early results with initial positive gross margin improvements and a healthy backlog position we expect more benefit across the portfolio as we progress as momentum continues. I look forward to further organic growth investment, paying down our acquisition debt and being our next accretive M&A search.
Thanks, everyone. That concludes the prepared remarks for today. Now we'll go back to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Josh Sullivan, The Benchmark Company.

Josh Sullivan

Good morning.
Congratulations on a nice quarter.
Here.

Philip Fain

Thank you.

Michael Manna

Thank you from you.

Josh Sullivan

As far as the gross margin initiatives, how much of the improvement here is is the benefit of volumes versus those strategic initiatives?
It's probably shared at this point. I mean, obviously, we're putting more volume across the same fixed costs, which always helps your gross margin numbers. And we are seeing some additional price realization on the sales that we have. So it's the sales side is a double whammy on the gross margin. So I would say it's shared at this point.

Philip Fain

And Josh, I'll just add a little bit to that. The primary example that we use is right where we're Mike and I are located is new or kind of new work perform because the volume was slightly higher, but we did see a very, very nice increase in gross margin. So that goes beyond the volume, the value portion of it. So there is the other items that Mike mentioned really at play here.

Josh Sullivan

And then if we look at the recent defense funding for Ukraine and elsewhere, should we expect that to benefit your defense worker needs or is there anything that's been pulled forward into recent quarters,

Michael Manna

while we would hope that it does help our defense business and funnel through the money usually is not unfortunately as much as they are they're saying that it's an immediate funding. It's going to primes typically and then the primes are giving orders to us. So it is taking probably four to six weeks for us, they even have any mentioned that orders are possibly coming our way.

Josh Sullivan

And then on the inventory side, how should we think about the cadence through the year and the way I look at inventory is it absolutely depends on the POs in hand, the timing of deliveries and some great lessons that we learned during the lean COVID years with all the supply disruptions to put ourselves in a position where we're going to get the orders out on time to support our level loading and level loading.

Philip Fain

Josh, if there was one thing that helped us more than anything with gross margin. It's level loading and level loading is not just trying to do the same level of production on a at an debt day-in and day-out basis. It goes all the way through our purchasing process all the way through our materials planning through our manufacturing all the way through cash collections that is in the perfect world, but there certainly are exceptions because you get to know your suppliers very, very well. And one of the reasons why inventory went up over year end is specifically because of that, we know the orders, we know the suppliers, we know their supply chain. We do not want to be cut short.

Josh Sullivan

So could you could the inventory go up at $2 million or down $2 million compared to any future quarter?

Philip Fain

Yes, it absolutely can just because we want to be able to serve our customers. And this does cost. The cost of that at some point is the paydown is the paydown of the debt, but that will all get caught up.

Josh Sullivan

And then just on the stem cell opportunity and any update on timelines as far as, yes, FDA certification or for any trials that we can keep an eye on?

Michael Manna

Well, we're still being told over the summer, they should be through some of their initial testing on. They're still positive that we're going to see production orders this year, and we do continue to ship in small quantities to that customer for other applications, but it's not the big announcement or the bigger award that we're hoping for in the future for sure.

Josh Sullivan

And then how should we think about the EL. 8,000 cadence. Are these orders lumpy or do you think this is the beginning of more kind of consistent flow here,

Michael Manna

and it's a little early to say definitively which way that's going to go, Josh, and there's a couple of different components with this business. In some cases, we're doing the actual integration of actually placing the server in the cases in other cases, we're just selling cases and someone else is doing integration work. So it really depends on which scenario it is. And unfortunately for us on the integration side, are the servers available number one and number two, just, you know, the cadence of the customers' orders going out to the field.

Josh Sullivan

And then maybe just one last one on the decline in the oil and gas market, is that end market dynamics or is there anything else going on there?

Michael Manna

We don't look at end markets dynamics at all. We had one customer. We believe overbuy in Q4 on they've been slow through Q1. We're starting to see some orders pick back up now, but we know we believe it's a long-term impact to the business I think we kind of look at things as a yearly run rate, and we think we're still on track to have a really strong year in that business fit both.

Josh Sullivan

Thank you for the time.

Philip Fain

Thank you, Josh.

Operator

(Operator Instructions) Samuel McColgan, Breakout Investors.

Samuel McColgan

Can you hear me okay?

Philip Fain

Yes.

Samuel McColgan

And we're hearing that phenomenon has made and Yes, congratulations. Great quarter.
Well, done well done. And I just had a couple of questions. One was on operating expenses. They came in a little bit lower. I just wondered if and pacing kind of progress you would be are you hoping to kind of stay at or a little bit lower level or are they just going to kind of fluctuate around where they are? Just wondering how that might?

Michael Manna

Well, while our goal is to keep our operating expenses as low as possible, I mean in Q1, I think we underspent a little bit on the R&D side we thought we'd probably spend a little bit higher, but it's just a matter of timing and some of that spend. And we want to add a little bit of expense on this on the marketing and sales side just to really drive that funnel growth. But overall, we're not looking for huge swings in that expense line at this point.

Samuel McColgan

Yes, prudent and the other question I had was about debt. I know you're hoping to kind of ramp up how quickly you're paying that down. Obviously, you don't know how they were quite seen that yet. But I just wondered if you had kind of a goal in mind of how much you were hoping to reduce that debt through 2024.
I don't know if you can comment on that, I can comment on that.

Philip Fain

I previously have commented on that, Sam and my goal going into any quarter is to reduce our debt on a quarterly basis by $2 million. And that is that is through solid operations. What we have in hand with an unknown expert X expectation date of when we're going to see it is the ERC. claim that we have with die with the IRS. We announced it in Q2 of last year. This 1.5 million, not sure when we're going to see that, and I'm not sure the IRS knows that either. And then the of the business interruption insurance claim and that we have spoken about the last couple of quarters that that's still in process with deal with the insurance underwriters. And with the volume of work they have, those do take some time. But those I would absolutely earmark to debt reduction. But on an ongoing basis, all things being equal, I target $2 million going into any one quarter, and that would be an impressive impressive reduction through the year to be able to fund a little less than that.

Samuel McColgan

Yes, that's it from me that well then and really impressive quarter.

Philip Fain

And thank you.

Michael Manna

Thank you.
Thank you. Have a great day.

Operator

(Operator Instructions) I am showing no further questions at this time. I would now like to turn to I would now like to turn it back over to Mike for closing remarks.

Michael Manna

All right. Thanks, everyone, for listening to today's call, and we look forward to talking to you next time during the Q2 2020 for our earnings call in July sake. Then thanks, everyone, by now, Vicki.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.