Q3 2019 Earnings Call
Good day and welcome to the Ultralife Corporation third quarter 2019 earnings release Conference call.
Never mind during today's conference is being where current debt.
At this time for opening remarks, I'm injections I'd like to trying to call overcome these Jody frightening. Please go ahead man.
Thank you should Nate and good morning, everyone and thank you for joining US. This morning for Ultralife corporations earnings conference call for the third quarter of 2019.
With us on the on the call today, I might populates, Ultralifes, President and CEO , it's helping Ultralifes Chief Financial Officer.
The earnings press release was issued earlier. This morning, if anyone has not yet received a copy.
Due to visit the company's website Www Ultralife Corporation Dot com, where you'll find the release under news in the Investor Relations section.
For turning the call ever 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 at various risks and uncertainties. These include potential reduction in revenues from key customers on search.
Global economic conditions and acceptance of new products on a global basis.
The company cautions investors not to place undue reliance on forward looking statements, which reflect the companys 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.
Factors that could affect Ultralifes 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 todays call management will refer to certain non-GAAP scenario, but there's a management considers to be useful and differ from gap. These non-GAAP measures should be considered supplemental corresponding GAAP figures.
With that I would now like to turn the call over to Mike Good morning like.
Good morning, Jody and thank you everyone for joining the call.
Today I'll start by making some brief overall comments about our Q3 2019 operating performance after which I'll turn the call over to Phil who will take you to the detailed financial results.
When Phil is finished I'll provide an update on the progress against our 2019 revenue initiatives.
Including the acquisition of southwest Electronic Energy Corporation, which we refer to a suite.
Then open it up for questions.
For Q3 in 2019 total company revenue increased 35% year over year.
We used to buy the contribution of the battery and your products acquisition a suite.
And a 62% increase in communication system sales.
Driven by shipments under existing contracts for the U.S. armies network modernization initiatives and other previously announced idea queues.
These gains fully offset a decline in battery and your products core revenue, resulting primarily from lower government defense sales.
Despite the total company revenue increase Q3 operating profit was down year over year.
Due to late cycle, new product changes and rework it communication systems.
Manufacturing cost to ramp up production of new products have battery energy products.
And investment in engineering, and sales headcount to support new product development and future revenue streams.
And a few minutes I'll give you a further update on our revenue initiatives, but first I'd like to ask all type CFO Phil thing.
To take you through additional details of the Q3 2019 financial performance Bill. Thank you, Mike and good morning, everyone.
Earlier. This morning, we released our third quarter results for the quarter ended September 29 to 2019.
We also filed their Form 10-Q , one form 8-K with the FCC.
And if updated our investor presentation in the Ultralife web site.
I would like to thank called though to help make this happen.
For the third quarter.
Well, David revenues totaled 27.5 million, representing 7.2 million or 35.2% increase over the 20.3 million reported for the third quarter 2018.
Overall commercial sales increased 74.6%.
Understood by southwest Electronic Energy Corporation, or suite, which we acquired on May 1st.
Government and defense sales decreased 3.8% compared to the 2018 period.
Revenues from our battery and energy products segment were 22.6 million, an increase of 5.3 million or 30.6% over last year.
Year over year increase was attributable to the 7.2 million revenue contribution from suite.
In a 3% increase in core commercial sales.
These increases more than offset lower government and defense revenue.
Associated with a large 53 90 bad battery order and 2018 in the timing of sales to global defense primes.
Including suite the sale split between commercial and government and defense was 70 822 compared to 59 41 for the 2018 third quarter.
And the domestic to international split with 51 41 compared to 54 46 last year.
Revenues from our communication systems segment were 4.9 million, an increase of 1.9 million or 61.6% over last year.
During the quarter, we increased shipments of vehicle amplifier adapter systems to support the U.S. armies network modernization and other initiatives onto the delivery orders announced in October 2018.
Shipments a beautiful communication cats under an idea Q with a major defense contractor also announced in October 2018, and shipments of Universal vehicle Adaptors under an I'd like to contract with the Naval Air Warfare Center announced in June 2019.
By contrast into 2018 third quarter, we were not shipping under these contracts and shipments included several small volume legacy flow products.
On a consolidated basis, the commercial to government and defense sales split 60, 436 versus 50 50 for the year earlier period, reflecting both our acquisition of suite in the year over year, increasing core battery commercial sales.
Our consolidated gross profit was 7.9 million compared to 6.6 million for the 2018 period.
As a percentage of total revenues consolidated gross margin was 28.6%.
Versus 29.7% for last year's third quarter, a decrease of 110 basis points.
Gross profit for our battery and energy products business.
Increased 30.1% to 6.1 million from 4.7 million.
Gross margin was 27.1% a decrease of 10 basis points from 27.2% reported last year due primarily to incremental costs associated with their transitioning up several new products to high volume production.
Gross margin for the 2019 period, which also negatively impacted by the completion of the sell through out the opening inventory of suite, which had been written up to fair market value with the time of the acquisition in accordance with purchase accounting.
Resulting in a 26 basis point reduction in reported gross margin for the segment.
For our communication systems segment gross profit was 1.7 million, an increase of point 4 million or 30.2% compared to 1.3 million for the year earlier period.
Gross margin was 35.5% compared to 44.0% a decrease of 850 basis points due to late cycle product changes and rework relating to the vehicle amplifier adapter systems for the U.S. Army as well as sales mix.
Operating expenses totaled 6.6 million compared to 4.5 million last year, an increase of 2.0 million or 44.3%.
The increase was primarily attributable to the addition of 1.5 million as a result of the acquisition of suite.
In a point fourmillion or 32.1% increase in core engineering and technology spending for the high volume of new product development and testing.
As a percentage of revenue operating expenses were 23.8% compared to 22.3% for the year earlier period.
Operating income for the third quarter 2019 was 1.3 million compared to 1.5 million for the 2018 period, representing a decrease of 12.9% as higher operating expenses driven by new product development more than offset the increase in gross profit.
And operating margin was 4.8% for the 2019 period versus 7.4% last year.
Adjusted EBITDA defined as EBITDA, including noncash stock based compensation expense was 2.3 million or 8.4% of sales a decrease of 6.7% from the 2.5 million or 12.2% for the third quarter of 2018.
On a trailing 12 month basis, adjusted EBITDA is 9.5 million or 9.8% of sales.
Our tax provision for the third quarter was 225000 compared to 86000 for the 2018 period.
As a result of reversing the valuation allowance on our U.S. deferred tax assets at year end 2018.
Accordance with generally accepted accounting principles, we utilized a 21% tax rate on the U.S. portion of net income, resulting in an overall effective tax rate of 19.6% to determine our reported tax provision for the third quarter of 2019.
This compares to an effective tax rate of 5.7% for the year earlier quarter.
In a cash based effective tax rate for the 2019 third quarter of 5.2%.
We expected our deferred tax assets will offset U.S. taxes for the foreseeable future.
Including the interest expense on debt incurred to fund our recent suite acquisition and using the 19.6% effective tax rate net income was point 9 million or six cents per share compared to net income of 1.4 million or nine cents per share for the third quarter of 2018.
Adjusted EPS was seven cents per share for the third quarter of 2019, bringing our trailing 12 month adjusted EPS.
35 cents per share.
We define adjusted EPS as EPS, excluding the provision for noncash U.S. taxes.
Back to to be fully offset by our net operating loss carry forwards in other tax credits.
The company's liquidity remains solid with cash on hand of 7.1 million working capital of 50.7 million in a current ratio of 3.8, we will continue to carefully manage our liquidity to fund organic new product development strategic capital expenditures and M&A.
While reducing our acquisition debt.
In summary, the actions we are taken to drive profitable growth remains our highest priority our intent remains on driving volume and sales through further organic and synergistic initiatives supplemented with accretive M&A to release, the full leverage potential of our business model I will now turn it back to.
Mike.
Thank you Phil.
For 2019, we continued to be focused on increasing our revenue growth opportunities through diversification marketing sales reach expansion, new product development and strategic Capex and accretive acquisitions.
For the overall battery and energy products business.
Strategy continues to be market and sales reach expansion into global commercial markets and international government defense markets, thereby lessening our historical concentration in the U.S. government defense market.
To that end, we remain very excited about this we acquisition as it is another step in diversifying our end markets to not only grow revenue, but also to mitigate the lumpiness and unpredictability of some of our U.S. government defense revenue streams.
The acquisition was clearly EPS accretive in Q3, its first total quarter as part of the ultralight portfolio net about acquisition amortization interest taxes and pro forma corporate allocation expenses.
Revenues met expectations and in addition to battery pack revenues from a traditional oil and gas end markets. We saw an uptick in revenue from suite C. Safe product line, which is part of that subsea electrification focus.
Including suite. The Q3 2019 total commercial and international government defense revenues represented over 80% of our total being sales.
The initial 100 day functional tactical integration plans are substantially complete and we are now transitioning sweet into other regular ultralife operating cadences, such as implementation of a standard cost system preparation of a 2020 operating plan.
And participation in our just completed annual three year strategic growth planning process.
We intend to continue to expand suites wallet share with new and existing customers in our core oil and gas space, but also pursuing new revenue growth opportunities in subsea electrification currently a small get exciting growing new market.
We also plan to fully leverage the acquired suite technical talent base through global engineering councils and other mechanisms such that we can deliver more exciting new product developments and other areas of the company.
Both the oil and gas and sub sea electrification markets were largely previously unserved by Ultralife. However, they share attributes similar to our core businesses and that they involve mission critical niche applications with competitive differentiation based on superior service quality and reliability.
And long term high value proposition customer relationships.
Reviewing medical revenues in Q3 2019 global medical sales represented 19% of total beanies sales were down slightly as compared to last year's third quarter due primarily to nonrecurring revenue associated with one particular customer.
In general key medical device battery and charger product shipments were made in Q3 2019.
For a wide range of applications, including breathing devices medical carts infusion pumps digital X ray and surgical robots.
New delivery orders also continued for existing customer blanket and or multiyear agreements and in Q3 2019 totaled over $2.6 million.
In terms of other commercial and international government defense end markets. Some specific transactions in Q3 2019 included.
And international Government Defense order for $1.1 million for our 20 590 batteries expected to start shipping in Q4.
And OEM Prime follow on order to a Q2 land water, where your battery award.
In oil and gas customer initial trial order a battery packs for a measure while drilling application.
And as you say battery order brand new sub sea electrification customer.
Lastly for Beanies, U.S. government defense customers key shipments and follow on orders in Q3 2019 included a range of batteries for energy storage and take a tactical communications. However, Q3, 2019 revenues were down year over year, driven by some shipment timing lumpiness from the Deo.
Through at delay as well as by some of our OEM Prime channels.
During Q3, we did receive from delay a new five your idea Q with total maximum value of $14.4 million for our VA 5300, 68 battery, which is used for a variety of military applications such as in detection and imaging.
The amount and timing of deliveries under this contract Arthur discretion of de La.
Expected to start in 2020.
Battery energy products now has over $84 million, an untapped IDI Q contract potential for military battery revenue.
In addition to the $14 million Q4 5300 60, it's just received.
This includes a $21 million Q for 53, Ninetys and a $49 million I'd acute for 57 Ninetys both received in 2017.
After a lengthy rigorous inpatient first article testing process.
We expect to finish our portion of the 53 90 batteries that testing by the end of this year.
Another 57 90 battery by around the end of Q1 2020.
So in approved by an order from customers.
These new battery idea accuse could start generating revenue by mid 2020.
In the meantime, we're positioned to brookdale periodic request from delay for spot buys of legacy 53, 90 batteries as current inventories are consumed.
Regarding be any new product development during the third quarter activity continued across numerous projects, including a new digital X Ray battery.
The next generation recognize modular large format energy storage battery.
And new military communications backup battery.
Multiple public safety radio batteries.
Since our product for the smart labor market.
And at Sweet, they're drilled that gauge new product development.
Regarding be any strategic Capex project at our Newark, New York facility low volume production of a new premium three volt product is now underway.
And in Q3, we continue providing samples for qualification testing to customers.
Our high speed line is fully installed.
And final integration and commissioning efforts continue as we transition from our low volume equipment to the higher speed line.
As a reminder, this new product will serve the rapidly growing aiotv wireless devices market.
Next generation three both smoke alarms.
Asset tracking devices and metering.
It will provide customers with world class product performance safety and a competitive price value proposition.
As was the supply chain proximity of a us manufactured product.
We're also making progress on our final chloride so upgrade project in China.
Involving numerous process improvements.
Which will help us expand our total available market with newly identified commercial and industrial applications.
Regarding communication systems in Q3, 2019, new product development revenue from products less than or equal to three years old represented approximately 75% of communication systems revenues.
These statements included.
The remainder of the Naval Air Warfare Center order for Uva radio amounts.
As well as additional vehicle amplifier adapters and mounted power amplifier systems for the US armies Army network modernization initiatives.
The U.S. armies handheld manpack small form fit program and leader radio continuous operational testing would follow on contracted to an opportunities anticipated in 2020.
Also in Q3 major defense contractor exercise its first option year of our previously announced 9.5 million dollar I'd add Q4, non standard commercial vehicle communication kits.
Under this contract which consists of a base year plus four options years, we shipped approximately $1.6 million for the base year portion in 2019.
We're pleased with the option your exercise have now begun and are currently awaiting that notification of the amounts and timing of deliveries under this first option.
Initiatives continue with the focus on new product development for ancillary products supporting new to channel radios in their tree installation and various communication packages vehicles and airborne systems.
Another new product Development example is a recently completed lightweight power supply that will support emerging multichannel manpack radios.
Communication systems remains well positioned to support quick turn and new product development requirements for ongoing military initiatives and future programs.
In closing.
For the third quarter 2019.
We're very pleased to see solid year over year revenue increases in both of our business units.
Communication systems, driven by shipments under the US armies network modernization initiatives.
In a better Genie energy products from the acquisition of suite.
We were also delighted with the accretive EPS contribution of the new acquisition.
Through the first nine months of the year.
Total revenue was up 14% year over year.
As we near the end of 2019.
We remain focused on delivering profitable growth in 2019.
And from solid suite performance.
Finishing out 2019 and heading into 2020 at better engine products.
We are targeting project completion.
These include but are not limited to.
49 million dollar 57, 90 idea Q the $14 million 5300, 68 idea Q the new three volt product line, the new IAR product line, New Smart you one batteries and several other new medical in subsea electrification applications.
Battery packs.
At communication systems, we are focused on actively pursuing follow on other new product development driven.
Integrated communication system program revenue opportunities.
Integrated system market expansion is strong.
And we're leveraging our existing products and intellectual property to realize products to provide line of sight to growth with new OEM partners over the coming year.
As a company, we're strengthening our capability.
To pursue and capture new revenue opportunities as a result of the investments made in 2019.
As well as from leveraging the technical sales and marketing and operational resources from the news we acquisition.
And finally, our strong balance sheet.
Afford us the opportunity to simultaneously pursue organic revenue growth through new product development.
Invest in strategic Capex for competitive advantage.
Operator. This concludes concludes my prepared remarks, and we'd be happy to open the call for questions.
Thank you, ladies and gentlemen, if he would like to ask a question. Please take note by pricing.
Juan on your telephone keypad.
Good morning, I can tell.
Good morning here.
So I just wanted to drill down on.
The fact that you had some.
Changes.
From a customer I guess.
I think we saw that happened in Q1, and then it seems like you got it fixed and then had a big 13 cents Q2.
So I'm just curious is what's the problem this quarter the same customer.
Satisfying their first the adjustment and then having but the good shipments and earnings in Q2, just a little more color on that it if you would.
Sure Gary you know I look at Q3, as as an investment quarter as an investment in our future.
For probably the most complex military radio.
That's how we're been developed so.
You know in situations like that.
Especially with a new radio introduction of.
And this program is no different you have some expected changes some some that are not and Mike will go into some of the examples on that but the point I want to make is that.
I think you're trying to look at the quarter and trying to pigeon hole it into one specific item or one specific event.
In the time since I've been with the company. This is probably.
At the highest volume of transition completing development of new products, and then transitioning those new products into higher volume production and.
For us that's really what Q3 was all about so we made the necessary investments in the data in the file development in.
The final engineering and the transition.
And I really can't pigeon hole, it to one or two items. It. So it's several items and we don't like Mike went through and like went through the list. So that's how I look at it.
Okay. Okay. That's fair no I know you have to do them for the future revenue and to keep the customer happy and has the product evolves I guess.
Based on.
The second quarter conference call I.
Maybe I misunderstood I thought there was a change from the customer which impacted Q1, you've got the change done so Q2.
Was very good to shipments resumed and they were at the appropriate margin after you've made to changes.
So we thought that was history. So are you saying.
Is it different customer or its just.
Thats part and parcel it can happen.
I was just little confusion on that.
And when does when does the product becomes steady state.
Yes, I mean, theres a couple of meat moving parts I hear this is Mike.
In.
Q1, we were getting things kicked off the ground there was mounted power amplifiers and what we call it vehicle amplifier adapter.
So starting off from really have a black start we started shipping initially and it's a modern power amplifiers and very very very low quantity of initial prototype type amplifiers in Q1.
Those are made enough its learning curve and.
A small amount of vehicle amplifier vehicle amplifier adaptors being shipped in Q2 so.
The increase in monitored power amplifiers from Q1 into Q2 drove a pretty significant positive results in Q2.
Our sort of going through that learning curve with the last part of the system, which is vehicle amplifier adapters.
There was a handful dipped in Q1.
Many dozens shipped into Q2.
As we sit here in Q3.
When we're done.
Sure.
As the wave forms changed initially as a radio continues to be tweak along the way we were sort of the lag last Lincoln and change and then we'd have to modify our equipment and then the whole thing we have to Organise system. So.
And then going forward.
Mike Your script.
Extremely robust about all the opportunities.
Coming to bear and all the different idea cues that.
That could start going into production in 2020.
In addition to the Threepo with the various uses and moving into the high higher speed production for our I O T.
Metering et cetera.
It seems like everything's coming together at the same time.
I I know they all have different starting points and I think you highlighted the middle of 2020.
But it seems like all the hard work is starting up finally come together.
Well we could.
To get into more of a steady state there is always bumps with customers make changes but.
It seems as the different products mature and you get into this more higher volume.
Production.
Maybe some of the volatility will come out of the quarter by quarter results is that there's not a fair statement.
Yes, another way to look at that as we've been working on a number these projects for a couple of years and.
But you reach a point, where you just need to get the projects done and so.
Got it the place where we had a number of things these things coming together.
Rather than try that nickel and dime.
For a particular penny here or there.
We went ahead and spent the money on technical resources testing and even some outside resources.
It really try to drive these projects over the finish line so.
We saw an increase.
Cost, which is quite rare for us as you would remember from from our history.
But we're getting to that point were when I get these projects done so we can't pinpoint the exact month or quarter that they're going to hit in starting in next year, but.
We're pretty bullish about the prospects for next year.
Okay and with the various I'd queues.
I guess, they total over 85 million now in totality over a multiple of years.
Thats always possible I mean, we're cautiously optimistic they hit in 2020, but some could triple over in 2021.
Okay, all right Thats fair, but but you have indications that at least maybe four out of the six or three out of the five will start in 2020.
We really to I mean, the only indications we would have is that we've completed in getting so my where we complete our first article testing at that point they are free to.
Once everything signed up to to place delivery orders so.
I don't have a specific.
Piece of information is says, yes, we're going to start giving delivery orders for shipments and ex timeframe I'm using where we are in the overall milestone schedule and completion.
Tasks to say, okay, we're reading, reaching the conclusion of those tab.
Yes.
The next step would be.
Start placement of post delivery orders, but don't have any specific information about the exact timing when those delivery orders placed.
Yes understood. Thank you and you mentioned in the scrip a couple of times.
The leader radio and.
And the manpack.
The manpack, just again from my clarity as demand tack on part of a Harris.
Dan.
Yes.
Is the manpack eight particular had the Harris brand of the leader program.
Is that what you were referring to.
In that case and that could result in some some orders from them in 2020.
Manpack as a generic term use.
Regardless of the manufacturer and supplier.
Yes.
We're not involves obviously and making the radios, whether they be handled or manpack, but those suppliers are well known in the marketplace.
But just how they factor into our participation.
Is that as we said previously we work closely with our channel partners we have the.
Most.
Amount of being careful in terms of not sharing from one manufacturer to the others.
As we participate with them to surface specifications, but what we provide.
We provide some cases the batteries.
For handheld some as we provide batteries for manpack.
Hi.
Pottery worn dismounted amplifiers.
And then views and hand held applications, we supply amplifiers associated with our integrated vehicle adapter amplifier solutions.
Wherever there is a handheld or a manpack radio opportunity.
We have a product through one of our businesses to support that.
And and so when it make those comments, we're just really reflecting on the fact that we're continuing to develop new products to support.
The deployment of both handheld and manpack radios.
Okay. Thanks that helps.
Clearer now on that and finally in your script you talked about the still hopeful to achieve our profitable growth and 29 team. So I think we did 39 cents last year with a seven cents fourth quarter.
This year you at 22 cents through nine months, you got October pretty much under your belt.
And you still said profitable growth in 2019, so that would imply.
In 18 cents fourth quarter.
So as a is my math right and be with October under your belt, and you, saying that that much syndicated pretty robust November and December .
Yes, Gary you know.
The way the way I personally look at it.
Mike comparison is always.
Not to say that were clearly focused and on the GAAP reported.
Yes, as well, but the adjusted EPS and that's the reason why we use it is a better and as the best indication of our business performance in reflecting the fact that we have $63 million of annual wells that were going to use to offset the profitable operations that were seeing in the U.S. So I.
And my recommendation as if that is that you focus on the adjusted EPS, because it's it's a better reflection.
Of the cash performance of the business.
Through nine months I thought adjusted EPS was.
Adjusted through three months is 28 cents.
Okay got you 28 cents, okay Super so.
40, so a 28, okay at least 12 cents got you alright. Thank you guys. Good luck.
Thank you thanks, Gary.
There are no further questions in the queue at this time.
Alright, Thank you everybody again for joining us for our third quarter 2019.
Earnings call, we look forward to sharing with you our quarterly progress on each quarters conference call in future as Bill mentioned, we've updated our investor presentations on our website.
So please check it out thank very much and have a great day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.