Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to this Ultralife Corporation fourth quarter Trench 19 earnings release conference call at this time.
Opening remarks introductions I'd like to turn call over time is Jody Burfening people at night.
Thank you James and good morning, everyone and thank you for joining US This morning's Ultralife Corporation earnings Conference call <unk> fourth quarter fiscal 2019.
With this on today's call or like public ocular, president and CEO and Phil Fain hopefully.
Chief Financial Officer.
<unk> press release issued earlier this morning, if anyone does not yet received a copy I invite you to visit the company's website www dot spoke to work for Dot com, where you'll find the release under the Investor Relations Thunder.
That's true news in the Investor Relations section.
Before turning the call ever to management.
I would like to remind everyone that some statements made during this conference call contain forward looking statements based on current expectation actual results could differ materially from those projected as a result of various risks and uncertainties.
These include.
Capital reductions in revenues from key customers uncertain global economic conditions and acceptance of.
New product comparable base.
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 reflect subsequent events or circumstances.
Further information on these these.
The other factors that could affect Ultralifes financial results is included in <unk> filings with the Securities and Exchange Commission, including the latest annual report on form 10-K. In addition on today's call management will refer to certain non-GAAP financial measures that management considers to be useful metrics in differ from GAAP to non-GAAP measures.
Should be considered a supplemental the corresponding GAAP figures.
With that I would now like to turn the call over to Mike Good morning, Mike.
Good morning, Jody. Thank you everyone for joining the call.
Today I'll start by making some overall comments about our Q4 total year 2019 operating performance.
After which I'll turn the call over to Phil.
Take you through the detailed financial results.
After dose finished I'll provide an update on the progress against our 2019 revenue initiatives, including the acquisition of southwest Electronic Energy Corporation referred to as suite.
And I'll talk about the focus areas for.
Turning 20 before opening it up for questions.
Well in the fourth quarter 2019, total company revenue increased 48% year over year.
Having leveraged operating profit top 132% and GAAP earnings per share up 49%.
Book Battery and energy products and communication systems core businesses achieved quarterly revenue increases leading to a total company Q4 organic revenue growth of 16%.
At communication systems fourth quarter revenues were up 113% year over year.
Resulting from salad shipments under existing contracts for the U.S. armies network modernization initiatives.
At being.
Total fourth quarter revenue was up 38% year over year with the core business revenue growth again boosted by strong Sweet acquisition.
Fusion.
So the total year of 2019, we were pleased to deliver our fifth consecutive year of profitable growth.
With operating profit increasing 12% and.
Total company revenue increasing 22%.
The business teams finished the year strong.
Offsetting.
Earlier in your increased cost to ramp up production new products.
Investment in additional headcount to support future revenue streams.
And completion of the acquisition integration of suite.
Our while achieving a total year increasing EPS.
In a few minutes I'll give you further.
Dates on our revenue initiatives, but first I'd like to ask alternative CFO, Phil Fain to take you through additional details of the fourth quarter 2019 financial performance Phil.
Thank you, Mike and good morning, everyone.
Earlier. This morning, we released our fourth quarter results.
For the quarter ended December 30, Onest 29 team.
We also filed our form 10-K with the FCC enough updated our investor presentation, which you can find in the Investor Relations section of our website.
I would like to thank all those to help make this happen.
For the fourth quarter.
Salivated revenues totaled 31 point Onemillion, representing a 10.1 million for 48.2% increase over the 20.9 million reported for the fourth quarter of 2018.
Overall commercial sales increased 53.6.
X percent.
Since I southwest Electronic Energy Corporation, or suite, which we acquired on May Onest.
Government and defense sales increased 43.1% and favorable performances by both businesses.
Revenues from our battery and energy.
Alex segment were 25.1 million, an increase of 38.4% over last year.
Merrily attributable to a 6.8 million revenue contribution from suite.
Sales for our core business was at the highest quarterly level.
Over two years.
Driven by a 14.9% increase in government and defense sales.
Including suite the sale split between commercial and government and defense was 60 733.
Compared to 60 139 for the 2018 fourth quarter.
The domestic to.
International split remained fairly constant if 40 951 compared to 40 753 last year.
Revenues from our communication systems segment were 5.9 million, an increase of 3.1 million more than doubling over last year.
The increase primarily reflects shipments of vehicle amplifier adapter systems.
Port the U.S. armies network modernization and other initiatives onto the delivery orders announced in October 2018.
And shipments a vehicle communication kits under an idea Q contract with.
The major defense contractor also announced in October 2018.
On a consolidated basis, the commercial to government and defense sales split was 55 45 versus 53 47 for the year earlier period, demonstrating the continued success.
For revenue diversification strategy.
Our consolidated gross profit was 9.4 million compared to 5.7 million for the 2018 period, an increase of 63.8%.
As a percentage of total revenues consolidated gross margin.
<unk> was 30.2% versus 27.3% for last year's fourth quarter.
An increase of 290 basis points.
Gross profit for our battery and energy products business increased 35.1% to 6.6 million from 4.9 million.
Gross margin was 26.4% decrease of 60 basis points from 27.0% reported last year due primarily to incremental costs associated with transitioning several new products.
Commercial and government and defense to higher volume production.
For our communication systems segment gross profit was 2.7 million an increase of 1.9 billion compared to point 8 million for the year earlier period.
With the transition of vehicle amplifier adapter systems for the Us Army.
Higher volume production.
In the.
The reworked due to late cycle product changes now behind us.
Aided by favorable sales mix.
Gross margin grew to 46.1% compared to 28.8% last year.
Operating expenses totaled 6.9 million compared to 4.6 million last.
An increase of 2.2 million or 48.2%.
The increase was primarily attributable to the addition of 1.4 million related to the acquisition of suite.
In a point 5 million or 49.5% increase in core engineering and technology spending.
Well it even leave between the businesses.
For the high volume of new product development and testing.
As a percentage of revenues operating expenses were 22.2% for both the current in your earlier periods.
Operating income for the fourth quarter of 2020 was too.
Point 5 million compared to 1.1 million for the 2018 period.
Representing an increase of 1.4 million or 131.8%.
Operating margin was 8.0% for the 2019 period versus 5.1% last year.
Driven by the 290 basis points improvement in gross margin.
Adjusted EBITDA defined as EBITDA, including noncash stock based compensation expense.
3.4 million or 11.0% of sales.
An increase from 77.7.
Percent.
Over the 1.9 million or 9.2% for the fourth quarter of 2018.
On a trailing 12 month basis, adjusted EBITDA is 11 point onemillion or 10.3% of sales.
Our tax provision for the fourth quarter was.
515000, compared to 47000 for the 2018 period prior to the income tax benefit of 18.7 million recorded last year to release, the valuation allowance on our us deferred tax assets.
As a result, as a result of reversing the valuation.
At year end 2018, we are required by generally accepted accounting principles to utilize the Usdsix story rate on the domestic portion of our income.
To report our tax provision for 2019.
Accordingly, our report a tax provision for the fourth quarter is based on.
The effective rate of 23.7% while utilization of our deferred tax assets will drive this rate down to approximately 6.5% when we pay our Texas.
We expect that the net operating losses and tax credits included in our deferred tax assets will offset.
You less taxes for the foreseeable future.
Including the interest expense on debt incurred to fund our recent suite acquisition and using the 23.7% effective tax rate.
Net income was 1.7 million or 10 cents per share on a diluted basis for the 2019 fourth.
Quarter.
This compares to net income of 19.7 million or a $1.21 per share on a diluted basis for 2018.
The tax benefit adjustment accounts for 18.7 million or a $1.15 per share of the reported 2018 results.
For a more consistent comparison of EPS between periods, we utilize adjusted EPS to reflect actual taxes paid or to be paid.
We define adjusted EPS is EPS, excluding the provision for non cash use tax is expected to be fully offset by our net operating loss.
Sorry forwards in other tax credits.
As noted in the supplementary table in our earnings release adjusted EPS on a diluted basis was 13 cents per share for the 2019 fourth quarter and 40 cents per share for the year.
Compared to six cents for the 2018 fourth.
Quarter in 38 cents for the 2018 year.
The company's liquidity remained solid with cash on hand of 7.4 million working capital of 53.2 million in a current ratio of 4.1.
We will continue to carefully manage our liquidity to fund organic.
New product development strategic capital expenditures in M&A, while substantially reducing our acquisition debt in 2020.
In summary, the actions we are taken to drive profitable growth remain our highest priority our intent.
Mains and driving volume and sales from.
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.
As was the case for 2019 continuing in 2020.
We are focused on increasing our revenue growth opportunities through diversification.
Expansion of markets and sales reach.
New product development, and strategic Capex and potential acquisitions.
For the battery energy products business.
This is Matt expanding our participation and penetration in the.
Light commercial markets.
International Government defense markets, while continuing to bolster our existing position in the U.S. government defense market.
Be any is 2019, so we acquisition was another step in diversifying our end markets and mitigating the lumpiness in long.
Revenue realization cycle times.
So should it with some of our U.S. government defense revenue streams.
In Q4, it second complete quarter as part of the Ultralife portfolio.
The acquisition provided 27% of total beanies sales.
We met our internal revenue target and.
As again EPS accretive.
Acquisition amortization interest taxes, and pro forma corporate allocation expenses.
Considering the addition of suite.
Our diversification into global commercial and international government Defense revenues has further lessened our historical dependence on U.S. government defense.
Market now representing below 25%.
Our total beanie sales.
Taking a closer look inside commercial revenue at our medical revenue.
In Q4, 2019 global medical sales represented 20% of total Beanie sales.
Slightly down as compared to last.
Fourth quarter due to timing as well as nonrecurring revenue from two particular customers.
In general key medical device battery and charger product shipments were made in Q4 2019.
A wide range of applications, including breeding devices infusion pumps digital.
X Ray and surgical robots.
New delivery orders also continuing for existing customer blankets indoor multiyear agreements and in Q4 2019 totaled over $4.2 million.
Looking at the other nonmedical commercial and international government defense end markets.
Some examples of specific transactions in Q4 2019 included.
1 million dollar and in orders from an international oil and gas customer from a customer for custom primary batteries for logging while drilling applications.
And international customer order for final chloride batteries for at 12.
Pass application.
And international Government defense order for charters and land warrior batteries.
Our domestic order for batteries used in an asset tracking applications.
And an international customer order for pipeline inspection gauge batteries.
To drive.
I mentioned in revenue growth in our commercial business in addition to medical.
And now oil and gas.
We continue to target other end markets such as asset tracking.
Industrial equipment.
The internet of things.
Metering and sensors and safety and security.
Lastly for Beanies U.S. government defense customers, we were delighted to see Q4, 2019 revenues increased 18% year over year.
Driven by steady demand of many core products in a large increase in shipments of advanced handheld radio batteries.
In Q4 2000.
I was 19.
Also announced a $4.9 million delivery contract award from deal a bright spot by of our legacy 53 90 primary batteries.
These are expected to ship throughout the first three quarters of 2020.
Actual timing pending the usual lab testing and approval to ship by the.
Regarding beanie new product development during the fourth quarter 2019.
Activity continuing on numerous projects.
Including a new digital X Ray battery.
A new military communications backup battery.
Multiple public safety radio batteries.
Hey stem cell product.
For the smart labor market.
And at Sweetie.
They're drilled data gauge new product development.
Regarding beanie strategic Capex projects at our Newark, New York USA facility.
Low volume production of the new premium three both product is now underway.
In Q4.
We continued some design for manufacturing activities and adjusting of equipment.
To achieve more reliable higher volume production and to prepare for ramp up activities in 2020.
This new product will serve the rapidly growing aiotv wireless devices market.
Next Gen 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 well supply chain proximity of a U.S. made product.
Separately.
In China.
We also have a new local demand.
Manufactured.
Magnesium oxide three bulk sale.
Which is now available for customers sampling and is seeing some initial small quantity sales.
And we continue to make progress on our final chloride saw upgrade project in China.
Involving numerous process improvements.
Which will help us.
Expand our total available market.
Newly identified commercial and industrial applications.
Overall, our new product development goal.
We produced the highest value proposition best quality and safest products.
In close collaboration with our end market and OEM customers.
Whichever one of our global locations that serves their supply chain.
Regarding communication systems in Q4, 2019, new product development revenue from products less than or equal to three years old.
Represented approximately 89%.
Communication systems.
Revenues.
Key shipments included additional vehicle amplifier adapters and mountain power amplifier systems for the US armies network modernization initiatives.
US armies handheld manpack, and some are form fit and leader radio programs continued operational test and evaluation.
With follow on contracted opportunities anticipated in 2020.
Communication systems has multiple ongoing initiatives underway with the major tactical communication OEM Prime contractors supporting new product development ongoing product support and new business development.
Also noteworthy.
In January of this year Ultralife was presented with a strategic partnership award from a global provider of mission critical servers and data storage solutions for our work and system integration and initial field trials of cutting edge server technology.
Small initial sample purchase.
Have started and we're excited about the potential for revenue growth.
In the business opportunity expansion as this relationship and the program progresses through 2020.
Going forward.
Medication systems will continue to make new product development investment in technological advances to our core.
Our amplifier power supply and other ancillary components to meet the ongoing demands of the state of the our radios being manufactured by our OEM partners.
Just as importantly, we will continue to be their trusted system solution integrator.
Whether it be in the form of vehicle amplifier adapters.
Using several of our components in concert with Oems handheld radio.
Tactical operation centers tightly incorporating our components with Oems Manpack radio.
Or an integrated mission critical service solution by others.
Protected from forward deployed feel conditions.
To provide.
Compute capability at the edge.
Each of these solutions help provide today's soldier with highly improved communication range enhanced digital voice and data connectivity and or computing capability for improved operational flexibility and readiness.
In closing.
For the fourth quarter 2019.
We were very pleased to deliver organic revenue growth in both of our core business units.
And achieve EPS accretion in this we acquisition.
Which capped off a solid year.
And yielded another consecutive year.
Profitable growth.
Heading into 2020.
Our beanie core business begins the year with a backlog roughly 17% higher than a year ago.
Without including any of the potential from a de la IDI queues.
As you were comp from last quarter's call, we have approximately $84 million.
In presently untapped us government defense deal law I'd Q contracts.
Including the $21.4 million 53, 90, I'd like to you.
$49.8 million 57, 90 idea Q.
And the $14.4 million 5300, 68 I'd at Q.
We continue to make progress towards the first article testing and production readiness for these opportunities and whereas the amount and timing of deliveries under I'd like you contracts Rx discretion of delay.
We are hopeful some initial revenue will start in 2020.
Overall activity.
US from the various defense department contracting channels and global OEM primes remain high.
In addition at better Andrew products, we are targeting project completion and revenue realization from several multiyear projects currently underway.
These include but are not limited to.
New public safety radio battery packs.
The new three volt product line.
The new IAR product line.
New Smart you one batteries.
And several other.
Good thin cell medical in subsea electrification applications battery packs.
That sweet.
2020 will be the first full year as part of Ultralife.
And we intend to continue to expand wallet share with new and existing customers in the core oil and gas space, while also pursuing new revenue growth opportunities in subsea electrification.
A small yet growing new market.
We are watching oil.
And gas market dynamics closely.
And are confident in our position to ride through the expected ups and downs as we're serving mission critical niche applications with competitive differentiation based on superior service quality and reliability.
Which has resulted in a durable customer base.
Of high value proposition relationships.
For 2020 communication system starts the year with about 25% remaining on a leader contracts in backlog.
With follow on contracts and several other new product development and integrated system driven program opportunities in pursuit.
In summary for 2020.
We are expecting to deliver another year of profitable growth.
As new revenue streams, and an increase started the year backlog battery end products.
Combined with the revenue from a full year of this we acquisition.
Offset a potentially softer year at communicate.
Yes in systems as shipments under our current US Army program contracts near completion.
And before any follow on.
Our new program awards kick in.
We are excited about investments made in new team members and a talented staff during 2019.
Both organically and through.
The acquisition of suite.
To help us achieve continued financial success in 2020.
As a total company our strong balance sheets.
Solid cash flow from operations in a disciplined execution of our business model by our management team.
Or just the opportunities to simultaneously pursue.
Organic revenue growth through new product development.
Invest in strategic Capex for competitive advantage.
And seek out bolt on acquisitions.
Operator. This concludes my prepared remarks, and we'd be happy to open up the copper questions.
Thanks, very much ladies and gentlemen, if you'd like to ask a question at this time please.
Signal by pressing star one of your telephone keypad piece and sure your mute function on your telephone is switched off to allow your signal to reach our equipment and again Thats star one on your telephone keypad. Thank you for a question not Pulitzer Modelo, everyone is an opportunity.
We'll now take our first question Mr. Brett Davidson. Please go ahead. Your line is now open.
Good morning.
Got a quick question regarding the R&D expenses.
Run rate and.
Fourth quarter was.
Considerably higher than that.
The rate of the prior three.
Hi, Good morning give an idea is that just.
Fourth quarter thing or is that.
Representative of a new rate going forward.
Brett This is Phil Fain I believe.
There is really.
Two ways to look up the increase in R&D R&D expense in the.
Fourth quarter, there is the development testing, a resulting from the timing of the introduction of certain new products and then there's the increased investment that we're making in bringing in what I consider what we consider to be world class Engineering talent and I believe the split between the two is.
Probably 60, 40, meaning that perhaps 40% of the increase that we're seeing in Q4 could likely be ongoing.
Well, a 40% of total or 40% of the increase.
A 40% of the increase.
Got it.
And.
Can you just given some color as to how much of the R&D is related to new products and how much is targeted to.
To new or customer development, so developing a product for specific customer and how much of its two new products in general.
I would say that.
We work and very close collaboration with our customers in developing most of our most of our new products. So Mike Mike My guess would be 80% of it is is yes. The at this time, 80% is working with specific customers and 20%.
Overall, the 20% being certain things like the new three volt line or the improvements in final chloride.
The other applications.
We work with and customers does absorbed quite a bit of our time, but it results in very sticky relationships going forward.
So were the most part.
Then when you guys are.
Generating R&D expenses.
Produce a new product or update a product for a particular customer.
Yes, absolutely.
Thank you very much.
Okay.
Just as a reminder, today, if you would like to queue for.
Please press star one on your telephone keypad.
There are currently no further questions.
And is on the phone line.
Okay, operator, I'll close then well thank you very much for joining us again for our fourth quarter 2019 earnings call.
I look forward to sharing with your quarterly progress on each quarters conference call in the future. We'd also like to note as Bill mentioned at the Investor presentation, as an update and it's on the.
Sites.
So please check it out.
Ladies and gentlemen that will conclude our conference call for today. Thank you very much for your participation you may now disconnect.
Okay.
Yes.
No.
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Okay.
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