Q3 2021 Ultralife Corp Earnings Call
Good day and welcome to this Ultra Life Corporation third quarter 2021 earnings release Conference call. At this time for opening remarks, and she's instructions I'd like to turn the call over to MS. Jody Bachman. Please go ahead.
Thank you Catherine and good morning, everyone. Thank you for joining US. This morning ultralight corporations earnings conference call for the third quarter of fiscal 'twenty one.
On today's call are Mike pop electrical ultralight, President and Chief Executive Officer, and Phil Fain Ultra lives Chief Financial Officer. The earnings Press release was issued earlier. This morning, if anyone who has not yet received a copy I invite you to visit the company's website www ultralight core dot com, where you'll find a route from Jordan.
For news in the Investor Relations section.
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.
Potential risks and uncertainties that could cause actual results to differ.
<unk> includes the impact of COVID-19 potential reductions in revenues from key customers.
That's a new products on a global basis and uncertain global economic conditions.
The company cautions investors not to place undue reliance on forward looking statements, which reflect the company's analysis only as of today's date.
The company undertakes no obligation to publicly update forward looking statements to reflect subsequent events or.
Further information on these factors and other factors that affect ultra financial results is included in ultra life's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K in.
In addition on today's call management will refer to certain non-GAAP financial measures that 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.
Good morning, Jody and thank you everyone for joining the call.
Today I'll start by making some brief overall comments about our Q3 2021 operating performance.
After which I'll turn the call over to Phil who will take you through the detailed financial results.
When Phil is finished I'll provide an update on the progress against our 2021, our revenue initiatives then open it up for questions.
For the third quarter of 2021, Covid supply chain challenges negatively impact our customers as well as our own product manufacturing schedules.
Affecting quarterly shipments revenue and earnings.
We estimate the COVID-19 supply chain issues for the third quarter of 2021.
So it had an adverse impact on revenue of approximately $4 $1 million on.
On operating profit of $1 $3 million.
And EPS up success.
As such total company revenue was down 11% or $2 $6 million year over year.
This drove a slight operating loss and negative earnings per share.
Revenues in our core end markets of government defense and medical.
Down year over year.
However, we did continue to see improvement in our oil and gas and China revenues up.
90%.
86%, respectively year over year.
Which drove our total company commercial revenues up 5%.
Coincident with the Covid supply chain related revenue impact.
Customer customer demand remained high and.
And our ending Q3 total company firm order backlog increased by 22% or $7 $7 million over the end of Q2.
And not including the $4 2 million dollar leader radio AD on contract received and announced just a few days ago.
To address these supply chain challenges, we have leveraged our established relationships with our suppliers and customers.
Working side by side to acquire and quasi required materials.
Managing freight and logistics costs as best as possible.
Transparently adjusting delivery expectations.
Tightening overhead spending and in many cases raising prices.
So difficult we do not view the current COVID-19 supply chain challenges as permanent.
And while closely monitoring cost and worldwide supply chain developments.
Given our solid liquidity position, we presently continuing to aggressively pursue completion of.
Of our transformational projects and to support new contracts.
In order to realize the expected new revenue growth streams, they would bring.
Despite the near term pressure on our profitability.
And year over year comparisons.
In a few minutes I'll give you a further update on our revenue initiatives, but first I'd like to ask ultralight CFO Bill thing to take you through additional details of the Q3 2021 financial performance Bill.
Thank you, Mike and good morning, everyone.
Earlier. This morning, we released our third quarter results for the quarter ended September 32021.
We also filed our Form 10-Q with the SEC and have updated our investor presentation, which you can find in the Investor Relations section of our website.
I would like to thank all those who helped make this happen.
Consolidated revenues for the 2021 third quarter totaled 21.8 million compared to $24 4 million reported for the third quarter of 2020 a.
A decrease of 10, 7%.
Commercial sales increased five 1%, reflecting a rebound in oil and gas and international industrial markets partially.
Offset by a reduction in medical sales from the initial surge.
Batteries for ventilators respirators and infusion pumps in response to COVID-19 last year.
Government defense sales declined 39, 7% relative to the shipment of an order for $53 90 batteries in last year's period.
Lower shipments for our communications systems business.
As Mike mentioned for the 2021 third quarter increased lead times on components from suppliers and other COVID-19 related logistics matters significantly impacted both our internal and our customers' manufacturing schedules, resulting in delays in our shipments to <unk>.
Future periods.
Of the $4 1 million adverse revenue impact $2 5 million was related to our government defense business with the remaining $1 6 million related to our commercial business.
On a segment basis battery and energy products accounted for $2 5 million of the $4 1 million revenue impact and.
And communications systems for $1 6 million.
Revenues from our battery and energy product segment, or 20.1 million compared to $21 8 million last year.
A decrease of eight 3%.
Attributable to a $2 9 million or 28, 3% decrease in medical sales.
$2 6 million or 43, 3% decrease in government defense.
Partially offset by a 2.1 million or 89, 5% increase in oil and gas market sales.
And a 1.2 or 86, 2% increase in sales for our China operations, primarily driven by our new E R and thin cell products.
The decline in government defense sales resulted from a large shipment in last year's third quarter, Although $53 90 battery order placed in December 2019 by the U S Department of defense.
And delayed sales to a large global defense primes.
Okay.
Yeah.
The sales split between commercial and government defense for our battery business was $83 17, compared to $72 28 for the 2023rd quarter and the domestic to international split was $40 60 compared to $50 50 last year.
Accentuating, both the delays in U S government defense sales in the combined success of our global revenue diversification strategy.
Revenues from our communications systems segment were $1 8 million compared to $2 5 million last year, a decrease of 31, 1%, reflecting shipments delayed to future periods due to increased lead times on components from suppliers and other COVID-19 related logistics.
Matters.
On a consolidated basis, the commercial to government defense sales split was $76 24 versus 65 35 for the year earlier quarter.
Our consolidated gross profit was $5 1 million compared to $6 5 million for the 2020 period.
As a percentage of total revenues consolidated gross margin was 23, 5% versus 26, 7% for last year's third quarter.
Most profit for our battery and energy products business was $4 8 million compared to $5 7 million last year.
Gross margin was 24, 8%.
Decrease of 200 basis points from 26% reported last year.
<unk> sales product mix and lower factory volume.
For our communications systems segment gross profit was <unk> 3 million compared to <unk> 8 million for the year earlier period.
Gross margin of 18, 8% compared to 32, 8% last year, reflecting lower factory throughput and the 2021 period.
Operating expenses were $5 9 million compared to $5 8 million last year, reflecting investments in engineering resources for new product development, including resources dedicated to the conformal wearable battery IQ contract announced on May 17th.
As a percentage of revenues operating expenses were 27, 1% compared to 23, 8% for last year's third quarter.
Operating loss for the third quarter of 2021 was <unk> 8 million compared to income of <unk> 7 million for the 2020 quarter, reflecting lower sales and gross margins, resulting from supply chain delays and our continued investments in new product development.
Adjusted EBITDA defined as EBITDA, including noncash stock based compensation expense was <unk> 3 million or one 3% of sales compared to $1 7 million or six 8% for the third quarter of 2020.
On a trailing 12 month basis, adjusted EBITDA was $8 3 million or 8% of sales.
Our tax benefit for the third quarter was <unk> 2 million compared to a provision of <unk> 2 million for the 2020 quarter computed at statutory rates for GAAP reporting purposes.
Accordingly, our reported tax benefit for the third quarter is based on an effective rate of 22, 4%.
Which is reduced to five 5% when we pay our taxes.
Using the 22, 4% statutory tax rate.
Net loss was <unk> 6 million or four cents per share on a diluted basis for the 2021 third quarter. This compares to net income of <unk> 4 million or <unk> <unk> per share on a diluted basis for the 2020 quarter.
We utilized adjusted EPS to reflect actual cash taxes paid or to be paid and define adjusted EPS as EPS, excluding the provision for noncash U S taxes.
<unk> to be fully offset by our net operating loss carryforwards and other tax credits.
As noted in the supplementary table in our earnings release adjusted EPS on a diluted basis was a loss of five <unk> per share for the 2021 third quarter compared to a positive <unk> for the 2023rd quarter.
Ultralight maintained its solid balance sheet and liquidity in the third quarter with cash on hand, slightly increasing from $15 8 million to $15 9 million in debt decreasing from <unk> 7 million to <unk> 3 million from the second quarter.
We ended the 2021 third quarter with working capital of $47 9 million and a current ratio of three nine.
Compared to $45 8 million and three 4% for year end 2020.
As a result, we remained well positioned to fund organic growth initiatives, including new product development and strategic capital expenditures, while expediting, our organic growth through accretive M&A.
Going forward with our growing backlog and ample liquidity diversified end markets and growth initiatives. We remain steadfastly focused on realizing the full leverage potential of our business model I will now turn it back to Mike.
[noise].
Yeah.
Thank you Phil.
For 2021, we continue to focus on driving revenue growth.
By market and sales reach expansion primarily through diversification.
New product development and strategic Capex for competitive advantage.
And a disciplined approach to accretive acquisitions.
For the battery energy products business the strategy per market and sales reach expansion is about diversifying more into the global commercial markets and international government defense markets to lessen our historical concentration in the U S government defense market.
For Q3, 2021 overall global Beanie medical revenue represented 37% of total battery energy products revenue.
Demand from current customers, but for applications, such as ventilators, respirators, and infusion pumps digital X ray and surgical robots.
We also received over $4 $3 million in delivery orders from existing medical customer blanket <unk> multiyear agreements.
And new emerging medical device application that we're very excited about is in the area of Wearables thin cell batteries, such as used to power devices for vital signs monitoring.
For our product line for which we were just shipping testing samples in 2019 and 2020 and.
In Q3, we received initial production orders for shipments in Q4, and we are now ramping up their production to serve demand, which is expected to grow significantly over multiple customers in the 2022 2023 time frame.
Q3 oil and gas and subsea electrification commercial revenue was approximately 21% of total <unk> sales.
As mentioned earlier, we continue to see encouraging signs of improvement in our core oil and gas business, which drove up total Q3 oil and gas revenues at a strong double digit rate year over year.
In Q3, <unk> U S government business represented approximately 15% of total be any product sales with shipments primarily for radio batteries and Chargers to OEM primes.
Revenue was down year over year as stated earlier due to OEM COVID-19 supply chain shipment delays and the non recurrence of prior year DLA <unk> $53 90 shipments as the main drivers.
The first article testing for the next generation <unk> hundred 90 primary battery is now fully approved and signed off and we do have a small delivery order to supply into this current IQ with shipments expected in the first half of 2022.
We're also now eligible for additional delivery orders under this idea IQ subject to the discretion of the Dod.
So there is no guarantees of future delivery orders for government <unk> contracts the historical revenue over the last decade in any given year is range from hundreds of thousands of dollars to up to several million dollars.
Regarding the wearable conformal battery IQ contract, which we announced on May 17th and supports the U S Army's new integrated visual augmentation system.
We are currently executing the development sourcing phase of the process, while navigating through the supply chain challenges to best meet an ambitious first article testing scheduled.
As the Army recently announced the overarching IV program was delayed up to one year due to technical challenge and the IV heads up digital display.
Despite this we continue to aggressively work towards the key first article testing completion milestone for the associated can form a wearable battery.
Now more likely to occur in the latter part of 2022 with.
With Prudential protection proceeded with potential production awards thereafter.
As new product development remains a core element of our organic growth strategy. In addition to the next generation of $53 90, and conformal wearable batteries during the quarter. We continued to advance several of our multiyear development, new products, including but not limited to.
Our next generation Hot Swappable medical battery.
New smart <unk> batteries.
New 50, 790, <unk> blend primary batteries.
OEM public safety radio batteries and.
And next generation Ruggedized modular large format energy storage batteries.
It is worth noting that with some easing of the Covid restrictions, we have begun to once again attempt public industry events and we were delighted to introduce a new hot Swappable medical card battery at the August 2021, healthcare information and management system Society Tradeshow in Las Vegas.
The showcase resulted in several specific customers requesting product for formal technical evaluations later this year with production deliveries beginning as early as the first half of next year.
We are also very proud of the fact that this product was conceived designed sourced and manufactured over multiple ultralight locations leveraging our worldwide technical talent and delivering our products suitable for our global customer base.
As access to our key customers opens up post Covid, we are seeing a return to more opportunities for new product development and collaboration across all of our locations.
New product development and multi generational product planning.
To keep us current with market needs and gives us the opportunity to remain close with and provide value to our key customers.
Regarding your efforts to strengthen our competitive differentiation. We also continued to invest in strategic Capex.
The new manufacturing line at our Newark, New York facility for our new high performance lithium manganese dioxide three volt cell is now fulfilling initial customer orders.
Voice of the customer feedback is showing positive responses for our products performance safety contribution to the OEM devices competitiveness as well as its U S manufacturing locations.
Performance differentiation has been demonstrated in a high rate or power capability, which is particularly useful in illumination devices.
In medical devices with short high pulse rate applications.
In China.
The performance attributes expected from the completion of the first phase of our project to upgrade our vinyl chloride <unk> continue to be confirmed by customer testing for.
For this product line, which can be an operation anywhere from five to 10 to 20 years.
Customers have long testing and qualification periods. So their feedback provides valuable validation of our product and leads to sticky customer relationships.
As you May recall. This overall project involves several steps of product and process improvements, which will help us multiplied by several fold our total available market with newly identified vinyl chloride <unk> commercial and industrial applications.
Medical medical and other industrial customers also continued to tap into our China operations for supply of battery packs solutions, not just yourselves, which is growing our value proposition.
In Q3, our total China operations revenue was up 86% year over year and indicator of growing global demand for our China capabilities.
Our goal remains to produce the highest value proposition best quality and safest products.
And whichever one of our global locations best services supply chain of a particular end market.
<unk> OEM customer.
Looking at our communications systems business Q3, new product development revenue from products less than or equal to three years old.
I presented approximately 51% of communications systems revenues.
Regarding the U S Army handheld manpack small form fit and leader radio programs, We just received and announced a follow on order for $4 $2 million with delivery starting in Q2 2022.
And as the army is moving into full rate production, we expect potentially another round of rewards for leader Radio program in the first half of 2022.
As radios are the critical enable other communications systems business. The team is continually focused on in technology innovations market trends and customer requirements to position us for future business.
Supporting both handheld and manpack radios and integrated systems.
The effects of COVID-19 continued to impact the communications systems business.
Apply chain issues are affecting our electronic component availability, resulting in extended material lead times and manufacturing timelines.
<unk> revenue forecast.
For supply chain components that are available the shortage of global transport resources, calling is causing delay deliveries often compounded with increased transportation and logistics costs.
Our teams continue to work closely with customers and suppliers to actively managed sales and operations planning to mitigate the supply chain and manufacturing impact to the extent possible.
Communications systems also continue working to expand into the commercial market with multiple system integration product initiatives for several key customers.
For the mobile data card, which will enable analysis autonomous vehicle data during testing and manufacturing of the vehicles.
Initial purchases of low rate production quantities for test and evaluation are received and will be delivered in Q4.
We are pleased to have reached this milestone and are working steadily with the customer to position for a successful test and evaluation with production orders to follow.
This product is the first purely commercial product offering for communications systems, and a significant milestone for the communications systems team.
Separately Communications systems has also continued the prototype phase for a Virtualized radio access network enclosure supporting <unk> network deployments worldwide.
This is the second all commercial business opportunities.
We have experienced delays immaterial acquisition for finalizing prototypes, but anticipate completion soon with delivery to customer for test and evaluation in Q4 with production volume orders to initiate in early 2022.
The award of additional HMS manpack handheld amplifier systems.
Ongoing dialog with other government defense Oems.
The initial order in a commercial business program with the second quickly to follow.
Are all opportunities for increased revenue, which insist and mitigating the op and inconsistent or lumpy defense sales to which communications systems has been traditionally dependent.
The diversification into commercial products.
Bind with our participation ongoing military radar programs anchors, our optimism about the long term growth of our communications systems business.
In closing for the third quarter of 2021 through our financial results were challenged on several fronts.
We were pleased with our overall total company and commercial growth.
Progress on transformation of projects.
Addition of new orders to our backlog.
And positive operational cash flow.
We are also glad to now have the next leader Radio following award in hand.
Most importantly, I want to thank each and every one of our employees channel partners and customers for their tremendous effort and cooperation and fulfillment execution.
Given the present extra ordinary supply chain hurdles.
Our top priority remains to achieve revenue realization from our transformational projects delivering.
Station pass through Congress.
As we approach the end of 2021, we will continue to optimize our financial performance targeting total your profitability.
Solid cash flow from operations and maintaining our strong balance sheet.
While supporting transformational products and investments.
Though we expect the current COVID-19 supply chain challenges to potentially continuing at least a few more quarters.
It is imperative that we stay keenly focused on completing our current multiyear transformational projects.
In order to unleash the new revenue streams each will bring.
We continue to focus our time and effort.
On completing these transformational projects as we believe they are the elements, which are most under our control.
To improve our organic revenue growth rate and revenue in EPS consistency.
We will also continue to evaluate acquisition opportunities, where we can quickly gain scale and achieve further operating leverage.
Operator. This concludes my prepared remarks, and we'll be happy to open up the call for questions.
Thank you.
Like to ask a question please signal by pressing star one on your telephone keypad.
You're using a speaker phone. Please make sure you'll meet function is turned off to allowed to signal to reach our equipment.
[noise] again press star one to ask a question will pull trudges from mainland China Aphonia Cutie signal for question. Thank you.
[noise] [noise], Yeah, we'll take the first question from Gary.
<unk>.
Right well punishment. Please go ahead.
Good morning, Mike himself how are you.
Good morning here.
Mike on the Covid and supply chain.
You mentioned you put through some price increases on do you feel that will offset.
Most of the added expenses I know, it's not going to necessarily change any any delays, but do you think that'll help with half the expense increases or a quarter of the expense increases.
I think generally yes, I mean, I think we've been working extremely close with our customers I mean in some cases, our customers are stepping right up to help us with some of the premium premiums that we've been subject to and freight kind of like.
Some of our contracts are existing contracts and so you have to go in after the fact and make some changes.
But for the most part is indicated in my prepared remarks, our customers are right there side by side and helping us try and address on these caused central creases in somebody's delays so from a standpoint purely of the cost increases I.
I think we are doing a pretty good job of knocking those down but as you indicate.
The delays those bigger and bigger impact at this point.
Okay and did those.
Did those price increases go through later in the third quarter. So we will have a full quarter effect in queue for or did they just go through recently, so it'll be more of a Q1.
Part of the fourth quarter and more of a Q1 opportunity.
Gary They went through earlier in Q3.
Okay. Thank you.
And.
In terms of.
The lead a radio.
One of the.
Prime contractors recently got a 200 million dollar contract.
And they said they went into a full rate production.
And then the news release it said the.
The ceiling on that contract over the next 10 years is 16 billion and they talked about 100000 leader radios and 65000 manpack radios.
And that was just one of the contractors and then the other contractor I guess for the amplifiers, where you just got that 4.2 million dollar contract.
So my first question is.
Does the government give out equal contracts to both.
Prime contractors.
Or is it is it different did the amplifier customer.
I'll also get a 200 million dollar contract.
As they went into a full rate production Ah or is it hard to know who gets what.
Yeah, it's really hard to know what goes into the final details of each of those individual contracts I mean, we read the news headlines as well.
Sometimes they split on sometimes they allocate.
Bigger portions to one versus the other at least from my own experiences sometimes they just give a single award. So what we try to do is not try to figure out too much what's going into our.
Partners contracts, but really just whenever we're called upon by the way I'm partners to our very very best job to help them make them as competitively has passed competitive as possible. So we can get the biggest share possible for us.
Okay, and and trying to.
Come out with a potential figure for for Ultralife.
16 billion over 10 years is 1.6 billion a year for that one contractor.
So even if you hear a cut it by 50%, it's still almost a billion a year.
$800 million or something like that.
For that one contractor.
And I know you guys to supply batteries and Chargers to one and amplifiers to the other so if indeed it is worth 800 million annually.
To to to at least at one contractor on batteries and Chargers.
Does that mean the opportunity for ultra life is $5 million to $10 million, a year or is it $10 million to $15 million a year I'm just trying to get a.
Sense for the battery and Chargers, if that contractor does continue to go into full production with the government.
Yeah.
Yeah, Kerry I wish life was that easy that we had a straight line. This across the years, but you know to 100000 figure that you gave is accurate that that was issued three years ago and he just using math from the initial.
Press release by the U S Army, it's 20 or 22% of all of those leader radios have the VA type of system with it so that magnifies the opportunity and you're correct, we supply batteries two batteries and a R V a systems.
But then again predicting the annual impact of government.
Contracts the timing of those the magnitude of those.
[laughter].
I used to call at four dimensional chess is now five dimensional chess very difficult to do.
So the opportunity is there on both the battery side and and and at the AA site.
Okay and on the recently, one 4.2 million dollar contract for amplifiers.
You said they would start shipping in queue to next year.
Is there and expect to is it going to take two quarters to ship that or is that all get shipped in one quarter.
I mean, it really depends on the supply chain.
And that's probably the biggest obstacle we have is really good.
Firm commitments from our suppliers and.
To construct the units and to ship them. So it would be just haven't received this contract a few days ago.
It would be premature to try to guess exactly when everything would ship that we believe it to be starting in Q2 2022.
Okay, Okay and.
Have there been any indications from that customer on follow on orders after that point and they they they give you any color on.
What kind of orders the government's expecting from them and what therefore.
From you. So you can improve the supply chain have have you know six months notice that kind of thing nine months notice.
We tried to keep.
Close here too.
Are told by our channel partners as well as what we read in various.
Media.
And it's just really too early to say I mean I. We believed as was mentioned in my prepared remarks that the fact that has gone into a four ray production as a positive sign.
But there's just a lot of variables.
Government budgeting and various things going on in the world that I would make it on some hospital or predict right now but.
What the next steps would be but at this point, we're very pleased that they have gone to for a production because they could potentially creates another opportunity for us.
Okay moving to the three bold product line.
Think last quarter's conference call you mentioned.
Different discussions for.
With customers I think you said there were up the 20 potential customers and different.
Applications and you mentioned.
Some of the customers are six figure orders, some or a million.
Million.
Million unit orders or even more can you give us any color on what's going on there.
Now those those continue on as I mentioned last quarter and that's why I didn't re covered again this quarter, but we're continuing to work through.
Final tweaks on products and make an initial shipments and.
Continuing to work the customer funnel of new opportunities and and as I mentioned in the remarks.
Getting good feedback on some of the characteristics of the product bring into the marketplace and so we're very very optimistic about its future.
Okay, and moving to the conformal So you said.
The schedule has changed a bit. So previously you had talked about maybe getting into testing starting in the first quarter of next year and maybe shipments.
Or orders and the second half so now testings delayed till the second half of next year is that correct.
Yes, yes that the overall program.
Due to a a part of the program that we're not involved with has been delayed.
Data publicly up to a year.
And so it's sort of push the whole program out a little bit. So we're trying to still work as aggressively as possible.
Spending extra money to do it frankly.
To make sure that when the time comes that we're in a good position to pass the first article testing and hopefully be first in line to some of the delivery so would fall back.
Okay and is the government, giving you any color on when they can start first article testing.
Yeah.
We have no new updates on our specific schedule.
Okay and.
In terms of the operating model for the company.
Originally it was I think.
30, 10, 10, five equals 10, something like that.
The company has been challenged for a while now to get to the 30% gross margin can you talk to that model, if it's still effective and what it's gonna take to to get through it.
Yeah, I think it's I think it's still very much effective I think.
Overall principles still hold firm as.
As I mentioned in the battery side of the business.
As you can glean from some of the comments that Bill has made over the last couple of quarters.
Is that with the number of new products going through.
The factory that are brand, new there's certainly some inefficiencies associated with that extra production of scrap and so on and so forth and so that's taken a hit a little bit on.
Our gross margins it hasn't necessarily been anything related to do with price per se or the value proposition that has more to do with.
Just the development cycle and getting up to full volume.
Going through some of the growing pains of some of the complex products that we make the.
The case of communications systems.
Tends to be at a higher margin type of an activity and also frankly, a higher level of investment technically.
Capabilities.
It's very very susceptible to.
And so in the last quarter and you saw that.
That the volume as low as that had an adverse effect.
Overall gross margin so collectively we know what's causing.
The gross margin challenges.
We know that these are not permanent situations.
But they are having an impact on gross margin it hasn't been price though.
I want to emphasize that mostly it's just sort of going through the growing pains of new products getting through the factory and getting up to very efficient.
Production manufacturer.
Okay. So.
If the revenue levels start picking up and you had the right mix between.
The base business and the battery and battery business in the communications business. So as you get that to $25 million on a quarterly run rate and then move hopefully to 30 million.
That would get us to the 30%.
Okay Directionally. It was certainly helped remarks, but I don't know about that.
Okay, great, but the direction or buying.
It will be possible.
Okay, but but you still believe you can get to 30%.
Yeah, Yeah, I mean, there's no reason why we can't most of it has to do with our aspirations and.
Simultaneously putting into a lot of new products all at the same time.
Short term, there's some impact as we talked about earlier in the call about inflation from someone.
Some of the supply chain issues, we have but again.
Those won't last forever, how long their last but they won't last forever, but fundamentally I still believe that our business model that we put together as a team.
Okay. So so if indeed, the COVID-19 pressures.
Start to mitigate over the next six nine months.
With the booster shark.
Coming approval for kids five to 11 years old with the numeric drug and I think they mentioned anti depressant.
Having some success with <unk>.
People, who already have COVID-19, so of Covid starts to peak and wane over the next six to nine months and if supply chain.
Lingers, but you get better at.
Dealing with it and some of the parts of the supply chain get address the government is getting some of these these ports and logistics operations working 24 seven.
So maybe that starts to peak.
Pecan Wayne over the next six to nine months. So as those goes will go away or mitigate maybe they'll go away completely but they mitigate.
<unk> with the.
Backlog being up over $7 million, and that's not including the 4.2 million contract.
So with a 4.2.
Over $11 million in.
And ultimate backlog of for the next 12 months.
It seems like there's a strong possibility that that third quarter could not mark the nader could be the bottom and things slot to start to a slightly improve in Q4, and then as we get into next year coupled.
Coupled with all the new products starting to come out starting to go from testing to production. So that'll slowly ramped maybe one.
One or two products a quarter as you go through the year. So so with all that being said and use to confirm to the potential for the model So hall.
It seems like the future is.
A lot brighter than what the stock prices, telling us and and the last two quarters, which are.
Both revenue and earnings challenging so I guess my question is.
It's time for the company to to look at the buyback program.
Alright, and because if I remember the last time when you guys bought back stock.
Just under five Bucks at that time that was the company was trading at one time sales or more and the book value I think was four and a half 475 and you bought back.
A lot of stock just under five Bucks.
So right now on an enterprise basis market cap minus the cash.
Alright, and we're looking at a revenue rebound starting next year.
But clearly under one time sales.
Plus we're at a more of a discount to book value than you were when you bought back stock several years ago and the four dollar range.
So with almost 16 million cash in a $35 million a line of credit.
This 50 million and potential.
Availability it.
It seems to make sense to take advantage of the fact that the futures continues to be bright and nothing's going away.
And the stock stock price the stock was giving you an opportunity.
To buy and presumably we continue to go lower.
People are disappointed with the quarterly results plus we're getting into tax loss selling time.
And then obviously a lot of people a lot of hot money bought the stock on the conformal announcement at higher prices 910, 11 Bucks. So there's gonna be some tax selling.
So <unk> and the company is also had over the last 12 months several inside.
Insider buys at higher prices than where the stock is now and some option exercise.
Corresponding selling to pay for the exercise at higher prices. So in terms of capital allocation I'm, not saying instead of buying another company and keeping M&A alive, which you just mentioned emanate is still part of the plan.
But in addition to M&A because as we know the last two times you bought companies you paid about one time sales.
So here you can buy your own stock.
Less than one time sales.
In less than book and again more than likely but two companies you previously bought at one time sales or more.
I am sure we're overbooked belly, so you start.
Seems to be the best bargain.
Instead of M&A et cetera, but I am not saying by your stock and don't do M&A I'm, just saying as part of capital allocation program. In addition to looking for decent accretive acquisitions with $50 million and capacity to take $5 million and by your stomach back in between now and year end with tax salad.
Seem to it seems to be a plan that would accrue to all our benefits.
Going forward, especially its third quarter amongst the Nader marks the bottom and things start to get better as we go into the new year and all the different transform it'll opportunities you're talking about.
So maybe it takes two or three or three or four quarters to get back to.
25 million to $30 million, but.
It seems possible and likely some of the headwinds start to mitigate and diminished and as some of these products go from testing into production.
So can you talk to that Mike.
Possibility of using some of the cash and to take advantage of this opportunity.
Oh, Thank you very much for those those comments and suggestions I mean, when we look at our capital deployment, we do it on a regular basis.
Look at a number of different things and I would say sort of in the top category is what can we do for organic growth organic revenue anything we can to.
Put apple towards.
Increasing trajectory of our organic revenue growth and that's going to have a very high priority.
We talk about.
Transformational products and also capabilities.
Which is lenses has been more time and effort obviously recent years strategic capex.
So that's another gross organic growth initiative that we play capital towards.
We look at acquisitions.
I think we've made some goodbyes and acquisitions and have creative acquisitions to show for it.
Now almost that free again.
So we continue I think good stewards of the cash that we are generating.
And I think it gives us some flexibility, especially in difficult times like these and then of course, we have the opportunity to return.
To our shareholders in the form of of stock buyback so.
Those are on the table at any given time discuss those internally.
And I.
I appreciate your suggestions about maybe the timing is being good will take that under advisement, but.
Generally speaking.
Look at those items I, just mentioned that a regular basis.
Our cash balance continues to grow so we want to make sure we put it to good use.
The the top and bottom line with the company.
Okay. Thank you for that I would just add.
You know you've done all that he has invested in transformational products.
Investigated and inorganic too.
To position the company you've made acquisitions.
You have absorbed.
The Covid problems, you have absorbed supply chain problems and.
And you're still been EBITDA positive that will put proved to be the the low for the company.
And you've still increase your cash so.
So again, I'm, not saying instead of inorganic opportunities instead of a transformational products instead of.
Capex as.
Transformational Capex, you've done all those things and still have gotten out of debt and cash keeps going up every quarter.
So again, it seems to be an opportunity and presumably <expletive>.
The future unfolds and all these things go into production, whether it's the second half of 2022 or 2023, when you're hitting on all cylinders.
It could be an opportunity where this starts back to a box 10 Bucks 12 Bucks who knows.
And you always have an opportunity for a secondary soda buy stock.
Five or six range.
With tax settling and with the recent poor results.
It just seems like you can have your cake and eat it too that it wouldn't prohibit you from any of the investments you've talked about any of the priorities that come before a buyback alright and also your ability to.
Find and buy a good M&A deal.
Alright, guys. Good luck. Thank you.
Alright. Thank you very thank you care.
On that type of next question from Josh Sullivan The benchmark company. Please go ahead.
Hey, good morning.
Hi, Josh.
Your comment on predicting a five dimensional chess that is the defense spending if we get a longer continuing resolution how does that impact you what percentage of your defense contributions over the next three quarters or so are defined by new program spending.
Yeah I think.
It's an excellent question, Josh I mean.
I'm not an expert personally I'm continuing resolutions both of them and I understand.
To understand as best I can I know that.
With the continuing resolution I think is roughly 80% of their budgets are in play.
And that existing projects continue to get funded.
It may have an impact on new project.
And at the same time, just from a behavioral perspective.
Cause there's overall less money available.
You see it sort of sometimes impacting us on the day to day of Clomid, which impacts both of our our business unit. So now going forward.
Under the understanding that some a large programs that we're currently involved with would be captured under listing funds.
But some of the brand new programs that may be bidding.
With the customer.
May be potentially delayed.
Probably in a long term basis trying to understand.
What that impact will be.
Knowing that maybe somewhere we say, we're not gonna get it exactly right, but just to understanding of the possibilities.
But I think that the bigger issue or a short term is.
Trying to make sure that whatever funding is available so flying through the sort of the core flow business for our respective.
Right Okay.
And then in your early eat reads into the twenty-three budget as it comes together any comments out of the Pentagon on if you've seen some support for your various programs in there.
Yeah, we I mean, we have some of that as an expert on analyze what they can glean.
You think there's opportunities in both of our businesses.
You know, we're cautiously optimistic about that.
And we're trying to make sure that we understand.
What potential things are available so we can target.
Either direct participation or participation many times, we would be throwing OEM or another channel partner.
So we're cautiously optimistic about what it says on the surface, but I'll wait until things actually completed.
Science off on them and.
It comes.
Reality versus speculation.
[noise] and then just on the vaccine mandate I mean.
Is there a deadline comes up do you see it impacting your labor availability or or your customers labor availability.
Do you consider yourself high touch labor or just curious I was thinking about that.
Even without the vaccine availability I think papers challenge [laughter].
You know whether it be from availability of labor.
Or wait.
Wage and benefit rate inflation.
Let alone.
Maxine mandates are so.
To me that's just another facet of an already challenging situation.
What we're trying to do is just try to be a good employer.
Trying to make sure that.
We don't whip saw people in terms of headcount reductions and things like that just because there's a quarter to profitability pressure, we want to make sure. We're sending the right message and were taken care of or.
Good employees and are trying to make it attractive for.
A place to come in and work was from a wage perspective as well as from a benefit portfolio. So.
To me the vaccine potential is just another facet of.
Met existing situation.
God.
And then you talk a little bit about diversifying into international defense sales what are those opportunities.
Most of the time.
We have relationships with other.
Multi national companies and other other countries, probably see United States.
And so lots of times when a technology.
Chairs in the U S.
As an opportunity.
And one of our allies around the world for that technology or a derivative of it so.
There are also long cycle some other countries that.
We weren't participating in their large countries that you would know the well named.
I have gone through some of their own Covid shutdowns then.
Lockdowns, even more severe than we had that time here and so that has had an impact on us but.
Generally speaking these are allied countries that.
Very positive relationships with our military as such are involved in similar types of equipment or derivatives thereof, and like the case of Cam systems.
Certainly there's.
As a provider of ancillary equipment to radio.
Out of the modernization activities that are taking place in the U S.
Also taking place in their own right.
A number of international company. So we would be working with partners there as well to try to prove.
Byproduct in those modernization activities.
Alright.
And then as far as passing prices on to customers just be curious how are you balancing those conversations between what you might see as transitory costs versus structural inflation or reality, how are you having those conversations with customers.
Oh I think.
We're very closely aligned with our customers and I think that the customers themselves are dealing with the same.
Pricing cost pricing issues that we're dealing with so I think there is.
Yeah first day were relatively difficult.
But.
As it progressed I think that there was a much better understanding because we're pretty much in the same boat and you start out by talking about passing on cost to the customers and instead of hearing their defense against that they come back to you with their own personal stories.
So there is a general understanding of what is driving the price increases and I don't want to say it it's it's.
Z conversations, but then again in many cases it seems like it it's expected so.
Initially difficult with some outliers, but.
I think our our folks have done a really terrific job and based on the relationships that deep relationships, we have with our.
With our customers.
Okay Alright.
And then just one on the oil and gas strength that you mentioned.
Specific products are driving and then you have an inventory in that in that segment, just given that it's kind of on the rebound here that might blow to capture this environment.
Yeah, I think the main driver Josh if you look if you look year over year, you look at the U S right now.
Closely follow on a weekly basis, the U S rig college, so the U S rig count is 505 545 active rigs right now you look at it a year ago, it's higher by 255 rigs and I think more than anything it's that rig count that's driving that.
And and where are we see the large the largest portion of the increase is purely downhold drilling that that is.
[noise] Downhold drilling itself is up over the 90% that we that we mentioned and with not a lot of lead time.
Within this industry.
We have to have inventory available or access to available inventory. So that's why you'll see that our inventory is is pushing 28 million. We're under normal circumstances, we would gladly up to be below 26 million.
Trending towards $25 million so.
Again, those close relationships and just trying to anticipate.
What's going to happen next week.
Is really what it's all about but again, it's driven by the.
By the by.
The rig count.
Which is the number they gave you an international as well which is also what.
Thank you for that that.
Thank you Josh.
I conclude today's question and answer session I'd now like to turn the conference back to Mike for any class no additional remarks.
Great. Thank you once again for joining us for our third quarter of 2021 earnings cause we look forward to sharing with you.
Quarterly progress on each quarter's conference call in the future.
As mentioned nearly also like knows we update our investor presentation on our website.
So please check that out everybody have a great day. Thank you so much for Christmas.
That concludes today's call. Thank you for your participation you may now disconnect.
[music].
[music].
[music].