Q4 2022 Ultralife Corp Earnings Call
Speaker 2: You.
Speaker 3: Good day and thank you for standing by. Welcome to the Ultra Life Corporation fourth quarter 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone.
Speaker 3: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jody Burphining. Please go ahead. Thank you, LaChanya, and good morning, everyone. Thank you for joining us this morning for AlterLife Corporation's Earnings Conference call for the fourth quarter.
Speaker 3: where you'll find the release under investor news in the investor relations section.
Speaker 3: Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. Story
Speaker 3: The potential risks and uncertainties that could cause actual results to different materially include the impact of COVID-19 and related supply chain disruptions, potential reductions in revenues from key customers, acceptance of new products on a global basis, and uncertain global economic conditions.
Speaker 3: The company cost and investors not to place undue reliance on forward-looking statements which reflect the company's analysis only as of today's date.
Speaker 3: The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.
Speaker 3: further information on these factors and other factors that could cause ultra-lifes financial results is included and ultra-spylings with the Securities and Exchange Commission including the latest and report on Form 10K. In addition on today's call, management will refer to certain non- GAAP financial measures that management considers to be useful metrics and differ from gap.
Speaker 3: These non- GAAP measures should be considered as supplemental to corresponding gap figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.
Speaker 4: Good morning. Thanks for joining the call on UltraLifes Q4 2022 operating results. This being my first call as president and CEO , I will start with some of my background. I am a Rochester Institute of Technology graduate. I have been part of UltraLifes 1993. Back when UltraLifes first started working on the rechargeable lithium ion polymer.
Speaker 4: growth rate and including Excel drew top line revenue from 84 million to 120 million a 43% increase.
Speaker 4: delivering operating profit of approximately $10 million while navigating through a pandemic, inflation, and supply chain challenges.
Speaker 4: We won the largest contract award in history of the battery and energy business, the conformable wearable battery with an additional possible value of 165 million and additional option years that could add another 350 million. Ultra life has been my life's work. I am passionate about the business and the products and have a strategy for growth. It diversifies the business across multiple markets.
Speaker 4: and increases value for our employees, our customers, our suppliers, and our stockholders.
Speaker 4: As for my current assessment, we have subject matter experts and professionals in both our battering communications divisions to give us unique expertise that our customers value and require. We need to support these individuals and increase spend strength to achieve our future growth plans.
Speaker 4: We have unique products that target demanding applications that deliver superior performance. These products by nature are designed to meet rigorous standards and requirements which can result in multi-stage product development that consume resources.
Speaker 4: and interim designs that can incur higher manufacturing costs. We have multiple facilities which provide this proximity to customers and localized support.
Speaker 4: allows us room and flexibility for anticipated growth without large increases in costs and also does give us redundancy in case of sight interruptions. There are back office synergies we are beginning to implement which will increase the utilization of our personnel across the various sites. We have a brand.
Speaker 4: that I feel is vastly underutilized, which I think can be leveraged in new ways to enhance wallet share and value and help with other intangibles like recruitment and retention.
Speaker 4: Our variable costs, productivity projects, were drastically reduced due to the pandemic and park shortages, and as resources were needed to source parts.
Speaker 4: due to customer commitments. Now we are in process of reinvigorating these activities with focus on cost-down efforts and secondary sourcing of key components.
Speaker 4: I will now turn it over to Phil to talk to you four numbers. Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter end of December 31, 2022. We also updated our investor presentation, which you can find in the Investor Relations section of our website.
Speaker 5: and plan on filing our form 10K with the SEC in the next few weeks before the filing deadline. We're reporting our quarterly results later than our customer reporting practice due to illness experienced by some members of our accounting finance team.
Speaker 5: causing delays in the year and closing in audit. I would like to thank the members of the Accounting Finance team for their dedication and hard work.
Speaker 5: Before starting my review, I want to point out to everyone that our fourth quarter includes a $0.8 million one-time charge for Severance Class associated with the company's former president and CEO . Cool.
Speaker 5: is announced on November 22nd, 2022, is no longer with the company. The majority of the costs will be paid in 2023.
Speaker 5: I will present our fourth quarter operating results within without this one-time charge. Now I'll take you through our fourth quarter results. Consolidated revenues for the 2022 fourth quarter totaled $36.1 million. The highest quarterly sales reported in over 10 years.
Speaker 5: Compared to 23.8 million reported for the fourth quarter of 2021.
Speaker 5: an increase of 51.9%. Government defense sales increased 84% with strong growth in both business segments driven by order flow and the commencement of deliveries of some long lead time components.
Speaker 5: Commercial sales increased 38.1% reflecting the contribution of Excel in solid organic growth in oil and gas and markets. Excluding Excel, total organic sales increased 23.1% from the prior year period.
Speaker 5: Our total backlog, exiting the fourth quarter, grew to 111 million. The highest level in our company's history, which represents an increase, a 4.8 million, or 4.6% over the comparable backlog exiting the prior quarter.
Speaker 5: In an increase of 47.3 million or 74.2% over that exiting the fourth quarter of 2021.
Speaker 5: During the quarter, supply chain disruptions persisted, including increased lead times and components from suppliers, impacting both our internal and customer manufacturing delivery schedules, resulting in continued delays in our shipments to future periods.
Speaker 5: Mike will address our Go Forward actions in his comments which follow.
Speaker 5: Revenue from our battery and energy product segment or 32.1 million compared to 22.1 million last year. An increase of 45.4% with 7 million of the 10 million variants attributable to itself and 3 million of net organic growth.
Speaker 5: Comprise of increases of 67.5% in government defense sales and 26.9% in Suisse Oil and Gas Market sales. Partially offset by a 17.2% decrease in medical sales do solely.
Speaker 5: to component shortages to fulfill increased demand from a large international medical device OEM.
Speaker 5: Net Organic Sales for this segment increased 13.9%. The backlog for our battery and energy products business of $88.6 million, representing 74% of our 2022 total year sales.
Speaker 5: is an increase of 0.4 million or 0.4 percent over the comparable amount exiting the third quarter.
Speaker 5: The sales split between commercial and government defense for a battery business was $71.29 compared to $75.25 for the $20.21 fourth quarter, and the domestic to international split was $55.45 compared to $50.50 last year, accentuating both.
Speaker 5: growth in U.S. government defense sales, and the continued success of our global revenue diversification strategy. Revenues from our communication system segment were 4 million compared to 1.7 million last year. An increase of 138.1% reflecting the receipt of components to commence.
Speaker 5: the fulfillment of a large international order and to continue with the fulfillment of a large US order with some spillover into 2023. The backlog for our communication systems business of 22.4 million, representing 190% of our 2022 total year segment sales.
Speaker 5: is an increase of 4.5 million or 25.1 percent over the comparable amount exiting the third quarter.
Speaker 5: On a consolidated basis, commercial to government defense sales split with 6337 versus 7327 for the year earlier quarter, again reflecting the growth in government defense sales. Our consolidated gross profit was 8.1 million for the 2022 fourth quarter, up 52.8% over the 2021 period.
Speaker 5: As a percentage of total revenues, consolidated Gross Margin was 22.4% versus 22.3% for last year's fourth quarter. Gross profit for a battery and energy products business was 6.9 million compared to 4.8 million last year. Gross Margin was 21.6%
Speaker 5: A sequential increase of 290 basis points over the 18.7% reported in the third quarter and a decrease of 20 basis points from 21.8% reported last year.
Speaker 5: The sequential improvement was primarily due to our closer matching of customer price increases with the continued cost inflation of certain raw materials and key components, including various electronic components, PC boards, chipsets, and certain metals to name a few. For our communication system segment, the
Speaker 5: Gross profit was 1.1 million compared to 0.5 million for the year earlier period. Gross margin was 28.7 percent compared to 28.1 percent last year. Reflecting higher factory throughput leading to higher cost absorption.
Speaker 5: tempered by inefficiencies associated with delays and receipts of components.
Speaker 5: Operating expenses were 7.9 million compared to 6.5 million last year, an increase of 1.4 million or 20.7%.
Speaker 5: The increase was primarily attributable to the one-time sovereign's charge of .8 million in incremental expenses, including in tangible amortization of .7 million due to the timing of the Excel acquisition on December 13, 2021.
Speaker 5: As a percentage of revenues operating expenses were 21.8%, or 19.6% when excluding the one-time sub-rins charged, compared to 27.4% for last year's fourth quarter, a 780 basis point improvement reflecting sales leverage.
Speaker 5: Operating profit was 0.2 million inclusive of the 0.8 million one-time severance charge compared to an operating loss of 1.2 million last year. Our tax benefit for the fourth quarter was 0.2 million. The same as that reported for the 2021 quarter computed on a gap basis.
Speaker 5: including the one-time charge and the impact of interest expense to help finance the Excel acquisition, and foreign currency losses associated with the strengthening of pound sterling to the US dollar, net loss was 0.2 million or 1 cent per share. This compares to a net loss of 1.1 million or 7 cents per share for the 2021
Speaker 5: Turning to our balance sheet, to proactively influence our position to service our substantial backlog, we increased inventory by .4 million or 1.1% over the third quarter.
Speaker 5: This represents an increase of 8 million or 24.1% over year-end 2021. We ended the 2022 fourth quarter with working capital of 50.1 million compared to 47.6 million for last year. That to capital at quarter-end remained low at approximately 0.18.
Speaker 5: Going forward with our backlog diversified end markets, growth initiatives, and ongoing actions to improve our gross margins, we remain tenaciously dedicated to realizing the full-everage potential of our business model. Before turning it back to Mike, there is one other matter that I will share with you. Thank you.
Speaker 5: On January 25, 2023, during performance of their daily morning information technology security procedures, our information technology team discovered an unauthorized entry into our information technology systems for our Newark, New York, and Virginia Beach locations. The accounts in question were immediately disabled by our
Speaker 5: professionals to assist with our assessment, recovery, and response.
Speaker 5: On February 7th, the company received an electronic communication allegedly from the third party known for nefarious ransomware attacks.
Speaker 5: claiming responsibility for the incident and discussions with the third party commenced through experienced cybersecurity professionals engaged by the company. This incident caused a partial disruption of our business operations at both locations which resulted in production and shipping downtime of approximately two weeks.
Speaker 5: The company has now restored its information technology systems and production has been resumed in both locations. We do not believe that any other company locations were affected by this incident.
Speaker 5: And these other locations have continued their normal operations. The full scope of the costs and related impacts of this incident on Q-1-23 results, including the extent to which the company's cybersecurity insurance will offset the costs of the professionals we engaged in the interruption to our business.
Speaker 5: is currently under review. The company's deductible for its cybersecurity insurance is $100,000. Based on the recovery of our systems, review of the files affected as well as the company's prompt response to an assessment of the incident, no ransom.
Speaker 5: or other amount has been or is expected to be paid to the third party. We continue to monitor our information systems for any irregularities.
Speaker 4: I will now turn it back to Mike. Thank you Phil, for the detailed breakdown of the Q4 results. For 2023 we are focused on executing our backlog and improving the gross margin of the businesses. We've been working through headwinds of supply chain disruptions and inflationary pressure over the last 12 plus months.
Speaker 4: We have started to see some improvement over the last quarter, but expect continued cost pressure through 2023. With a strong backlog and known product mix going forward, we can work on leverage purchasing of components and lean activities. An important piece of our business is electronics.
Speaker 4: which with the recent supply chain delays and parts shortages, we're using all the available parts to meet existing customer demand, and then not every source has developed second sources of supply or lower cost suppliers.
Speaker 4: Now, as supply chain starts to keep pace with needed demand, we can again work on these important variable cost improvements, as well as three other important pieces. First, continuing price realization activities that also cost pressures we are seeing throughout the supply chain, and internally with increasing labor and expense costs. Second, we are adding sourcing resources and extending the time horizon of our sales and operations planning process.
Speaker 4: with both customers and suppliers, improving our end-to-end forecasting. This will reduce additional fees for expedited parts and logistics, reduce manufacturing inefficiencies both internally to ultra-life, and within our supply chain, which in turn helps working capital reduces over time and line changeovers, and will improve inventory turns. Third.
Speaker 4: We're improving the process of launching our new products and transitioning them to higher volume production. Aligning resources to focus on lean principles and process capability improvement activities.
Speaker 4: Next, I would like to review an important piece of organic growth strategy, which is product development, and the major focus projects currently underway. First, on the better energy side of the business, our new X-Five medical cart system shipped over $1.2 million in Q4.
Speaker 4: demand remains high and we continue to develop additional variants based on customer feedback and need. Our ThinSault product line continues to grow in the medical wearables in tracking product spaces. We will invest CAPEX in 2023 to support forecast the demand by our customers for these products. We expect as wearable telemetry device use increases.
Speaker 4: Several of our technologies may be key enablers for the required runtimes. On the UB123A cell product line serving the IoT market space, we are commencing the first production shipments of this product is quarter, after a lengthy qualification process, a critical milestone. The XR123A, our carbon monofluoride blend version of this cell, which offers 20 to 30% more energy in the same size.
Speaker 4: We have multiple partners now evaluating our improved final chloride product line targeting industrial monitoring and telemetry applications where this technology can power items across an extreme temperature range from the 20 years.
Speaker 4: We have several commercial negotiations ongoing and will have several new final products that will launch in 2023.
Speaker 4: The development of the conformal wearable battery, which is used to power advanced, dis-mounted soldier equipment, continues to make progress.
Speaker 4: We are currently expected to start first article testing of the battery in the back half of 2023. This being an indefinite quantity, indefinite delivery contract with uncommitted volumes, we are bouncing internal resources for this project with other known revenue generating and cost reduction projects.
Speaker 4: we are currently expected to start first article testing of the battery in the back half of 2023. This being an indefinite quantity, indefinite delivery contract with uncommitted volumes, we are bouncing internal resources for this project with other known revenue generating and cost reduction projects. Our product line of C safe.
Speaker 4: Sub-surface batteries continue to gain initial customers in various applications, which we believe will be a growth market as offshore projects increase. We have some immediate capability that our products can operate an incredible pressure in depth while providing needed power to the equipment on the ocean floor. Secondly, on the communication side of the business, we are through the qualification testing with multiple partners for our EL-8000 server case and power system.
Speaker 4: This will help diversify this business in the commercial spaces and add further scale to the business. We continue to work on advanced amplification and power products with multiple partners to support air ground and sea communications primarily military and nature. We are investing in the next generation of gallium nitrite amplifier and power.
Speaker 4: future revenue growth.
Speaker 4: Lastly, on growth.
Speaker 4: I am working on developing strategy and relationships and how best to take advantage of the electrification in 5G market spaces, looking for niche applications and investments that will bring us competitive advantage, leveraging our cell design expertise and power system capabilities.
Speaker 4: We will invest CAPEX in prototyping equipment for rechargeable cells and future technologies this year to allow us to evaluate possible future investments. We have had multiple partners approach us on this front due to our cell assembly expertise and the ability to extrude and work with metallic lithium. We have a unique acquiescic electrode coating technology.
Speaker 4: there could be advantageous in lower-large rechargeable cells. This could support a wide variety of potential applications in the energy storage or specialized mobility markets. In closing, I expect 2023 to be a traditional year back to profitable growth. Execution is the main priority for both businesses.
Speaker 4: with communication systems increasing scale to achieve profitability, battery energy converting on multiple growth initiatives while driving gross margin improvement. I'd like to take a moment to recap Phil's comments on the cyber event earlier. We experienced facility interruptions and recovery expenses at the Newark and Virginia Beach locations during the first quarter of 2023.
Speaker 4: None of our other locations are believed impacted, and all locations are operational this time. And as stated, there will be some undetermined time gap between the insurance reimbursement containing to this event, which is still being quantified at this time. Finally, I would like to welcome Janie Goddard to the Board of Directors. I believe Janie's background will be a welcomed addition. I look forward to working with her in this next phase of ultra-life history. Thanks, everyone, for the attention. That concludes the prepared remarks back to the operator for questions. Certainly as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced.
Speaker 3: Do it withdrawal your question, please press star 1-1 again. Please send by while we compile the Q&A roster. And our first question comes from Josh Sullivan, a benchmark company. Your line is open.
Speaker 6: Take good morning. Good morning, Josh. So Mike, now that you've been in the seat for a couple of months, what are some of the initial more tactical opportunities we might see you execute on externally. I know you mentioned a couple of the prepared marks there. And then maybe, what do you see just on the more long-term strategic level as well? Wow.
Speaker 4: Well, on the tactical side, there's just some internal heavy lifting we need to do to get cross margin back to where it needs to be. We definitely hit it up on the prepared remarks. We need to focus on lean activities. We need to definitely work on our cost down initiatives.
And then, you know, just execution. Execution is key. And we have, the backlog is in sight. It's not like we're guessing it what's coming at us. We just need to execute it and get it out the door.
you know, just execution. And we have, the backlog is in sight. It's not like we're guessing it, what's coming at us. We just need to execute it and get it out the door. On the straight side.
On the strategy side, we're still developing a lot of things. There's a lot of relationship things I'm working. We'll see how those play out. Got it. And then, as far as the backlog, can you just help us understand the breakdown between the industries where the growth has been recently? And then I understand the supply chain issues, but how durable is the backlog? Any risk of customers bleeding out given the time? Actually, I'm pleasantly happy to be able to say that it's really been across the board. I mean, we've seen G&D increases, obviously. Medical, we've had a lot of backlogs somewhat.
just due to some carp parts supply issues that we would have loved to have liquidated. But, you know, due to the supply chain lead times, we just couldn't. You know, our oil and gas areas remain strong, our industrial markets remain strong. Our medical cart products seem to have a lot of good backlog. So right now, there's no real, you know, one area I can point to that's...
supply issues that we would have loved to have liquidated. But due to the supply chain lead times, we just couldn't. Our oil and gas areas remain strong. Our industrial markets remain strong. Our medical cart products seem to have a lot of good backlogs. So right now, there's no real one area I can point to that's declining.
And then as far as the supply chain in general, there's some commentary. The industry might see some opening up here in the second half. And as far as the raw material inventory you guys have been holding above historical levels to mitigate some of that, how should we think of your overall working capital needs as the supply chain does improve or when it improves? And then too, what do you see as far as the timing of supply chain improvements? Well, I'll take the supply chain piece and let Phil hand over working the capital piece. But I mean, on the supply chain piece, it's still very spotty. You know, we have a lot of different components in our batteries on the electronic side.
There's some micro processors that seem like they're opening up and we're able to get them easier But there's some other critical parts like MOSFETs and other things where you know you have a fire in a packaging plant and all of a sudden the lead times go out another 12 weeks and they're just starting to get better So it's still difficult to really navigate that and give you a good time horizon and when it's gonna get totally better But I expect it's probably Q3Q4 this year before we really start seeing anything that looks even close to normal Regarding Josh the
The work in capital. I remember at the end of 2021, I looked up the balance sheet and I said, holy cow, $33.2 million of inventory. And here we are with $41.2 million of inventory, up $8 million, which is the way I look at it is the equivalent of a small acquisition that we have invested in inventory. So in many cases, it's cash in advance. It's for the cells and for the key components that now with the backlog and hand and the firm POs, as Mike said, we have much better visibility. We just don't want to be shut out of at least the big components, but still what rocks the boat on a day-to-day basis that makes life a...
tougher are the things you take for granted, the smaller items, the everyday items. So our focus is throughout the full breadth of what goes into the products. So first and foremost, we know $40 million plus of inventory is just, we don't want to sustain that. We want to bring the work in capital down, starting with inventory. The other piece of this is you look at receivables, you look at payables. We have global, very large OEM customers.
fantastic. We have small local regional supply chain and there's a mismatch where in the receivables side, terms are generally extended by the large global players, but the smaller supply chain folks, our supply chain, needs cash to survive. So it's a constant balance that we're doing our very best on, but our goal is to shrink, to shrink a working capital, taking cash out as a percentage of sales, bringing that down into the low 30s and approaching the high 20s. We want rapid turnover. That's our goal with working capital. Look forward to that day.
Absolutely. And then just with regard to inflation, you know, benefited from price this quarter, can we expect you to continue to match price with inflation on labor and cost going forward? Is there any timing gaps we should think about ahead? Well, I'll take it and I'll let Phil go from there. I mean, absolutely. I mean, last year we had over six price list changes in the battery and energy business alone.
We have to increase price to maintain our position to be able to, you know, service the customers we have and provide the value and engineering and quality support in the markets that we're serving. We have to be solvent, period. With that, there's always a time gap between one you increase the price and one you actually see it realize, especially in some of our longer-term backlog. You look at the comm system side of the business where they've had contracts in place for over a year, while our cost of reason substantially over the last 12 months.
but there's really no mechanism to go back and recapture those costs. So it's an erosion of your margin. Obviously, the next contract, we're going to bid correctly and we'll increase crop. Not that we didn't bid the first one correctly. We're going to increase costs in the next contract we bid, but it's just a gap between those events and then when you actually shift the product. Regarding the labor and overhead and all that stuff, I'm just going to go back to the backlog a little bit just to set the stage. We ended Q3 with a backlog of $106 million that I shared on the Q3 call. We shipped $36 million in Q4.
The thinking would be that the backlog would, a lot of that came from the backlog would be reduced. Instead, the backlog went up. So you look at 106, less a big portion of the 106 coming from the backlog, you add what really came in during Q4, and it's a situation that we always looked forward to hoping for our fingers crossed, $11 million of backlog with more things coming at us, more opportunities coming at us. We're not just sitting back where things are happening. To be able to execute, it's not just a matter of having the right inventory and the right quantities, having the people. And to get the people in today's market automatically causes some inflation. Because in many cases,
You have to buy the people from various other alternatives that they're looking at. What works to our advantage in some cases is our various locations, like a great example being the medical clerk that Mike spoke of, conceived here, designed in the UK, being built in Houston, we need more things like that to take advantage of where the pockets of people availability are before we just raise the prices significantly to the cost of labor to bring in people because that has a trickle down effect into the entire direct labor population. So we have alternatives, we're looking at those alternatives and we're trying to be as smart as we can about this, but we know that we need people. Okay, well, thank you for all the time. Thank you, John . One moment for our next question. And our next question comes from Don. I'm sorry. John .
interruption piece, the business interruption piece, and since we've been able to get back operations within a couple weeks with the great job done by our IT team and the outside resources,
Our goal is to isolate those costs into Q1. And then the focus is on the reimbursement. So you can see the hit in Q1, the reimbursement could certainly, will certainly occur.
And it'll let it a later date. Now I know when we announce our Q1 results, we're hoping to have an insurance settlement by then, but realistically thinking with the backlog that the cyber insurance carriers are going through, it's more realistic to think that the reimbursement would come in.
small additional cost and just environment hardening that would go on in Q2. I mean, we're working with no external professionals that do this as a living every day and we're going to do whatever we can to prevent this from ever occurring again. So there may be some some other it cost around the environment itself making sure that we're more bulletproof, so to speak.
And then one income statement related question, there's other expenses, almost 600,000. Can you tell us what that is? Is that a quarter? Yes, absolutely. So I'll break it down into a couple different buckets. In Q4, interest expense, as you'll see, once we file our 8K, is around $350,000. Yeah, $350,000. And then a foreign currency, which you'll see is favorable, will be favorable for the year, but during the fourth quarter, as I mentioned in my remarks, the pound significantly strengths in versus the US dollar. So we do show a hit to the PNL in the fourth quarter for foreign currency.
Okay, and that makes up the difference to get to the 600,000? Yes, exactly. And it's the absolute numbers are 368 and in 230. 368 for the interest expense, 230 for the FX. Okay, good. What was interest expense for the year? Yeah, interest expense for the year is $951,000. And where does that show up on the income statement for the year? Well, where it's going to show up is going to be another income and expense because the 950,000 of interest expenses can be offset by around 400,000 of income and currency. So you'll see a net of just over just over 500,000.
Okay, and that's okay. That's what the other expense was for the year. Okay. Good. Yeah. So you just buy your question You can see that our goal in reducing the inventory is the quickest cheapest way of of getting cash and Applying that against bringing the debt down if that's our goal. That's that's your goal any idea of how Where you want that to be a year from now? Oh? Oh, I absolutely, you know, when we bought the sweet when we bought sweet a couple years a couple years earlier we paid it off in 32 months. Now I know the world is a slightly different place right now, but you know my goal is and always has been to to extinguish acquisition debt in a three to four year period. So my goal is to bring that down evenly. Under normal economic conditions. We'll see we'll see what the next few quarters have to hold, but our intention is to bring that down as swiftly as we can pass as we possibly can.
Okay, that makes sense. That's all I have. Thanks and good luck. Thank you, Chair. Again, if you'd like to ask a question, please press star 1-1 on your touchtone telephone. For any questions, please press star 1-1. And I am showing no further questions. I would now like to turn the conference back to Mike Manne, CEO for closing remarks.
All right, thanks for attending today's call. We look forward to seeing everybody in the Q1 2023 earnings call. Have a great day. Bye, everyone. And this concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly to raise and lower your hand during Q&A. You can dial star 1-1.
I.
Will.
Good day and thank you for standing by. Welcome to the Ultra Life Corporation 4th quarter 2022 Results Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask the question during the session, you will need to press star 1-1 on your telephone. You will leave here an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jody Burfening. Please go ahead. Thank you, LaChania, and good morning, everyone. And thank you for joining us this morning for authorized corporations' earnings conference call for the fourth quarter of physical 2020. With us on today's call, our Mike Manna, Paul for Life's President and CEO .
and Phil Fain, ultra life chief financial officer. Press release, the earnings press release was issued earlier this morning. Anyone has not yet received a copy. I invite you to visit the company's website, www.ultralesscore.com, where you'll find the release under investor news in the investor relations section. For turning the call over to management, I would like to remind everyone that some statements made during this conference call contain four-word-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 and related supply chain disruptions, potential reductions in revenues from key customers, acceptance of new products on a global basis, and uncertain global economic conditions.
The company cost and investors not to place undue reliance on forward looking statements which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could cause ultra-lives financial results is included in ultra-spiling with the Securities and Exchange Commission, including the latest and report on Form 10K.
In addition on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics and 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. Thanks for joining the call on ultra-life Q4 2022 operating results. This being my first call as president and CEO , I will start with some of my background. I am a Rochester Institute of Technology graduate. I have been part of ultra-life since 1993. Back when while Chile first started working on the rechargeable lithium ion polymer battery program. I have experienced everything from testing, cell design, battery pack design, new product development, operation, sales, and most recently, president of the battery and energy business for over three years.
where I led the business to an average 8% net organic growth rate, and including Excel through top line revenue from 84 million to 120 million, a 43% increase. Delivering operating profit of approximately $10 million while navigating through a pandemic, inflation, and supply chain challenges. We won the largest contract award in history of the battery and energy business, the conformable wearable battery, with an additional possible value of 165 million and additional option years that could add another 350 million. Ultra life has been my life's work. I am passionate about the business and the products, and have a strategy for growth. It diversifies the business across multiple markets and increases value for our employees, our customers, our suppliers, and our stockholders. As for my current assessment, we have subject matter experts and professionals in both our battery and communications divisions.
to give us unique expertise that our customers value and require. We need to support these individuals and increase spend strength to achieve our future growth plans. We have unique products that target demanding applications that deliver superior performance. These products, by nature, are designed to meet rigorous standards and requirements, which can result in multi-stage product development that consume resources and interim designs that can incur higher manufacturing costs.
We have multiple facilities which provide this proximity to customers and localized support, allows this room and flexibility for anticipated growth without large increases in costs and also does give us redundancy in case of site interruptions. There are back office synergies we are beginning to implement which will increase the utilization of our personnel across the various sites. We have a brand that I feel is vastly underutilized which I think can be leveraged in new ways to enhance wallet share and value and help with other intangibles like recruitment and retention. Our variable cost productivity projects were drastically reduced due to the pandemic and park shortages.
And as resources were needed to source parts due to customer commitments, now we are in process of reinvigorating these activities with focus on cost-down efforts and secondary sourcing of key components. I will now turn it over to Phil to talk to his Q4 numbers. Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter end of December 31, 2022. We also updated our investor presentation, which you can find in the Investor Relations section of our website, and plan on filing our forum 10K with the SEC in the next few weeks before the filing deadline.
We're reporting our quarterly results later than our customer reporting practice due to illness's experience by some members of our accounting finance team causing delays in the year-end closing in audit. I would like to thank the members of the accounting finance team for their dedication and hard work. Before starting my review, I want to point out to everyone that our fourth quarter includes a $0.8 million one-time charge for Severance Class associated with the company's former president and CEO , who is announced on November 22, 2022, is no longer with the company. The majority of the costs will be paid in 2023.
I will present our fourth quarter operating results within without this one-time charge. Now I'll take you through our fourth quarter results. Consolidated revenues for the 2022 fourth quarter totaled $36.1 million. The highest quarterly sales reported in over 10 years compared to $23.8 million reported for the fourth quarter of 2021 and increased of 51.9%. Government defense sales increased 84% with strong growth in both business segments driven by order flow in the commencement of deliveries of some long lead time components. Commercial sales increased 38.1% reflecting the contribution of Excel and solid organic growth in oil and gas and markets. Excluding Excel.
Total organic sales increased 23.1% from the prior year period. Total backlog exiting the fourth quarter grew to 111 million. The highest level in our company's history, which represents an increase of 4.8 million or 4.6% over the comparable backlog exiting the prior quarter, and an increase of 47.3 million or 74.2% over that exiting the fourth quarter of 2021. During the quarter, supply chain disruptions persisted.
including increased lead times and components from suppliers, impacting both our internal and customer manufacturing delivery schedules, resulting in continued delays in our shipments to future periods. Mike will address our Go Forward actions in his comments, which follow.
Revenue from our battery and energy product segment or 32.1 million compared to 22.1 million last year. An increase of 45.4% with 7 million of the 10 million variants attributable to itself and 3 million of net organic growth.
Comprised of increases of 67.5% in government defense sales and 26.9% in Swiss oil and gas market sales, partially offset by a 17.2% decrease in medical sales due solely to component shortages to fulfill increased demand from a large international medical device OEM. Net organic sales for this segment increased 13.9%. The backlog for our battery and energy products business of 88.6% in
50 last year, accentuating both growth in U.S. government defense sales and the continued success of our global revenue diversification strategy. Revenues from our communication system segment were 4 million compared to 1.7 million last year, an increase of 138.1%
reflecting the receipt of components to commence the fulfillment of a large international order and to continue with the fulfillment of a large US order with some spillover into 2023. The backlog for our communication systems business of 22.4 million.
Representing 190% of our 2022 total year segment sales is an increase of 4.5 million or 25.1% over the comparable amount exiting the third quarter.
On a consolidated basis, commercial to government defense sales split with 6337 versus 7327 for the year earlier quarter, again reflecting the growth in government defense sales. Our consolidated gross profit was 8.1 million for the 2022 fourth quarter, up 52.8% over the 2021 period. As a percentage of total revenues, consolidated gross margin was 22.4% versus 22.3% for last year's fourth quarter.
Gross profit for a battering energy products business was 6.9 million compared to 4.8 million last year. Gross margin was 21.6 percent, a sequential increase of 290 basis points over the 18.7 percent reported in the third quarter, and a decrease of 20 basis points from 21.8 percent reported last year.
The sequential improvement was primarily due to our closer matching of customer price increases with the continued cost inflation of certain raw materials and key components, including various electronic components, PC boards, chipsets, and certain metals to name a few. For our communication system segment, Gross Profit was 1.1 million compared to 0.5 million for the year earlier period. Gross margin was 28.7% compared to 28.1% last year.
Reflecting higher factory throughput leading to higher cost absorption, tempered by inefficiencies associated with delays and receipts of components. Operating expenses were 7.9 million compared to 6.5 million last year, an increase of 1.4 million or 20.7%. The increase was primarily attributable to the one-time sovereigns charge of 0.8 million in incremental expenses, including in tangible amortization of 0.7 million due to the timing of the XL acquisition on December 13, 2021.
As a percentage of revenues operating expenses were 21.8%, or 19.6% when excluding the one-time severance charge compared to 27.4% for last year's fourth quarter, a 780 basis point improvement reflecting sales leverage. Operating profit was 0.2 million inclusive of the 0.8 million one-time severance charge compared to an operating loss of 1.2 million last year. Our tax benefit for the fourth quarter was 0.2 million, the same as that reported for the 2021 quarter computed on a gap basis. Including the one-time charge and the impact of interest expense to help finance the excess.
increased inventory by .4 million or 1.1% over the third quarter. This represents an increase of 8 million or 24.1% over year-end 2021. We ended the 2022 fourth quarter with working capital of 50.1 million.
compared to 47.6 million for last year. Death to capital at quarter and remained low at approximately 0.18. Going forward with our backlog, diversified end markets, growth initiatives, and ongoing actions to improve our gross margins, we remain tenaciously dedicated to realizing the full-everage potential of our business model. Before turning it back to Mike, there is one other matter that I will share with you. On January 25, 2023.
During performance of their daily morning information technology security procedures, our information technology team discovered an unauthorized entry into our information technology systems for our Newark, New York and Virginia Beach locations. The accounts in question were immediately disabled by our IT team and the company's Information Security Committee met promptly taking swift action, including the immediate notification of our Cyber Security Insurance Carrier. Shortly thereafter, with recommendations from our Cyber Security Carrier, we engaged external incident response professionals to assist with our assessment.
technology systems and production has been resumed in both locations.
We do not believe that any other company locations were affected by this incident, and these other locations have continued their normal operations. The full scope of the costs and related impacts of this incident on Q1 2023 results, including the extent to which the company's cybersecurity insurance
will offset the costs of the professionals we engaged in of the interruption to our business is currently under review. The company's deductible for its cybersecurity insurance is $100,000. Based on the recovery of our systems, review of the files affected, as well as the company's prompt response to an assessment of the incident, no ransom or other amount has been or is expected.
to be paid to the third party. We continue to monitor our information systems for any irregularities. I will now turn it back to my phone. Thank you Phil, for the detailed breakdown of the Q4 results. For 2023, we are focused on executing our backlog and improving the gross margin of the businesses.
We've been working through headwinds of supply chain disruptions and inflationary pressure over the last 12 plus months. We have started to see some improvement over the last quarter, but expect continued cost pressure through 2023. With a strong backlog and known product mix going forward, we can work on leverage purchasing of components and lean activities. An important piece of our business is electronics, which with the recent supply chain delays and parts shortages.
We are using all the available parts to meet existing costumer demand, and then not every source has developed second sources of supply or lower cost suppliers. Now, as supply chain starts to keep pace with needed demand, we can again work on these important variable cost improvements, as well as three other important pieces. First, continuing price realization activities.
that also cost pressures we are seeing throughout the supply chain and internally with increasing labor and expense costs. Second, we are adding sourcing resources and extending the time horizon of our sales and operations planning process with both customers and suppliers improving our end-to-end forecasting. This will reduce additional fees for expedited parts and logistics, reduce manufacturing inefficiencies both internally to ultra-life, and within our supply chain, which in turn helps working capital reduces over time and line changeovers and will improve inventory turns. Third, we are improving the process of launching our new products.
and transitioning them to higher volume production. Aligning resources to focus on lean principles and process capability improvement activities. Next, I would like to review an important piece of organic growth strategy, which is product development. And the major focus projects currently underway.
First, on the better and energy side of the business, our new X5 medical cart system shipped over $1.2 million in Q4. The man remains high and we continue to develop additional variants based on customer feedback and need. Our thin cell product line continues to grow in the medical wearables in tracking product spaces. We will invest CAPEX in 2023 to support forecast to demand by our customers for these products. We expect as wearable telemetry device use increases.
several of our technologies may be key enablers for the required runtimes. On the UB123A cell product line serving the IoT market space, we're commencing the first production shipments of this product is quarter after a lengthy qualification process, a critical milestone. The XR123A, our carbon monofluoride blend version of this cell, which offers 20 to 30 percent more energy in the same size, is going through you on IAC testing this quarter. For the UB123A and the XR123A, we continue to work multiple opportunities for cell sales, but ultimately believe PAK, battery PAK assembly business will be a critical piece of this product line.
where custom solutions can offer added value and deeper customer relationships. We have multiple partners now evaluating our improved final chloride product line targeting industrial monitoring and telemetry applications, where this technology can power items across an extreme temperature range from the 20 years. We have several commercial negotiations ongoing, and we'll have several new final products that will launch in 2023. The development of the conformal wearable battery, which is used to power advanced, dis-mounted soldier equipment, continues to make progress.
We are currently expected to start first article testing of the battery in the back half of 2023. This being an indefinite quantity, indefinite delivery contract with uncommitted volumes, we are bouncing internal resources for this project with other known revenue generating and cost reduction projects. Our product line of C safe.
Sub-surface batteries continue to gain initial customers in various applications, which we believe will be a growth market as offshore projects increase. We have some immediate capability that our products can operate an incredible pressure in depth while providing needed power to the equipment on the ocean floor. Secondly, on the communication side of the business, we are through the qualification testing with multiple partners for our EL-8000 server case and power system. We anticipate initial production orders for this product this year supporting our strategic server partner. This will help diversify this business in the commercial spaces and I-
future revenue growth. Lastly on growth, I am working on developing strategy and relationships on how best to take advantage of the electrification in 5G market spaces, looking for niche applications and investments that will bring us competitive advantage.
leveraging our cell design expertise and power system capabilities. We will invest CAPEX in prototyping equipment for rechargeable cells and future technologies this year to allow us to evaluate possible future investments.
We have had multiple partners approach us on this front due to our a cell-exceptly expertise and the ability to extrude and work with metallic lithium. We have a unique aqueous thick electrode coating technology that could be advantageous in lower-late, large rechargeable cells. This could support a wide variety of potential applications in the energy storage or specialized mobility markets.
In closing, I expect 2023 to be a true and additional year back to profitable growth. Execution is the main priority for both businesses with communication systems increasing scale to achieve profitability, battery energy converting on multiple growth initiatives while driving gross margin improvement. I'd like to take a moment to recap Phil's comments on the cyber event earlier. We experience facility interruptions and recovery expenses at the Newark and Virginia Beach locations during the first quarter of 2023. None of our other locations are believe impacted and all locations are operational this time and as stated.
There will be some undetermined time gap between the insurance reimbursement containing to this event, which is still being quantified at this time. Finally, I would like to welcome Janie Goddard to the Board of Directors. I believe Janie's background will be a welcome addition. I look forward to working with her in this next phase of ultra life history. Thanks everyone for the attention. That concludes the prepared remarks back to the operator for questions. Certainly, as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. Would you withdraw your question? Please press star 1-1 again. Please send by, while we compile the Q&A roster. And our first-
We need to definitely work on our cost-down initiatives. And then, you know, just execution. Execution is key. And we have, the backlog is in sight. It's not like we're guessing at what's coming at us. We just need to execute it and get it out the door. And then, we need to get it out the door.
on our cost down initiatives and then you know just execution. Execution is key and we have the backlog is in sight. It's not like we're guessing at what's coming at us. We just need to execute it and get it out the door. On the stretch. On the stretch. On the stretch. On the stretch. On the stretch.
On the strategy side, we're still developing a lot of things. There's a lot of relationship things I'm working. We'll see how those play out. Got it. And then, I mean, as far as the backlog, can you just help us understand the breakdown between the industries where the growth has been recently? And then I understand the supply chain issues, but how durable is the backlog? Any risk of customers bleeding out given the time? Actually, I'm pleasantly happy to be able to say that it's really been across the board. I mean, we've seen G&D increases, obviously. Medical, we've had a lot of backlogs somewhat just due to some parts, supply issues that we would have loved to have liquidated.
But, you know, due to the supply chain lead times, we just couldn't, you know, our oil and gas areas remain strong, our industrial markets remain strong. Our medical cart products seem to have a lot of good backlog. So, right now, there's no real, you know, one area I can point to that's declining. And then as far as the supply chain in general, you know, there's some commentary, you know, the industry might piece them up here in the second half. And as far as the raw material inventory, you guys have been holding, you know, above historical levels to mitigate some of that. You'll one, how should we think of your overall working capital needs, you know, as the supply chain does improve or when it improves?
And then two, what do you see as far as the timing of supply chain improvements? Well, I'll take the supply chain piece and let Phil hand over the working capital piece. But I mean, in the supply chain piece, it's still very spotty. We have a lot of different components in our batteries on the electronic side. You know, there's some microprocessors that seem like they're opening up and we're able to get them easier. But there's some other critical parts like MOSFETs and other things where, you know, you have a fire in a packaging plant and all of a sudden the lead times go out another 12 weeks and they're just starting to get better.
So it's still difficult to really navigate that and give you a good time horizon and one it's going to get totally better. But I expect it's probably Q3, Q4 this year before we really start seeing anything that looks even close to normal. Regarding Josh the work in capital, I remember at the end of 2021, I looked up the balance sheet and I said, holy cow, $33.2 million of inventory. And here we are with $41.2 million inventory, up $8 million, which is the way I look at it is the equivalent of a small acquisition that we have invested in inventory.
In many cases, it's cash in advance. It's for the cells and for the key components that now with the backlog and hand and the firm POs, we, as Mike said, we have much better visibility. We just don't want to be shut out of at least the big components, but still what rocks the boat on a day-to-day basis that makes life a tougher, are the things you take for granted, the smaller items, the everyday items. So our focus is throughout the full breadth of what goes into the products. So first and foremost, we know $40 million plus of inventory is just, we don't want to sustain that. We want to bring the work in capital down.
Starting with the inventory. The other piece of this is you look at receivables, you look at payables. We have global, very large OEM customers. Great. Fantastic. We have small, local, regional supply chain. And there's a mismatch where in the receivables side, it terms are generally extended by the large global players. But the smaller supply chain folks are supply chain.
needs cash to survive. So it's a constant balance that we're doing our very best on, but you know our goal is to shrink, to shrink a working capital taking cash out is a percentage of sales bringing that down into the low 30s and approaching the high 20s. We want rapid turnover. That's our goal with working capital. Look forward to that day. Absolutely. And then just with regard to inflation, you know benefited from price this quarter, can we expect you to continue to match price with inflation on labor and cost going forward? Is there any timing gaps we should think about ahead? Well, I'll take it and I'll let Phil go from there. I mean, absolutely. I mean.
months, but there's really no mechanism to go back and recapture those costs. So it's an erosion of your margin. Obviously the next contract we're going to bid correctly and it would increase crop. Not that we didn't bid the first one correctly. We're going to increase costs on the next contract we bid.
but it's just a gap between those events and then when you actually shift the product. Regarding the labor and overhead and all that stuff, I'm just going to go back to the backlog a little bit just to set the stage. We ended Q3 with a backlog of $106 million that I shared on the Q3 call. We shipped $36 million in Q4. The thinking would be that the backlog would allow that came from the backlog would be reduced. Instead, the backlog went up. So you look at $106 less a big portion of the $106 coming from the backlog. You add what really came in during Q4. And it's a situation that we always looked forward to hoping for fingers crossed $11 million of backlog with more things coming at us. More and more things coming up. We're not just sitting back where things are happening. To be able to execute.
It's not just a matter of having the right inventory and the right quantities, having the people. And to get the people in today's market automatically causes some inflation because in many cases, you have to buy the people from various other alternatives that they're looking at. What works to our advantage in some cases is our various locations, like a great example being the medical character that Mike spoke of conceived here, designed in the UK, being built in Houston. We need more things like that to take advantage of where the pockets of people availability are before we just raised.
raise the prices significantly to the cost of labor to bring in people because that has a trickle down effect into the entire direct labor population. So we have alternatives. We're looking at those alternatives and we're trying to be as smart as we can about this, but we know that we need people. Thank you for all the time. Thank you, Johnny. One moment for our next question.
And our next question comes from Don. I'm sorry, John Desher of Pinnacle. Your line is open. Good morning. Thanks for taking my question and welcome aboard to you, Mike.
that related costs going into second quarter? Our goal is to, you know, we're working very, very closely with our insurance carrier. And we're at a point right now where...
We know what the out of pocket costs are. We know the costs of, we have a good idea of what the costs are related to the direct costs. And those are bringing in those experts that do this for a living with their former background and law enforcement and all that that know the game inside and out. That's the easier part of it. The more complex part that we're working through now is the business interruption piece. The business interruption piece and since we've been able to get back operations within a couple weeks with the great job done by our IT team and the outside resources.
Our goal is to isolate those costs into Q1. And then the focus is on the reimbursement. So you can see the hit in Q1, the reimbursement could certainly, will certainly occur in a later date. Now I know when we announce our Q1 results, we're hoping to have an insurance settlement by then, but realistically thinking with the backlog that the cyber insurance carriers are going through, it's more realistic.
occurring again. So there may be some other, it costs around the environment itself making sure that we're more bulletproof so to speak.
Okay, good, that's helpful. And then one income statement related question, there's other expenses, almost 600,000. Can you tell us what that is?
Yes, absolutely. So I'll break it down into a couple different buckets. In Q4, interest expense, as you'll see once we file our 8K, is around $350,000.
Yeah, $350,000 and then foreign currency, which you'll see is favorable, will be favorable for the year, but during the fourth quarter, as I mentioned in my remarks, the pound significantly strength inversions to the US dollar.
So we do show a hit to the P&L in the fourth quarter for foreign currency. Okay, that makes up the difference to get to the 600,000. Yeah, that's exactly it. Absolute numbers are 368 and 230.
368 for the interest expense 230 for the for the FX. Okay. What was interest expense for the year? Yeah. Interest expense for the year is $951,000.
And where does that show up on the income statement for the year? Well, where it's going to show up is going to be another income and expense because the 950,000 of interest expenses can be offset by around 400,000 of income and currency. So you'll see a net of just over just over 500,000. Okay. And that's okay. That's what the other expense was for the year. Okay. So, you know, your question you can see that our goal in reducing the inventory is the quickest, cheapest way of getting cash.
and applying that against bringing the debt down. That's our goal. That's our goal. Any idea of how, where you want that to be a year from now? Oh, I absolutely, you know, when we bought the sweet, when we bought sweet a couple years earlier, we paid it off in 32 months. Now, I know the world is a slightly different place right now, but, you know, my goal is and always has been to extinguish acquisition debt in a three to four year period. So my goal is to bring that down evenly.
Under normal economic conditions, we'll see what the next few quarters have to hold. But our intention is to bring that down as swiftly as we can possibly can. Okay. That makes sense. That's all I have. Thanks, and good luck. Thank you, Jim. Again, if you'd like to ask a question, please press star 11 on your touchtone telephone. For any questions, please press star 11.
And I am showing no further questions. I would now like to turn the conference back to Mike Manas, CEO for closing remarks. All right. Thanks for attending today's call. We look forward to seeing everybody in the Q1 2023 earnings call. Have a great day. Bye, everyone. And this concludes today's conference call. Thank you for participating. You may now disconnect.