Q1 2023 Ultralife Corporation Earnings Call

Speaker 1: You.

Speaker 1: Yeah.

Speaker 2: Thank you for standing by. Welcome to the Alterlive Corporation First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be the question and answer session. Thank you.

Speaker 2: To ask a question during the session, you'll need to press star 1 1 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded.

Speaker 2: I would now like to hand the conference over to Jodi Berferne. Please go ahead, Jodi. Thank you, Kathy, and good morning, everyone. Thank you for joining us this morning for UltraLife Corporation's Earnings Conference call for the first quarter of fiscal 2023. With us on today's call are Mike Manna, UltraLife's President and CEO , and our

Speaker 2: Phil Fain, UltraLife's Chief Financial Officer. The earnings press release was issued earlier this morning and if anyone has not yet received a copy, I invite you to visit the company's website www.ultralifecore.com where you'll find the release under investor news in the investor relations section.

Speaker 2: made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19-related supply chain disruptions.

Speaker 2: potential reductions in revenue from key customers, acceptance of new products on a global basis, and uncertain global economic conditions. The company Cauchons investors are not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date.

Speaker 2: The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.

Speaker 2: Securities and Exchange Commission, including the latest annual report on Form 10-K . In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures.

Speaker 2: With that, I would now like to turn the call over to Mike. Good morning, Mike.

Speaker 3: Good morning. Thanks for joining the call on Ultra Life's Q1 2023 operating results. Give it a cyber attack at two of our facilities at the beginning of the quarter. I'm extremely pleased with the Q1 results and the efforts of our internal teams.

Speaker 3: We managed to improve gross margin over Q4 as our teams diligently worked through the cyber attack, which consumed time and resources to assess, restore, validate systems, then resume business and production operations over many weeks.

Speaker 3: As a result, we experienced operational inefficiencies in Q1 and could not take full advantage of our backlog position while experiencing surging demand from our customers, especially in the medical and defense markets, reflecting in large part the adoption of new products and the strengthening of our customer relationships.

Speaker 3: I thank our teams and patient customers for working through the production validation and restart we experienced in Q1. It was a great team effort. I will now turn it over to Phil to talk through the Q1 numbers. Thank you, Mike, and good morning everyone.

Speaker 3: Earlier this morning we released our first quarter results for the quarter ended March 31st, 2023.

Speaker 3: We also updated our investor presentation, which you can find in the investor relations section of our website.

Speaker 3: and expect to file our Form 10-Q with the SEC in the next few days. Before starting my review, I will provide a few follow-up comments on the ransomware attack that we disclosed during our fourth quarter investor call on March 2nd. The attack at our Newark and Virginia Beach locations.

Speaker 3: which occurred on January 25th, impacted our ability to process orders, ship products, and effectively manage our SNOP process over a several-week period in our NURK facility.

Speaker 3: and during the remainder of the first quarter at our Virginia Beach facility. As previously disclosed, we have a cyber insurance policy in place and we are continuing to work on the claim, which covers both the direct costs of engaging cybersecurity experts to help with the data restoration.

Speaker 3: systems recovery, system security augmentation,

Speaker 3: in all of the resulting regulatory reporting.

Speaker 3: as well as the business interruption impact.

Speaker 3: I look forward to sharing with you the details of our claim once a settlement has been reached and funded.

Speaker 3: After which we will be able to report on the settlement amount and our financial results.

Speaker 3: For the first quarter, the only amount recognized is the $100,000 insurance policy deductible, which was reported in operating expenses.

Speaker 3: To reiterate, 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 will be paid. Now I'll take you to our first quarter results. Consolidated revenues for the 2023 First Quarter.

Speaker 3: compared to the year earlier period, with both sectors impacted by the cybersecurity attack.

Speaker 3: Our total backlog exiting the first quarter remained high at $108.1 million with $96.1 million due to shift over the remaining nine months of 2023.

Speaker 3: representing a 30.2% increase over the comparable amount of $73.8 million for the year earlier period.

Speaker 3: Revenues from our battery and energy product segment were $28.5 million compared to $29.2 million last year.

Speaker 3: a decrease of 2.3%. The cybersecurity attack primarily impacted our medical and government defense businesses, which declined 8.5% and 4.7% respectively for this segment.

Speaker 3: These declines were partially offset by higher oil and gas market sales, which increased 21.3% year over year.

Speaker 3: The backlog for our battery and energy products business of 87.9 million was virtually identical to the backlog of 88.6 million exiting the fourth quarter of 2022, which was the highest in our history for this segment.

Speaker 3: The sales split between commercial and government defense for a battery business was 7822.

Speaker 3: Identical to that reported for the 2022 year, and the domestic to international split was 4852 compared to 4951 for the 2022 year.

Speaker 3: accentuating the continued success of our global revenue diversification strategy.

Speaker 3: Revenues from our communication system segment were $3.4 million compared to $1.2 million last year, an increase of 181.8%, primarily relating to shipments under a vehicle amplifier adapter order.

Speaker 3: with a global defense contractor received in mid 2022.

Speaker 3: that was tempered by the impact of the cybersecurity attack.

Speaker 3: The backlog for communication systems business of 20.2 million was down 9.8% from the backlog of 22.4 million exiting the fourth quarter of 2022.

Speaker 3: On a consolidated basis, the commercial to government defense sale split was $70.30.

Speaker 3: virtually identical to the 7129 reported for the 2022 full year.

Speaker 3: Our consolidated gross profit was $7.4 million for the 2023 first quarter, up 6.9% over the 2022 period. As a percentage of total revenues, consolidated gross margin was 23.3% and was $7.4 million for the 2023 first quarter.

Speaker 3: versus 22.9% for last year's first quarter. Gross profit for our battery and energy products business was 6.5 million compared to 6.7 million last year. Gross margin was 22.9% A sequential increase of 130 basis points

Speaker 3: over the 21.6% reported in the fourth quarter, and a decrease of 20 basis points from 23.1% 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.

percent compared to 19.4 percent last year, reflecting higher factory throughput leading to higher cost absorption tempered by the inefficiencies associated with the cybersecurity attack.

Operating expenses were $7.4 million compared to $7.3 million last year, an increase of 2.2%

solely attributable to the recognition of the $100,000 cybersecurity insurance deductible. As a percentage of revenues, operating expenses were 23.2% compared to 23.9% for last year's first quarter.

a 70 basis point improvement reflecting sales leverage. Operating profit was break even. Inclusive of the .1 million one time insurance deductible compared to an operating loss of .3 million last year.

Our tax benefit for the fourth quarter was 0.1 million versus 0.3 million reported for the 2022 quarter computed on a gap basis.

including 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, and that loss was $0.3 million or $0.02 per share.

This compares to a net loss of $0.2 million, or one cent per share for the 2022 quarter.

Adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense was $1.2 million or 3.6% of sales for the 2023 quarter compared to $1.1 million or 3.6% for the prior year quarter.

Turning to our balance sheet, reflecting the impact of the cybersecurity attack as well as actions to proactively influence our position to service our substantial backlog, inventory increased by 6.1 million or 14.9% over the fourth quarter.

with 5.1 million or 83.1% of the total increase occurring in our Newark and Virginia Beach locations. We ended the 2023 first quarter with working capital of 52.5 million in a current ratio of 2.8.

compared to $50.1 million in 2.7 for the 2022 fourth quarter.

Death to capital at quarter end was slightly below 0.20.

going forward.

With our backlog, diversified end markets, growth initiatives, ongoing actions to improve our gross margins, and with the Cybersecurity Attack for the most part in our rear-view mirror.

we remain dedicated to realizing the leverage potential of our business model.

I will now turn it back to Mike. Thank you, Phil, for the detailed breakdown on the Q1 results. For 2023, as I explained in the last call, we are focused on executing our backlog and improving the gross margin of the business.

We did see improvement in gross margin in Q1, even with the inefficiencies due to the cyber event, which is encouraging, but we have more to accomplish. The cyber event impact delayed some of the improvement projects we have underway, such as printed circuit board redesigns and lean kizon events, as our teams were focused on the recovery efforts.

Speaking briefly to supply chain, we are seeing encouraging signs of component lead time reduction and improved part availability through 2023 thus far, although both businesses still have supply issues with certain specialty parts that impact production.

Direct labor in our locations and with our supply chain remain tight throughout Q1.

Our top initiatives are still in progress being first continuing price realization activities. We experienced some increased benefit on gross margin in Q1 and continue to work on adjustments to improve and stabilize our gross margin performance for both businesses.

Communication Systems specifically has a backlog of contracts that were priced in some cases over a year earlier which results in margin pressure from pricing then award to actual delivery. We should work through the earlier backlog in the next few quarters which will move us past these contracts and improve the gross margin. Second we continue our journey of extending the time horizon or sales and operation planning.

supply chain.

And lastly, we continue to improve our process of launching new products and transitioning to higher volume production, aligning resources that focus on lean principles and design for manufacturing.

Next, I will give some updates on our organic growth strategy, which is new product development and the major focus projects underway.

First, on the battery and energy side of the business, we continue to develop and improve products for our branded general sales and for our important OEM customers.

Our thin-cell product line continues to gain momentum in the rapidly growing medical wearables and product tracking market spaces.

We have purchased additional capex equipment to support forecasted demand by our customers. This equipment should start coming online in Q3 of this year.

On the UB123A product line serving the IoT market space, we continue cadence production shipments of this project and expect volumes to ramp this year.

The XR123A, our carbon monofluoride blend version of this cell which offers 20 to 30 percent more energy in the same size, is currently going through UL safety certification which is expected to complete in early Q3.

For both 123A cell variants, we continue to work on multiple opportunities for cell sales, but ultimately, battery pack assemblies will be a critical piece of this product line, where custom solutions can offer value in stronger customer relationships.

We have multiple partners evaluating our improved thionochloride product line, targeting monitoring and telemetry applications, where this technology can power items across extreme temperature ranges for up to 20 years. We have several commercial negotiations ongoing and will have multiple new thionochloride products launching in 2023.

the first of which is a 19-H

This cell is sampling now and will be available in production in the back half of 2023.

The development of the conformal wearable battery, which is used to power advanced dismounted soldier equipment, continues to make progress. We currently expect to start first article testing of the battery in Q3 of 2023.

This being an indefinite quantity, indefinite delivery contract with uncommitted volumes, we continue to balance internal resources for this project with other known revenue generating and cost reduction projects.

Secondly, on the communication system side of the business, we are working through branding and cosmetic items for our EL8000 server case and power system, a strong sign that we are close to initial commercial orders. This will help diversify and add scale to the business.

Meanwhile, we continue to work on advanced amplification and power products with multiple partners to support air, ground, and sea communications, primarily military in nature. Lastly, on growth, we continue to develop strategies and relationships on how to best position us to take advantage of electrification.

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 are in discussions with several partners to collaborate on advanced cell prototypes in 2023. We are in discussions with several partners to collaborate on advanced cell prototypes

In closing, after some frustration in Q1 with the cyber event and a great team effort to get back on track, we are laser focused on our goal of returning to profitable growth, which is key to paying down our acquisition debt. Execution continues the main priority and mandate for both businesses with communication systems increasing scale to achieve profitability.

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A reminder, press star 11 on your telephone if you'd like to ask a question.

If there are no questions, I'd like to now turn the call back to Mike for closing remarks.

Thank you, Kathy. Well, thanks everyone for listening to today's call. We look forward to talking with you next time at the Q2 earnings call. Have a great day. Bye, everyone. Thank you, everyone.

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