Q2 2023 Ultralife Corporation Earnings Call
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Good day and thank you for standing by welcome to the Ultra Your life earnings Conference call. At this time, all participants are in a listen only mode.
The speaker's presentation there'll be a question and answer session.
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Please be advised that today's conference is being recorded I would now like to hand, the conference over to you speak of today Judy <unk>. Please go ahead.
Thank you and good morning, everyone and thank you for joining US. This morning for all drive Corp's earnings conference call for the second quarter of physical 2023.
With us on today's call or Mike manner, I'll drive President and CEO until faint a drive to the 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 Dot <unk> dot com, where you find the release under invest.
<unk> and the Investor Relations section.
Turn 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 you up or 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.
Supply chain disruptions potential reductions in revenue from key customers acceptance of our new products on it.
Global basis, and uncertain global economic conditions.
The company cautions investors not to place undue reliance on forward looking statements, which reflects the company's analysis only as of today's date.
The company undertakes no obligation to publicly update forward looking statements to reflect subsequent events or circumstances further information on these factors and other factors that could affect all drives financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10-K.
In addition on today's call management refer to certain non-GAAP financial measures. The management considers to be useful matrix differ from gap. These non-GAAP measures should be considered a supplemental to corresponding gap figures with that I would now like to turn the call over to Mike Good morning, Mike.
Good morning, welcome to the call.
220, 23 operating results.
Well, let me first say I'm very proud of her internal team and valued supplier network.
Slow start to the quarter due to the lingering impact previously reported Q1 cyber attack.
Rally.
Businesses delivered strong Q2 performance with revenue up 33 per cent in operating profit increasing over 360% year over year, highlighting the leverage of our business model.
Gross margin for the total business over Q1, even with a slow start to the period.
I am pleased that even with a strong revenue or total backlog was not only replenished, but an increase of the highest in company's history exiting Q too.
I will now turn it over to fill the talk through the queue to financial results.
Thank you, Mike and good morning, everyone.
This morning, we released our second quarter results for the quarter ended June 30th 2023.
We also filed a Form 10-Q with the S. C C and updated our investor presentation, which you can find in the Investor Relations section of our website.
I'd like to thank all those who helped make this happen.
Before starting the financial review.
Point out that our business interruption insurance claim resulting from our first quarter cyber attack is still in process.
I look forward to sharing with you the details of our claim once the settlement has been finalized and funded.
After which we will include the settlement amount and our financial results.
Consolidated revenues for the 2023 second quarter totaled 42.7 million compared to 32.1 million for the second quarter of 2022.
An increase of 32.9%.
Government defense sales increased 111.5% <unk>.
Commercial sales increased 9.2% compared to the year earlier period.
Our total backlog accenting, the second quarter increased 2.6% over the first quarter.
To 110.9 million the highest level in the company's history, and representing a 40.1% increase over the comparable period last year.
The backlog as diverse in nature across our commercial and government defense customer base.
We expect approximately 70% of the backlog to ship during the second half of 2023.
Revenues from her battery and energy product segment, where 33.9 million compared to 30.1 million last year and it.
Kris of 12.3%, reflecting strong year over year growth in our three major markets.
[noise] together accounted for approximately 83 per cent of the segment revenues.
Government defense sales increased 26.6%.
Medical battery sales increased 25.2%.
And oil and gas sales increased 17.9%.
These increases were partially offset by an 18.8% decline and other commercial sales primarily in China due to the timing of certain industrial sales.
The backlog for a battery and energy products business exiting the second quarter increased 12.1% over the first quarter to 98.5 million.
Also the highest level in our company's history for this segment.
The sale split between commercial and government defense for a battery business was 80 20.
Compared to 70 828 reported for the 2022 year.
And the domestic to international split with 50 149 compared to 49 51 for last year.
Accentuating the continued success of our global revenue diversification strategy.
27 million of commercial sales for the second quarter was the highest for any quarter and the company's history.
Revenues from our communication system segment or $8.8 million compared to 2.1 million last year or more than fourfold increase primarily attributable to shipments a vehicle amplifier adapters to a global defense contractor for the U S Army.
An integrated systems of amplifiers and radio vehicle amounts to a major international defense contractor under an ongoing L. Like country government defense modernization program.
The backlog for our communications systems business of 12.3 million wished down 38.8% from the backlog of 20.2 million exiting the first quarter as we continue to deliver on existing programs.
While working towards securing the next round of defense program orders in the first round of significant commercial orders.
And Ah consolidated basis, the commercial to government defense sales split with 63 37 versus 70 129 reporting for the 2022 full year.
Our consolidated gross profit was 10.6 million for the 2023 second quarter up 38.5% over the 2022 period.
As a percentage of total revenues consolidated gross margin was 24.8% versus 23.8% for last year second quarter.
And increased by 150 basis points over the first quarter.
Gross profit for a battery energy products business with 7.5 million compared to 7.2 million last year.
Gross margin was 22.3% a decrease of 60 basis points from 22.9 per cent reported in the first quarter and a decrease of 140 basis points from twenty-three per cent reported last year.
The year over year decline was primarily due to lingering inefficiencies, resulting from the Q1 cyber attack the disposition of certain nonconforming materials.
And continued investments in the transition of new products to high volume production.
Partially offset by improved price realization.
For communication system segment.
Most profit was 3.1 million compared to point $5 million for the year earlier period.
Gross margin was 34.5% compared to 24.9 per cent last year, reflecting higher factory throughput, leading to higher cost absorption and favorable product mix.
Operating expenses were 6.9 million.
Same as that reported for the year earlier period.
As a percentage of revenues operating expenses were 16.2% compared to 21.3 per cent for last year second quarter.
A 510 basis point improvement demonstrating the sales leverage of our business model.
The combined leverage of our gross margin improvement and fled operating expenses resulted in a $2.9 million or more than four fold increase in operating profit to $3.7 million compared to point 8 million for the 2022 second quarter.
During the second quarter the company confirmed its eligibility for the employee retention credit E. R. C.
Which is a refundable tax credit against certain employment taxes under the care Act of 2020, and the American rescue plan of 2021.
And filed the necessary amended payroll tax forms with the internal revenue service to claim a refund for the credit.
The ERC refund receive a bowl of $1.5 million as reported in the other current assets on our balance sheet and his other income which is below operating profit and our income statement.
Our tax provision for the second quarter was 1.4 million versus point 2 million reported for the 20 twenty-two quarter <unk>.
Computed on a gap basis.
Including the impact of interest expense to help finance you sell acquisition foreign currency losses associated with the strengthening of pounds Sterling to the U S dollar and the ERC net.
Net income was $3.3 million or 21 cents per share.
E. R C net of taxes computer down a gap basis represented seven cents per share with the remaining 14 and a half cents per share resulting from operations.
This compares to net income a point 2 million or three cents per share for the 2022 quarter.
Excluding the provision for non-cash U S taxes expected to be fully offset by our net operating loss carry forward and other tax credits adjusted EPS was 29 cents for the second quarter of 2023.
With operations contributing approximately 20 cents per share.
Compared to three cents for the 2022 period.
Adjusted EBITDA defined as EBITDA, including non-cash stock based compensation expense was $6.3 million or 14.7% of sales for the 2023 quarter, including the ERC compared to 2.2 million or 6.8% for the prior year quarter.
Turning to our balance sheet.
We ended the 2023 second quarter with working capital of $58.6 million in a current ratio of three point elf compared to $50.1 million and 2.7 for 2022 year and.
While inventory decreased 2.6% on a sequential basis.
11.8% increase over 2022 year and primarily reflects the impact of the Q1 cyber attack.
As well as continued actions to proactively influence our position to service are substantial backlog.
With the cyber attack in our rearview mirror going forward, our backlog diversified and markets growth initiatives and ongoing actions to improve our gross margin.
Possession of swell to continue to optimize the leverage potential of our business model.
Now turn it back to Mike.
Thank you fell for the detailed breakdown in the queue to performance.
As mentioned, we continue to focus on executing our backlog in improving gross margin.
Several operational initiatives are in process to smooth production flow better manage inbound and outbound materials, which improves cash flow.
We realized some improvement in gross margin in queue too, but many of our initiatives are in the early stages of implementation. So I expect to see further improvement throughout this year and into 2024 subject to the stable mix of customer demand.
Supply chain improved in queue to where we were able to produce and procure parts needed to execute our ship backlog, except for some specialty parts that still have excessively long lead times <unk>.
Customer forecasts and orders remain strong, allowing us to order parts within lead time windows and eliminate expediting fees, which is expected to generate some cost site improvement by the end of the year.
Direct labor remains tight and all locations, both internally and within our supply chain, but we were able to increase our headcount and Q2.
To recap the top initiatives in progress.
We continued price realisation activities experiencing some benefit in gross margin and Q2 and continue initiatives to improve and stabilize our gross margin performance for both businesses.
Communication systems, specifically as a backlog of contracts or priced in some cases over a year earlier, which results in margin pressure pressure from pricing then award to actual delivery. We expect to complete this heightened pricing initiative this year and return to normal cadence price reviews, while transitioning focused internal.
Costs down activities.
We continue our journey of extending the time horizon of our sales and operations planning process with both customers and suppliers, improving our and and forecasting. This process is being refined and we've experienced strong orders and forecast for most of our recurring customers eating are planning and procurement functions.
Lastly, we continue to improve our process of launching new products and transitioning to higher volume production with appropriate designed for manufacturing and lean principles.
Next.
I will do some brief updates on our organic growth strategy of new product development.
First on the batteries in energy side of the business, we continue to develop and improve products for our branded general sales and for our important OEM customers.
Arkansas, a product line continues to gain momentum in the rapidly growing medical wearable and product tracking market spaces.
We have purchased additional Capex, which began arriving in Q2 and should be operational by the end of Q3. This equipment should start qualification invalidation in queue for to support forecasted demand by our customers.
And you'll be 123 cell line servicing the Iot market space, we continued cadence production shipments and expect volumes to ramp this year the.
XR 123, or carbon model fluorite blend version of this saw with 20% to 30% more energy and the same size.
Just successfully completed you all safety testing last week, enabling us to start commercial sales and our target and markets.
Both of the 123 solve variance we continue to work multiple opportunities for self sales, but ultimately really battery pack assemblies will be a crucial piece of this product line, where custom solutions can offer added value in longer term customer relationships.
We have multiple partners evaluating our improved vinyl chloride product line targeting monitoring and telemetry applications, where this technology can power items across an extreme temperature range for up to 20 years with a 20 year life expectancy. The qualification invalidation time for these products can be excessive.
In queue to receive a follow on purchase order for $2.5 million from an international partner for XY power system for medical cards initially launched in 2022.
We launched a follow on hot Swappable power system for U S. B powered devices. The X five like earlier this year, which is currently sampling to prospective customers.
The development of the conformal wearable battery used to power advanced dismounted soldier equipment was paused in queue to temporarily to utilize our engineering resources to support near term growth projects were committed revenue for this year.
With a 90 day contract extension with the government in place we anticipate the work will resume unconformable in queue for.
This being an indefinite quantity indefinitely delivery contract with uncommitted volumes, we will 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 anticipate commercial orders this year for R. E. O 8000 certification power system is validations or complete.
This will help diversify nance scale of the business. Meanwhile, we continue to work in advance amplification and power products with multiple partners to support air ground and see communications, primarily military in nature.
Lastly on growth we.
We continue developing strategies in relationships on how to best position us to take advantage of the electrification in five G market spaces looking for niche applications and investments. So our hands are competitive advantage leveraging our cell design expertise in power system capabilities.
As an example, we currently have one commercial OEM development partner resident in our Newark facility and are in discussions with several other partners to collaborate and advanced sell Chemistries and designs.
In closing after strong Q2, we continue to be laser focused on our goal of returning a profitable growth, which is key to paying down our acquisition debt.
Execution continues the main priority for both businesses with communication systems, increasing scale to achieve consistent profitability.
Energy converting on multiple growth initiatives, while driving gross margin improvements.
Thanks, everyone for the attention that concludes the prepared remarks now back to the operator for questions.
Thank you at this time, we will conduct a question and answer session.
Monday to ask a question you will need to press sorry, one one on your telephone and wait for your name to be announced to a guy you. A question. Please press one again, please stand by while we compiled a cute name is Shane.
Our first question comes from Josh Sullivan is the bench My company. Please go ahead.
Hey, good morning impressive results here.
Morning.
And are you still working through the cyber attack your paperwork, but can you talk about how you were able to recover so quickly and then any residual impact we should think about going forward at all.
Well, it's it's really a testament to our whole team and the extra resources that we we used to help US you know basically get through the event and back on her feet as quickly as we did there's still some pockets of recovery going on you know for the most part the attack did not disrupt <unk>.
Any of our technology or you know our manufacturing systems. It was mostly you know.
Documentation and other things that.
Can be recreated recreated over time.
And Luckily that the team did a great job until you get everything that yeah. You know, we we talked about the lingering effects of the cyber at the queue on cyber attack Dillinger at effect is that we both businesses and together we regrouped in the month of April to figure out of course going forward. So the April results were.
<unk>, what we did in April really help drive a more successful may and June and moral level loading and you know that that certainly is our help or hope going forward, but bottom line is that the teams working 24 seven to recover the data recover the systems and and ultimately pushed the business and the writer.
Section.
And then on the supply chain, you know as things begin to use and I know we're in a new reality, but any details you can provide where bottlenecks are starting to ease and allowing you to deliver deliver on some of these backlogs.
So I think as we commented I mean, we've got a pretty strong backlog now and have had for a couple of quarters, where it's really allowed us to get out in front of a lot of our supply chain problems, where things were out over 52 weeks now they're typically.
Typically in the 24 to 36 weeks, which is manageable I'm not gonna say it's perfect.
But it allows us to actually at least to execute.
Part of it I will say you know the cyber event from from supply chain side Might've helped us a little bit because we didn't ship everything we thought we wouldn't Q1 uhm. So we had a you know an inventory surge that we needed to plow through and and execute and get out of the building.
There's still some pockets of parts like especially in the RF side that.
Are pretty long lead and there's not a lot of vendors, so you're you're pretty hostage to whom you're using and most of them are in koala qualified products, where you really don't have an easy option to to change.
But other areas you know moss spots and some of the things that were really difficult previously seem to at least be within a you know a 26 week lead time, though.
And then just on the operating investments you've made no sounds like hiring is getting a little easier at least can you help us think about you know the leverage going forward and just how how we might frame that.
Sure I allocated purely on the financial side and and the most important number ingrained in my brain is for each 100 basis point increase in gross margin. It's worth seven cents of a V. P. S and that's calculated on a hat and a gap tax basis, which we know isn't isn't reality for us. So.
It it really comes down to just the.
The basics.
Keep the revenue stream, calling which I think we've been very successful at improved gross margin and when we say improved gross margin.
We have a whole series of different actions that were attacking that we meet when I.
I say three to four times a week, that's probably an understatement, but you know we're after that next 100.
Basis point increase in gross margin and we can't get that soon enough, but these actions have to get to the root cause they can't be bandaids and that's what our focus is really all about the spending while the spending we control. That's that's really what it comes down to so you know when you look at the the difference in the quad.
We went up 33% in sales 38, and a half per cent increase in gross profit, which defines to us leverage and then keeping keeping operating expenses flat. So.
And then we look back Josh shall we say well if if this happened or that happened or are these things happen. There's always things that you know that that that could have happened at the <unk>.
Could have helped us out, but it really comes down to the basics.
Yeah.
Improving operations and efficiencies that are sustainable and then going on to the next batch of issues.
Got it got it and then maybe just turn it over to some and market comments, you know up 25% and battery in the medical side you know what what did you see in there I mean is is that a supply chain getting easier is that demand coming through maybe maybe just some comments on the medical supply market My that was just wrong.
It's a combination of factors, Josh really you know the supply chain coming through has been <unk> been a big piece of it you know we've got some customers in the medical side that have been that of launch products and and they're starting to see their market penetration and growth you know start back up now that we're through the Covid time and some of the <unk>.
Fly chain issues of that they've had as well we're seeing some pull through we have one major OEM that I know is is benefiting from increased volume due to a competitors recall situation that I think has benefited us pretty pretty dramatically.
And then there's also some recurring revenue coming into that stream just for replacement products, where you know some of these products. We put out an early COVID-19 are due to have batteries replaced just buy the normal course of maintenance.
So I think it's been strong in a couple of different fronts.
Yeah, and then and then the oil and gas sales you up 18% I mean have you seen the offshore rig activity translating to demand for your product.
Yeah Yeah.
We've seen a lot of international business, we've seen a lot of offshore business. You know, we're kind of in a unique spot where we're servicing you know a lot of the bigger players and a lot of the smaller player. So we're kind of leveled loaded there.
Hopefully you know the natural gas price rebounds, a little bit here in the fall because I think that may even help but right. Now you know that that segment continues to be pretty strong I mean, there was a few players that announced over the last couple of days earnings that had been pretty strong and their forecasts are five look pretty positive.
So we're hoping that that stays solid.
Got it made me I'll just wrap up on government defense really impressive here how should we think about that you know going forward and then you mentioned you know as we think about the next round of defence backlog growth some of the opportunities there and just what we're seeing in defense.
On the defense side, you know obviously in the communication system side, there's been a substantial backlog for awhile that we've been wanting to get out the door and execute on.
It really was a supply chain a bottleneck we think that.
Revenue is gonna continue those they're embedded in some pretty longterm contracts that have your over here Ah buys an named programs for either the U S government or others.
The battery and energy side of the business. They are a lot of our military sales right now I've been direct OEM sales and pass through sales are our sales direct to D. L.
And others for products like the 50, 390, and others that we've talked about in the past have actually been very low and we are in <unk> contracts that you know could could assist with some additional revenue if they were to actually to have an order awarded.
Great well again, congratulations on a quarter and then thank you for the time.
Thank you Josh.
Alright.
Thank you again.
Please pull style online on your telephone.
There seemed to be no further questions.
Now like to turn it back to make me an S at closing your Max.
Alright, everyone. Thanks for listening today today's call. We look forward to talking to you next time at the Q3 earnings call are gonna have a great day.
Bye now.
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