Q3 2023 Ultralife Corp Earnings Call

Yeah.

Yeah.

Good day and thank you for standing by welcome to the Ultra Life Corporation third quarter 2020 to your results conference call.

All participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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I would now like to hand, the conference over to your Speaker today Jody Burford name. Please go ahead.

Thank you Bella and good morning, everyone and thank you for joining US. This morning for Ultra lives corporations earnings conference call for the third quarter of fiscal 2023.

With us on today's call are Mike manner, Ultra life's, president and CEO, and Phil Fain, <unk> Chief Financial Officer.

The earnings press release was issued earlier this morning, and if anyone has not yet received a copy.

But you to visit the Companys website, Www Ultra life core dot com, where you'll find the release under Investor News in the Investor Relations section.

Before turning the call over to management I would like to remind everyone that some statements made during this conference call contains forward looking statements based on current expectations.

Actual results could differ materially from those projected as a result of various risks and uncertainties the.

Potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 on our related supply chain disruptions potential reductions in revenue from key customers.

Acceptance of new products on a global basis and uncertain global economic conditions.

The company cautions investors not to place undue reliance on forward looking statements, which reflect the company's analysis only as of today's date.

Company undertakes no obligation to publicly update forward looking statements to reflect subsequent events or circumstances.

Information on these factors and other factors that could affect of life's 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 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 with that I would now like to turn the call over to Mike Good morning, Mike.

Thank you.

Morning, everyone welcome to our call and Ultra large Q3 2023 operating results.

I'm extremely pleased with the team's Q3 progress to stabilize and improve gross margin our initiatives have started to deliver with a year over year 460 basis point increase in gross margin for the business.

<unk> and an operating profit increase of $2 $7 million year over year.

We have a strong backlog position across the portfolio that sustained in Q3 with a strong pipeline of new products that should continue to support our main objective of continued profitable growth.

We have mostly recovered from the cash and balance to the cyber event reported in Q1 of this year.

Which will allow us to now start utilizing generated cash to pay down our debt, which is our highest near term priority. This will provide headroom new examined accretive acquisitions and invest in strategic business initiatives supporting overall growth going forward.

I will now turn it over to Phil to talk through the Q3 financial results.

Thank you, Mike and good morning, everyone.

Earlier. This morning, we released our third quarter results for the quarter ended September 32023.

We also filed our Form 10-Q with the SEC and updated our Investor presentation, which you can find in the Investor Relations section of our website.

Consolidated revenues for the 2023 third quarter totaled $39 5 million compared to $33 2 million for the third quarter of 2022.

An increase of 18, 8%.

Government defense sales increased 48, 1% in.

In commercial sales increased five 6%.

Revenues from our battery and energy products segment.

Were $31 9 million compared to $28 6 million last year, an increase of 11, 7%.

Reflecting.

Year over year growth in our medical and government defense markets, which increased 37, 9% and 36, 2% respectively.

While oil and gas market sales were essentially flat year over year due to the timing of shipments to international customers.

We experienced a 14, 9% decline in other commercial sales primarily.

Primarily in China due to the timing of certain orders.

The sales split between commercial and government defense for our battery business was $76 24, compared to 70 822 reported for the 2022 year and the domestic to international split was $50 50 compared to $49 51 last year that.

Constraining the continued success of our global revenue diversification strategy.

Revenues from our communications systems segment were $7 6 million compared to $4 7 million last year.

62, 7% increase primarily.

Attributable to shipments of vehicle amplifier adapters to a global defense contractor for the U S Army.

In integrated systems of amplifiers in radio vehicle amounts to a major international defense contractor under an ongoing allied country government defense modernization program.

On a consolidated basis, the commercial to government defense sales split was $61 39.

Versus $71 29 reported for the 2022 full year.

Our total backlog exiting the third quarter remained over 100 million yen is diverse.

In nature across our commercial and government defense customer base.

We expect over $35 million of the backlog to ship during the last three months of 2023.

Not included in this amount is approximately $3 5 million of shipments that were pushed into the fourth quarter due to delays in the deliveries of certain components from vendors.

These shipments primarily to medical and government defense customers have commenced.

Our consolidated gross profit was $9 8 million up 45, 5% over the 2022 period.

Operator: 3rd quarter of 2022 results conference call. 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 Tar 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Tar 11 again. Please be advised that the James conference is being recorded.

As a percentage of total revenues consolidated gross margin was 24, 8% versus 22% for last year's third quarter.

And remained consistent with that reported for the second quarter.

Gross profit for our battery and energy products business was $7 7 million compared to $5 3 million last year gross margin was 24, 2% and.

Operator: I would now like to have a conference over to your speaker today.

An increase of 550 basis points over 18, 7% reported for last year's third quarter.

Jody Burfening: Jody Burfening, please go ahead. Thank you, Padella and good morning everyone and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the 3rd quarter of fiscal 2023.

An increase of 190 basis points over the 22, 3% reported for this year's second quarter.

Jody Burfening: With us on today's call are Mike Manna, Ultralife's president and CEO and Phil Fain, Ultralife Chief and Ansel 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.

The year over year and sequential increases were primarily due to improved price realization as well as a concerted effort to level load production more evenly throughout the quarter.

Resulting in labor utilization efficiencies and higher cost absorption.

For our communication systems segment gross profit was two point million compared to $1 4 million for the year earlier period.

Jody Burfening: For 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. The potential risks and uncertainties that could cause actual results to differ materially include the impact of COVID-19 on related supply chain disruptions, potential reductions in revenue from key companies. Customers, acceptance of new products on a global basis and uncertain global economic conditions.

Gross margin was 27.8% compared to 29, 2% last year, primarily resulting from the delays experienced in the receipt of certain components.

Operating expenses were $7 6 million, an increase of <unk> 3 million over the year earlier period as a percentage of revenues operating expenses were 19, 3% compared to 22.1% per last year's third quarter.

Jody Burfening: The company cautions investors not to place undue reliance on forward-looking statements which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances.

270 basis point improvement, reflecting the sales leverage of our business model.

The combined leverage of our 460 basis point gross margin improvement in our 270 basis points of operating expense to sales ratio resulted in a $2 $7 million improvement in operating profit to $2 1 million compared to an operating loss of <unk> 6 million.

Jody Burfening: Further information on these factors and other factors that could affect Ultralife's financial results is included in the company's filings with the Securities and Exchange Commission, including the latest annual report on Form 10K. In addition, on today's call management will refer to certain non-GAP financial measures that management considers to be useful and differ from GAP. These non-GAP measures should be considered supplemental to corresponding GAP figures.

For the 2022 third quarter.

Our tax provision for the third quarter was <unk> 4 million versus <unk> $1 million benefit reported for the 2022 quarter computed on a GAAP basis.

Including the impact of interest expense to help finance, the <unk> acquisition and foreign currency gains.

Jody Burfening: With that, I would now like to turn the call over to Mike. Good morning, Mike. Thank you.

Michael Manna: Good morning, everyone. Welcome to our call on Ultralife's Q3 2023 operating results. I am extremely pleased with the team's Q3 progress to stabilize and improve gross margin. Our initiatives have started to deliver with a year-over-year 460 basis point increase in gross margin for the business, resulting in an operating profit increase of $2.7 million year-over-year. We have a strong backlog position across the portfolio that sustained in Q3 with a strong pipeline of new products that you continue to support our main objective of continued profitable growth.

Associated with the strengthening of the U S dollar to pound Sterling.

Net income was $1 3 million or <unk> <unk> per share. This compares to a net loss of <unk>.

<unk> 2 million or a loss of <unk> <unk> per share for the 2022 quarter.

Excluding the provision for noncash U S taxes expected to be fully offset by our net operating loss carryforwards and other tax credits adjusted EPS was <unk> 10 per share for the third quarter of 2023.

Compared to a loss of <unk> <unk> for the 2022 period.

Michael Manna: We have mostly recovered from the cash and balance due to the cyber event reported in Q1 of this year, which will allow us to now start utilizing generated cash to pay down our debt, which is our highest near-term priority. This will provide headroom to examine a creative acquisitions and invest in strategic business initiatives supporting overall growth going forward.

Adjusted EBITDA defined as EBITDA, including noncash stock based compensation expense was $3 5 million or eight 8% of sales for the 2023 quarter compared to $1 3 million or four 4% for the prior year quarter.

Philip Fain: I will now turn it over to Phil to talk through the Q3 financial results.

On a trailing 12 month basis, adjusted EBITDA is 13.1 million or eight 7% of sales compared to $6 6 million or five point to a percent of sales for the 2022 a year.

Philip Fain: Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter-ended September 30th, 2023. We also filed our form 10-2 with the SEC and updated our investor presentation, which is confined in the investor-relation section of our website. Consolidated revenues for the 2023-3rd quarter totaled 39.5 million compared to 33.2 million for the third quarter of 2022, an increase of 18.8 percent. Government defense sales increased 48.1 percent, and commercial sales increased 5.6 percent.

This represents the highest TTM level that we have that we have achieved in the last 15 years.

Turning to our balance sheet. We ended the 2023 third quarter with working capital of $62 8 million and a current ratio of three four.

Compared to $50 1 million and $2 seven for 2022 year end.

With the dramatic strengthening of our balance sheet, we are poised to commence in the fourth quarter, the paydown of our debt.

Philip Fain: Revenue this from our battery and energy product segment with 31.9 million compared to 28.6 million last year, an increase of 11.7 percent. Reflecting strong year-over-year growth in our medical and government defense markets, which increased 37.9 percent and 36.2 percent respectively. While oil and gas market sales were essentially flat year-over-year due to the timing of shipments to international customers, we experienced a 14.9 percent decline in other commercial sales, primarily in China due to the timing of certain orders.

And reducing the costly interest expense, which represents almost 12 cents per share on a TTM basis.

Going forward.

Our backlog diversified end markets growth initiatives and ongoing actions to improve our gross margins and strengthen our balance sheet position.

Position us well to optimize the leverage potential of our business model I will now turn it back to Mike.

Thank you Phil for the detailed review of the Q3 results the.

The team's focus on gross margin improvement has yielded promising early results, but we continue multiple efforts on this front, including price realization lean projects to improve throughput and level loading our factories to improve labor efficiency and utilization.

Philip Fain: The sales split between commercial and government defense for our battery business was 76.24 compared to 78.22 reported for the 2022 year, and the domestic to international split was 50.50 compared to 49.51 last year, demonstrating the continued success of our global revenue diversification strategy. Revenue from our communication system segment was 7.6 million compared to 4.7 million last year, a 62.7 percent increase, primarily attributable to shipments of vehicle amplifier adapters to a global defense contractor for the U.S. Army, and integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor under an ongoing allied country government defense modernization program.

Material flow is key to our production operations and although we have seen continued improvement throughout the year, we still experience occasional delays for specialized single source components, which disrupts our production lines.

We have established the framework of our ethanol process through which our major customers have provided extended forecast, thereby enabling us to order parts within lead time windows avoiding expedite fees.

As this process matures it will have positive impact in both labor efficiency and supply chain cost benefits going forward.

Our lean process journey is underway and imperative to offset rising costs and inflationary pressure in the supply chain direct labor and utilities.

The manufacturing team has completed several lean projects in Q3 with immediate impact with measured increases in throughput per labor hour. We are starting to expand this effort globally across facilities.

Philip Fain: On a consolidated basis, the commercial to government defense sales split with 61.39 versus 71.29 reported for the 2022 full year. Our total backlog exiting the third quarter remained over 100 million, and its diverse in nature across our commercial and government defense customer base. We have specced over 35 million of the backlog to ship during the last three months of 2023. Not included in this amount is approximately 3.5 million of shipments that were pushed into the fourth quarter due to delays in the deliveries of certain components from the vendors.

With the focus on these three initiatives I expect to see further improvement throughout the last quarter of this year and into 2024 subject to a stable mix of customer demand.

I will now review the organic growth opportunities in the business with a brief update on several key projects.

First in our battery and energy side, our thin cell product line, which is focused on medical wearable products and tracking applications continues to increase in future sales opportunities. We received our flexible production line equipment as expected in Q3, and we'll finish installation and begin line validation in Q4 to support forecasted demand.

Our customers in 2024 and beyond.

Philip Fain: These shipments, primarily to medical and government defense customers, have Our Consolidated Gross Profit was $9.8 million, a 45.5% over the 2022 period. As a percentage of total revenues, Consolidated Gross Margin was 24.8% versus 20.2% for last year's third quarter, and remained consistent with that reported for the second quarter. Gross Profit for a battery and energy products business was $7.7 million compared to $5.3 million last year. Gross Margin was 24.2% in increase of 550 basis points over 18.7% reported for last year's third quarter, and an increase of 190 basis points over the 22.3% reported for this year's second quarter.

On the U B 123 cell lines, serving the Iot market space. We continue cadence production shipments we're sampling our new XR 123 cells, now, which have 30% more energy in the same form factor to key customers in the optics and illumination markets.

We continue to work multiple opportunities for one two or three sell sales, but ultimately believe battery pack assemblies will be a crucial piece of this product line, where <unk> solutions can offer added value and longer term customer relationships.

Our improved vinyl chloride product line targeting monitoring and telemetry applications is in qualification and field testing with several customers. This technology can power items across an extreme temperature range for up to 20 years with a 20 year life expectancy, the qualification and validation time for these products can be.

Extensive leading to a lengthy sales cycle and revenue recognition.

On our X five medical Hot swap power system continues to sell well with a $2 $5 million order received in Q2 expected to fully ship. This year with further backlog increased as expected in Q4.

Philip Fain: The year over year and sequential increases were primarily due to improved price realization, as well as a concerted effort to level load production more evenly throughout the quarter, resulting in labor utilization efficiencies and higher cost absorption. For a communication system segment, Gross Profit was $2.0 million compared to $1.4 million for the year earlier period. Gross Margin was 27.0% compared to 29.2% last year, primarily resulting from the delays experienced in the receipt of certain components.

The follow on version of this system the X five white, which revised long term hot swap powered a USB devices is completing safety and compliance certification with preproduction samples available now.

Yes.

As mentioned last quarter, we paused work on the conformal wearable battery project with a 90 day contract extension granted from the government to focus our internal engineering bandwidth on other short term projects.

Philip Fain: Operating expenses were $7.6 million in increase of $0.3 million over the year earlier period. As a percentage of revenues, operating expenses were 19.3% compared to 22.0% per last year's third quarter, a 270 basis point improvement reflecting the sales leverage of our business model. The combined leverage of our 460 basis point Gross Margin improvement in our 270 basis point operating expense to sales ratio resulted in a $2.7 million improvement in operating profit to $2.1 million compared to an operating loss of $0.6 million for the 2022 third quarter.

We have resumed design and engineering work on the program and expect to enter first article testing with the government next year.

This project being an indefinite quantity indefinite delivery contract with uncommitted volume, we will continue to balance internal resources for this project with other known revenue generating and cost reduction projects that have near term impact to the business.

Switching over to the communication side of the business. We received a follow on order for $6 $1 million from an international customers to support their ground fleet communications upgrades for amplification and vehicle integration kits.

We have several other awards expected in support of funded U S government programs in the coming months, which will contribute to the communication systems backlog.

Philip Fain: Our tax provision for the third quarter was $0.4 million versus $0.1 million benefit reported for the 2022 quarter computed on a gap basis, including the impact of interest expense to help finance the Excel acquisition. In foreign currency gains associated with the strengthening of the US dollar to pound sterling, net income was $1.3 million or $0.8 per share. This compares to a net loss of $0.2 million or a loss of $0.1 per share for the 2022 quarter.

We continue engineering efforts for advanced amplification and power products with multiple partners to support Air ground C Communications, primarily military in nature.

I am pleased to announce that the communications business has received initial orders for the <unk> 8000 case integrated server systems.

Which I mentioned previously completed certifications earlier this year.

This system developed with our strategic partner allows high end computing server power to be used in difficult environments on the edge and industrial five Jian AI applications truly bringing computational power to the point of views. We expect this area to continue to grow and gain momentum adding.

Philip Fain: Excluding the provision for non-tash US taxes expected to be fully offset by our net operating loss carry forwards and other tax credits, adjusted EPS was $0.10 per share for the third quarter of 2023 compared to a loss of $0.3 for the 2022 period. Ajusted EBITDA, defined as EBITDA, including non-chash stock-based compensation expense, was 3.5 million, or 8.8% of sales for the 2023 quarter, compared to 1.3 million, or 4.4% for the prior year quarter. On a trailing 12-month basis, Ajusted EBITDA is 13.0 million, or 8.7% of sales, compared to 6.6 million, or 5.0% of sales for the 2022 year.

Adding diversity and scale to the business segment.

We are currently reviewing other strategic areas, we can leverage our integrated systems expertise with this type of advanced computing capability to further expand the communication systems portfolio.

This review as part of the strategic planning process. We have in development. This process has been a very thoughtful and impactful journey for both business segments.

Truly focused on technologies in areas to support our goal of significantly growing the size of the business.

These projects are now going through a business case and market analysis process.

And the next several quarters, we're real niche areas, we should focus our precious time and resources on to support future growth either through product development or acquisition.

We continue to work with multiple partners on advanced cell designs with current and advanced materials with one development partner resident in our Newark facility. We can look forward to additional disclose discussions on these activities in the Q4 in future earnings calls.

Philip Fain: This represents the highest TTM level that we have achieved in the last 15 years. Turning to our balance sheet, we ended the 2023 third quarter with working capital of 62.8 million, in a current ratio of 3.4, compared to 50.1 million, and 2.7 for 2022 year end. With the dramatic strengthening of our balance sheet, we are poised to commence in the fourth quarter, the paydown of our debt, and reducing the costly interest expense, which represents almost 12 cents per year on a TTM basis. Going forward, our backlog, diversified end markets, growth initiatives, and ongoing actions to improve our gross margins and strengths in our balance sheet, positioned us well to optimize the leverage potential of our business model.

With Q3 complete and momentum building, we continue to be laser focused on profitable growth, which allows us to start paying down our acquisition that <unk>.

Initial results from our execution of key initiatives are showing promising signs that provide a baseline for us to build upon and.

And as stated in the past few calls communication systems need to increase scale to achieve consistent profitability batter and energy needs to convert our multiple growth initiatives, while driving gross margin improvements.

Thanks, everyone for the attention that concludes the prepared remarks for today now I will go back to the operator for questions.

In order to ask a question at this time. Please press star one on your telephone and wait for your need to be announced.

Can withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.

Michael Manna: I will now turn it back to mice. Thank you, Phil, for the detailed review of the Q3 results. The team's focus on gross margin improvement is yielded promising early results, but we continue multiple efforts on this front, including price realization, lean project to improve throughput, and level loading the factories to improve labor efficiency and utilization.

Yes.

Yeah.

And now our first question comes from the line of Josh Sullivan with the Benchmark Company. Your line is now open.

Hey, good morning, Mike.

Michael Manna: Material flow is key to our production operations, and although we've seen continued improvement throughout the year, we still experience occasional delays from specialized single source components, which disrupts our production lines. We have established the framework of our SNLP process, through which our major customers have provided extended forecasts, thereby enabling us to order parts within lead-time windows, avoiding expedite fees, as this process matures, it will have positive impact in both labor efficiency and supply chain cost benefits going forward.

Good morning, Josh Good morning.

Yes.

Cash comes in you mentioned you started off the call what do you think the.

Net debt leverage.

Do you want to get through what's appropriate.

But Josh you know I look at past acquisitions I look at.

Us having.

We paid off the previous acquisition in 32 months.

With the positive cash GAAP based on the EBITDA level that we're seeing.

Michael Manna: Our lean process journey is underway, and imperative to offset rising costs and inflationary pressure in the supply chain, direct labor, and utilities. The manufacturing team has completed several lean projects in Q3 with immediate impact with measured increases in throughput per labor hour. We have started to expand this effort globally across facilities.

My goal is to extinguish the debt because I see 12 staring us.

Correct right in the face so.

That's certainly built into our iterative strategic plan that.

And that really enables us to see.

That's a nice a nice cash buildup across the next couple of years.

Michael Manna: With the focus on these three initiatives, I expect to see further improvement throughout the last quarter of this year, and into 2024, subject to the stable mix of customer demand.

Got it and then as you look at strategic opportunities I mean, what are you comfortable going to back up to on the leverage.

Well it certainly depends on.

Michael Manna: I will now review the organic growth opportunities in the business with a brief update on several key projects. First, on the better energy side, our thin cell product line, which is focused on medical wearable products and tracking applications, continues to increase in future sales opportunities, opportunities. We received our flexible production line equipment as expected in Q3 and will finish installation and begin line validation in Q4 to support forecasts of demand by our customers in 2024 and beyond.

Of the opportunities that we see in todays economy, it's not just one opportunity that we're seeing it's multiple opportunities that we're seeing in at any one point in time, we have a couple of books in front of us some of which are intriguing some of which we've seen before so it really depends on.

And the opportunity I would be comfortable with the level of where our business is going and you can see over the last couple of quarters, the pace of where our business is going.

I look at Q3, I look at Q3 being almost similar to Q2 had it not been for that a couple of the parts that were that were that were pushed out. So you can see the trajectory you can see the EBITDA and I'm not looking for any specific multiple I'm looking at I'm just focused on the actual dollars knowing that we're not.

Michael Manna: On the UB123A cell lines serving the IOT market space, we continue cadence production shipments. We are sampling our new XR123A cells now which have 30% more energy in the same form factor, the key customers in the optics and illumination markets. We continue to work multiple opportunities for 1 through 3A cell cells, but ultimately believe battery pack assemblies will be a crucial piece of this product line where pack solutions can offer added value and longer term customer relationships.

In a very whatsoever from our acquisition criteria, which are very very it's been very disciplined do you look at it I could try and ask you to look at Sweet look at Excel all performing just just admirably.

Got it.

Michael Manna: Our improved final chloride product line targeting monitoring and telemetry applications is in qualification and field testing with several customers. This technology can power items across an extreme temperature range for up to 20 years. With a 20 year life expectancy, the qualification and validation time for these products can be extensive, leading to a lengthy sales cycle and revenue recognition. On our X5 medical hot swap power system continues to sell well. With a $2.5 million order received in Q2 expected to fully ship this year with further backlog increases expected in Q4. The follow on version of this system, the X5 light which provides long term hot swap power to USB devices is completing safety and compliance certification with pre-production samples available now.

And then on backlog you mentioned $35 million release, just as supply chain improves manufacturing efficiencies is there a natural level of backlog, we should think about as run rate going back to 2021 levels. Just curious on what we should expect on 24 is kind of the run rate. There I know, it's hard to estimate, but it's hard to judge at this.

Point, Josh I mean.

Last year, we are a third of this level.

So now we've been we've been lucky to be in over 100 million now for multiple quarters in a row.

My guess is is supply chain loosens up and everything else happens depending on what's going on in the world.

Theres, probably somewhere between where it was and where where it is now probably that $60 million to $75 million range is is probably where it's going to settle short term.

Especially if we execute and ship it out the door I mean, ultimately ride that trend hold shipments. We're trying to we're trying to ship as quickly as we can based on component availability labor and et cetera.

Michael Manna: As mentioned last quarter, we pause work on the conformal wearable battery project with a 90 day contract extension granted from the government to focus our internal engineering bandwidth on other short term projects. We have resumed design and engineering work on the program and expect enter first article testing with the government next year. This project being an indefinite quantity indefinite delivery contract with uncommitted volume, we will continue to balance internal resources for this project with other known revenue generating and cost reduction projects that have near term impact to the business.

What I see from that I Couldnt agree more with Mike I see the leverage or the <unk>.

Leverage of our business model by our ability to move it out to move it out quicker.

Got it got it and then how should we think of the margin profile at this point.

With that backlog really is going to be beneficial to Q4, but what are your thoughts on the run rate margin profile as we get into next year.

Sure the way I'm looking at this Josh I think we're going to see approximately 150 basis point improvement.

Michael Manna: Switching over to the communication side of the business, we received the follow on order for $6.1 million from an international customers to support their ground fleet communications upgrades for our amplification and vehicle integration kits. We have several other awards expected in support of funded U.S, government programs in the coming months, which will contribute to the communication systems backlog. We continue engineering efforts for advanced amplification and power products with multiple partners to support air ground and sea communications, primarily military and nature.

This year over last year I would expect to see that same improvement, whether it's 150 or 170 does make a difference I'm looking at a 150 next year 150 of the following year 100, the next year and that's the base case and the.

The reason why that's so important to US is that every 100 basis point improvement in gross margin yields are seven cents of EPS. After tax so that that's why we're.

Michael Manna: I am pleased to announce that the communications business has received the initial orders for the EL8000 case integrated server systems, which I mentioned previously in completed certifications earlier this year. This system developed with our strategic partner allows high-end computing server power to be used in difficult environments on the edge in industrial 5G and AI applications, truly bringing computational power to the point of use. We expect this area to continue to grow and gain momentum, adding diversity and scale to the business strength.

So focused on gross margin so I'm looking at 150 150 or 100.

Okay.

And then on the <unk>.

Services the motor.

News.

Are you able to say how large that order was are there milestones where that order could expand and then what are you.

Maybe sees the opportunity over the next two years.

Oh well.

We're not going to comment right now on the size of that order, but I mean, it's it's.

It's not insignificant to the comm systems business, let's just say that.

So you know.

Michael Manna: Corp. We are currently reviewing other strategic areas we can leverage our integrated systems expertise with this type of advanced computing capability to further expand the communication systems portfolio. This review is part of the iterative strategic planning process we have in development. This process has been a very thoughtful and impactful journey for both business segments. Truly focused on technologies and areas to support our goals significantly growing the size of the business. These projects are now going through a business case and market analysis process, which in the next several quarters will reveal niche areas we should focus our precious time and resources on to support future growth, either through product development or acquisition.

It's a huge market I mean, you know our strategic partner has a huge backlog.

Multi billions of dollars of servers.

That need to go out in the marketplace. We are the preferred and only real vendor in this space the package that that equipment to get it to the edge.

So.

I don't even think I can quantify what the opportunity really could be.

We know what's going to be significant or we wouldn't be.

Investing the time energy and resources into the entity.

The effort, but.

We'll have to see how it develops just like you.

Sounds good.

And then just staying within communications, the $6 9 million quarter on the ground fleet upgrades you mentioned some additional programs coming down the pipe should we expect those to be about the similar size are those potentially large opportunity.

Michael Manna: We continue to work with multiple partners on advanced cell designs with current advanced materials with one development partner resident in our Newark facility. We can look forward to additional discussions on these activities and the Q4 and future earnings calls. With Q3 complete and momentum building, we continue to be laser focused on profitable growth, which allows us to start paying down our acquisition debt. Initial results from our execution of key initiatives are showing promising signs that provide a baseline for us to build upon, and as stated in the past few calls, communication systems needs increased scale to achieve consistent profitability, better energy needs to convert on multiple growth initiatives while driving growth margin improvements.

They are about the similar size at this point.

Got it got it.

And then just broadly obviously.

Just looking at industrial markets.

Do you have any comments on kind of broader themes within industrials energy.

Sir consumer markets, just any any dynamics, you're seeing obviously a focus of investors right now.

Well, there's still a lot of activity in.

In certain spots I mean, obviously oil and gas is still strong I mean that that market definitely has not went away and we don't anticipate that it's going to anytime soon.

Michael Manna: Thanks everyone for the attention that concludes the prepared remarks for today.

The monitoring and telemetry of of a lot of the industrial markets continues to be strong.

Operator: Now we'll go back to the operator for questions. In order to ask a question at this time, please press tar 11 on your telephone and wait for your name to be announced. To enjoy the question, please press tar 11 again. Please standby while we'll compile the Q&A roster.

Everybody wants to monitor everything these days, so there's sensors and things on every pipeline every water line every power line every switch gear.

Just a lot of activity.

And then all of that is going into a lot of AI equipment to monitor for you know failures in other and other things to predictably try to maintain some of the systems and reduce costs. So.

Joshua Sullivan: And now our first question to Councillor Delay of Josh Sullivan with the benchmark company, Caroline is now open. Take a morning, Mike. So, good morning, Josh. As cash comes in, you mentioned you started off the call. What do you think the net debt leverage you want to get to? What's appropriate? Josh, you know, I look at past acquisitions. I look at us having, you know, we paid off the previous acquisition in 32 months with the positive cash gap based on the EBITDA level that we're seeing.

That's what kind of what we're seeing at our end.

Great.

Again, congratulations on the quarter and.

Yes, thank you for taking the time.

Thank you. Thank you.

Thank you and ask a question. Please press star one on your telephone.

It is star one on your telephone.

Okay.

And I don't see any questions at this time I will now turn the call back over to Mike Madden.

Joshua Sullivan: My goal is to extinguish the debt because I see 12 cents staring us right in the eye, right in the face. So, you know, that's certainly built into our innovative strategic plan that really enables us to see a nice cash build-up across the next couple of years. As you look at strategic opportunities, I mean, what are you comfortable going to back up to on the leverage? Well, it certainly depends on the opportunities that we see.

Yeah.

Alright, thanks, everyone.

We'll talk next time in 2024 at the Q4 conference call.

Bye now.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Okay.

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Joshua Sullivan: And in today's economy, it's not just one opportunity that we're seeing. It's multiple opportunities that we're seeing. And at any one point in time, we have a couple books in front of us, some of which aren't intriguing, some of which we've seen before. So, it really depends on the opportunity. I would be comfortable with the level of where our business is going. And you can see over the last couple quarters, the pace of where our business is going.

Okay.

Okay.

Okay.

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Okay.

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Joshua Sullivan: You know, I look at Q3. I look at Q3 being almost similar to Q2. He had it not been for, you know, the couple of parts that were pushed out. So, you can see the trajectory. You can see the EBITDA and I'm not looking for any specific multiple. I'm looking at, I'm just focused on the actual dollars, knowing that we're not going to vary whatsoever from our acquisition criteria, which are very, very, it's been very disciplined.

Okay.

Yeah.

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Joshua Sullivan: You look at academics, you look at Excel, all performing just, just admirably, and then on backlogs, you mentioned 35 million release, just supply chain improves, manufacturing efficiencies. Is there a natural level of backlog we should think about as run rate, you know, going back to 2020? One level is just curious on what we should expect, you know, in 24, or is it kind of the run rate there? I know it's hard to estimate, but- It's hard to judge at this point, Josh.

So.

Hum.

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Okay.

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Joshua Sullivan: I mean, you know, last year we were a third of this level, you know, so now it's- we've been- we've been lucky to be at over 100 million now for multiple quarters in a row. You know, my guess is, is supply chain loosens up and everything else happens, you know, depending on what's going on in the world, you know, there's probably, you know, somewhere between where it was and where it is now, probably that $60 to $75 million range is probably where it's going to settle short-term, especially if we execute and ship it out the door.

Joshua Sullivan: I mean, ultimately, we're not trying to- You know, hold shipments. We're trying to- we're trying to ship this quickly as we can based on component availability, labor, and et cetera. And from what I see from that, I couldn't agree more with Mike. I see the leverage- the leverage of our business model by our ability to- to move it out- to move it out quicker. Yeah. And then, you know, how should you think of the margin profile at this point, you know, with that- that backlog release is going to be beneficial to Q4, but what are your thoughts on the run rate margin profile as we get into next year?

Joshua Sullivan: Sure. The way I'm looking at this, Josh, I think we're going to see approximately 150 basis point improvement this year, over last year, I would expect to see that same improvement, and I, you know, whether it's 150 or 170, does make a difference. I'm looking at 150 next year, 150 to follow in year, 100 the next year, and that's the base case. And, you know, the reason why that's so important to us is that every 100 basis point improvement in gross margin yields a $0.7 of EPS after tax. So that- that's why we're- we're so focused on gross margins. So, you know, I'm looking at 150, 150, 100.

Michael Manna: And then on the EL-8000 services to mortar, you know, great news, you know, are you able to say how large that order was, you know, are there milestones where that order could expand, and then- and then what do you maybe see as the opportunity over the next two years? Well, well, you know, we're not going to comment right now on the size of that order, but I mean, it's not insignificant to the comm systems business, let's just say that.

Michael Manna: So, you know, it's a huge market, I mean, you know, our strategic partner has a huge backlog, you know, multi-billions of dollars of servers that need to go out in a marketplace. We are the, you know, preferred and only real vendor in this space, the package that- that equipment to get it to the edge. So, you know, I- I don't even think I can quantify what the opportunity really could be. We know it's going to be significant, or we wouldn't be, you know, investing the time energy and resources into the- into the effort, but, you know, we'll have to see how it develops just like you, and then just on, staying within communications, you know, the 6.9 million border on the ground fleet upgrades. You mentioned some additional programs coming down the pipe. Should we expect those to be about the similar size or are those potentially larger opportunities? There are about the similar size at this point. Yeah, yeah.

Michael Manna: And then, you know, just broadly, you know, obviously, you know, just looking at industrial markets, you know, give any comments on kind of broader themes within industrial energy, their consumer markets, just any dynamics you're seeing, obviously, a focus of investors right now. Well, there's still a lot of activity in certain spots. I mean, obviously, oil and gas is still strong. I mean, that market definitely has not went away. We don't anticipate that it's going to anytime soon.

Michael Manna: You know, the monitoring and telemetry of a lot of the industrial markets continues to be strong. Everybody wants to monitor everything these days. So there's sensors and things on every pipeline, every water line, every power line, every switch gear, every, you know, there's just a lot of activity. And then all of that's, you know, going into a lot of AI equipment to monitor for, you know, failures and other things to, you know, predictively try to maintain some of the systems and reduce costs. So that's what kind of what we're seeing at our end. Good.

Joshua Sullivan: Well, again, congratulations on the quarter. And, you know, thank you for taking the time. Thank you.

Operator: Again, in order to ask a question, please press tar 11 on your telephone. That is tar 11 on your telephone. And I don't see any questions at this time. I will now try to call back over to Mike Manell. All right. Thanks, everyone.

Michael Manna: We will talk next time in 2024 at the Q4 conference call. Bye now.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.