Ultralife Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 1, 2025

There are 5 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Ultralife Corporation Fourth Quarter twenty twenty four Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there'll be a question and answer session. Please be advised today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Alex Violta. Please go ahead.

Speaker 1

Thank you, Kevin, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the fourth quarter of fiscal twenty twenty four. With us on today's call are Mike Mana, Ultralife's President and CEO and 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, ultralife.com, where you will find the release under Investor News in the Investor Relations section. Before turning the call over to management, I'd 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.

Speaker 1

The potential risks and uncertainties that could cause actual results to differ materially include uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in The U. S. And foreign military spending, acceptance of our new products on a global basis and disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather or factors not under our control. 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.

Speaker 1

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 10 ks. 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'd now like to turn the call over to Mike, our CEO. Good morning, Mike.

Speaker 1

Please go ahead.

Speaker 2

All right, thank you. Good morning, everyone. Welcome to our call on Ultralife's Q4 and full year 2024 operating results. Earlier this morning, we reported Q4 sales of $43,900,000 with an operating income of $1,500,000 which includes a $1,100,000 of one time cost directly related to the Electrochem acquisition, which resulted in $01 EPS. For the full year, we reported $164,500,000 in sales, with an operating income of $10,000,000 resulting in $0.38 of EPS for the year.

Speaker 2

We continue to improve operations in key areas throughout 2024, paying down a considerable portion of our debt in the first half of the year, affording us the opportunity to complete our largest strategic acquisition to date of Electrochem Solutions. Electrochem Solutions, with their high temperature, high vibration line of final chloride cells, was a key supplier prior to the acquisition, now adds a vertical integration capability to our oil and gas business, offers us the opportunity to expand in initial critical adjacent markets and creates material cost synergies with our other lithium cell businesses worldwide. With added key resources in critical areas to support future growth expectations, a pipeline of new products across a variety of valued markets, and the expanded aperture of our sales funnel, I look forward to a strong 2025. I will turn it over to Phil to talk through the detailed numbers.

Speaker 3

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth quarter results for the quarter ended 12/31/2024. We have also filed our Form 10 ks with the SEC and have updated our investor presentation in the Investor Relations section of our website, which includes a recap of our most recent acquisition, Electrochem. As noted in our March 7 press release, we are reporting our fourth quarter results and filing our Form 10 ks with the SEC later than usual to allow for the completion of our accounting close and audit for the inclusion of Electrochem, which the company acquired on 10/31/2024. The related accounting is presently reported to us by their former parent company under a transition services agreement.

Speaker 3

And now turning to our financial results for the fourth quarter. Consolidated revenues totaled $43,900,000 compared to $44,500,000 for the fourth quarter of twenty twenty three. Revenues from our Battery and Energy Products segment were $39,900,000 compared to $35,700,000 last year. Excluding the $6,100,000 of Electrochem sales for November and December, sales for the segment declined $1,900,000 or 5.3% year over year. A 48.1% increase in government defense sales and a 1.6% increase in oil and gas sales were offset by a 47.2% decline in medical battery sales compared to last year when we recorded the highest level of medical sales in the company's history, and a 4.4% decline in industrial market sales reflecting timing of orders.

Speaker 3

The sales split between commercial and government defense for our battery business was seventythirty compared to 70 seventwenty three reported for the twenty twenty three quarter, and the domestic to international split was 60 two-thirty eight compared to 40 eight-fifty two for the 2023 period, demonstrating the heightened domestic demand for our U. S. Government defense products. Revenues from our Communications Systems segment of $4,000,000 declined 55.1% from the $8,800,000 we reported last year, primarily attributable to large shipments in the 2023 period of vehicle amplifier adapter orders to a global defense contractor for the U. S.

Speaker 3

Army and of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor, for which shipments had been delayed from earlier periods due to supply chain disruptions. The year over year comparison was compounded by the timing of a follow on leader radio order expected in the third quarter of twenty twenty four that was not received until October, thus pushing fulfillment into 2025. On a consolidated basis, the commercial to government defense sales split was 60 two-thirty eight for both the 2024 and 2023 full years. Our total backlog, with high confidence orders exiting the fourth quarter, was 102,200,000 and remains diverse in nature across our commercial and government defense customer base. The replenishment rate remains high and the backlog represents a very healthy 62% of TTM sales.

Speaker 3

Our consolidated gross profit was $10,600,000 down 7% from the 2023 period. As a percentage of total revenues, consolidated gross margin was 24.2%, a 140 basis point decline from the 25.6% reported for last year's fourth quarter. Gross profit for our Battery and Energy Products business was $9,300,000 compared to $9,000,000 last year, an increase of 3.8%. Gross margin was 23.4%, a 180 basis point decrease from the 25.2% reported for last year's quarter, primarily due to both lower medical battery sales and factory cost absorption, as well as purchase accounting adjustments. For our Communication Systems segment, gross profit was $1,300,000 compared to $2,400,000 for the year earlier period.

Speaker 3

Gross margin was 31.9% compared to 28.7% last year, primarily due to favorable product mix and price realization, partially offset by lower factory volume. Operating expenses were $9,100,000 an increase of $1,400,000 or 17.7% from the year earlier quarter. Included in the $9,100,000 is $1,800,000 related to the inclusion of Electrochem in one time acquisition costs. Our spending for the addition of experienced sales and marketing resources to drive future growth was offset by lower general administration expenses. As a percentage of revenues, operating expenses were 20.8% or 18.4% when excluding the one time acquisition costs compared to 17.4% for last year's fourth quarter.

Speaker 3

Operating income was $1,500,000 compared to $3,600,000 last year, primarily reflecting the 55.1% decline in communication system sales and the one time acquisition costs and related GAAP adjustments. Accordingly, operating margin decreased to 3.4% for the fourth quarter compared to 8.2% for the twenty twenty three fourth quarter. Other expense reported below operating income was $1,000,000 for the quarter compared to $36,000 for the year earlier period, primarily resulting from the increase in interest expense on the acquisition debt and the impact of foreign currency fluctuations. Our tax provision for the fourth quarter was $300,000 for both periods computed on a GAAP basis at statutory rates. Net income was 200,000 or $01 per share on a GAAP fully diluted basis.

Speaker 3

This compares to net income of $2,900,000 or $0.17 per share for the twenty twenty three quarter. Adjusted EBITDA, defined as EBITDA including non cash stock based compensation expense, and one time acquisition costs and non cash purchase accounting adjustments, was $3,900,000 or 8.9% of sales, compared to $4,800,000 or 10.7% for the prior year quarter. Adjusted EBITDA on a TTM basis is 16,500,000 or 10% of sales. Turning to our balance sheet, we ended 2024 with working capital of $67,900,000 and a current ratio of 3.3, compared to $66,500,000 and 3.8 for twenty twenty three year end. Our liquidity remains solid.

Speaker 3

Going forward, our backlog, diversified end markets, the sheer volume of our growth initiatives, ongoing actions to improve our gross margins and our new sales and marketing leadership position us well to realize the leverage of our business model. Before turning it back to Mike, I will update you on a few subsequent events. First, regarding our business interruption claim resulting from our 01/25/2023 cyber attack, we have taken legal action. After almost two years of discussions, forensic audits, submissions of supporting materials, and meetings with our insurance underwriter, and receiving only $235,000 of business interruption loss against our policy's aggregate liability limit of $3,000,000 On February 4, we filed a complaint against the underwriter in the Supreme Court of New York, Wayne County, to prompt a fair settlement consistent with our facts. Our main point of contention is that the underwriter has taken the position that our business was only impacted for a seven day period despite the fact that our comprehensive detailed records and those of the outside vendors who assisted us substantiate a significantly longer period.

Speaker 3

Having reached a stalemate, we deemed it necessary to pursue legal recourse in the county where our headquarters is located, seeking a fair settlement through a jury trial. Second, on March 27, the IRS informed us that our 1,500,000 employee retention credit under the Coronavirus Aid, Relief, and Economic Security Act filed on 06/22/2023, has now been approved and that we should expect a refund plus interest shortly. Upon receipt, these funds will be used to reduce our acquisition debt. Third, as provided for in the stock purchase agreement signed in connection with our acquisition of Electrochem, in early January, we informed the seller of a working capital adjustment and are proceeding with the agreed upon process in that agreement to determine the final resulting purchase price adjustment. If we are not able to mutually agree upon the adjustment, any disputed amounts will be submitted to an independent accountant for final resolution.

Speaker 3

And last, we have identified a material weakness in our internal control process, which is reflected in the opinion of our independent public accountant included in our Form 10 ks. With the acquisitions completed over the last few years, we have identified a need for additional qualified accounting personnel to fortify our execution and monitoring of internal controls. We have commenced our search for additional personnel, including certified public accountants, and have recently hired a VP of Financial Growth, Transition and Efficiency and a Controller for Electrochem as initial steps, with our intention to have the requisite accounting staff in place in 2025. I will now turn it back to Mike.

Speaker 2

Thank you, Phil, for the detailed review of the Q4 and full year 2024 results. As mentioned on previous calls, we had three major twenty twenty four priorities to accomplish. First, continued material cost deflation. We had several wins in this category in 2024, where we negotiated down pricing on our lithium foil, electrolytes, and some printed circuit boards, all key components to our battery business. In Q4, we signed a long term supply agreement with a major customer for both businesses, giving us enhanced coverage and visibility over a rolling three year time horizon, which enables us to increase supply chain efficiency and cost leverage through volume commitments.

Speaker 2

Secondly, lean productivity. We continue to work lean projects throughout the company to offset the rising cost of labor, overhead and materials, and have started to plan out projects at our new Electrochem acquisition. We completed six major lean projects in 2024, '4 in Newark, One in Houston, One in Virginia Beach, that allowed for a minimum of 30% greater throughput and efficiency through our lines, which in turn frees up labor and space for other uses. Lastly, sales funnel improvement. We modified the sales leadership in the battery products group and updated our sales funnel capture tools in Q4 to better drive growth and monitor progress.

Speaker 2

We have a new Chief Marketing Officer starting in the New Year, bringing over two decades of experience to further drive and coordinate our messaging, brand strategy, and customer capture activities for the entire business, accelerating future growth. Q4 saw a large effort of integration and transition begin with the Electrochem addition on October 31, where we successfully transitioned payrolls and benefits to Ultralife Systems, formed working groups for materials procurement and lean activities, and started working carve out of their ERP and quality systems from their previous parent. As we enter 2025, the operational priorities are to complete the transition of Electrochem acquisition fully into the Ultralife back office, which includes such item as cloud storage, email and office, with the main one being the ERP system, which is expected to complete by the end of Q2. We continue to leverage and grow vertical integration opportunities due to the newly acquired business, which allows electrochem cells to be used in some of our current pack assemblies and expands our addressable market for products like pipeline inspection, seismic telemetry and sonobuoys. Lastly, we need to grow our sales opportunity pipeline to support growth and improve and stabilize gross margin through pricing, material cost deflation and lean productivity projects in both the Battery and Energy and Communications businesses in 2025.

Speaker 2

Next, I will give updates on the organic growth projects and new product development underway for the businesses, which are key to future sales and market expansion. The communication systems business is expanding the ruggedized server case portfolio to service customers and expand market share. The earlier mentioned DC power supply to support vehicle and remote use of our EL8000 case has completed validation and is available to order now. We have a smaller, lighter, portable case in development, which is in prototype state currently, with expectations these will begin fielding late twenty twenty five. The recently launched new amplification product, targeted to be radio agnostic to support international customers, will be available for pre production sampling and testing in June.

Speaker 2

We internally developed this amplifier to further support the needs of the warfighter, with what we believe is the smallest, lightest, most power efficient 20 watt man portable amplifier in the marketplace. Meanwhile, we are advancing our next generation high performance amplifier, targeting all advanced radio platforms used by the US Armed Forces. This amplifier continues our heritage as small, high power, high efficiency man worn and vehicular amplification products, with the next variant available in late twenty twenty five. Lastly, the communications group has developed a handheld radio vehicle mount upgrade kit, which allows the installed base of single channel radio mounts to be enhanced for compatibility with all the newer two channel handheld radios. This kit will be available for sale in q two of twenty twenty five.

Speaker 2

On the battery and energy side of the business, we are excited about the opportunity funnel growth across a variety of new and exciting products, and are optimistic we'll see orders in 2025. As previously mentioned, we've set up initial production equipment for our thin cell to support customers in the medical wearable space and several applications and item tracking. The sales funnel continues to strengthen with multiple projects now in the qualification phase. I am pleased to report a key partner that we've been collaborating with for multiple years on a medical wearable product has successfully completed FDA and EU MDR certifications for their back office system in Q4. This now allows the system to be sold and installed in hospitals, which is a key milestone for the commercialization of their product.

Speaker 2

We expect to see production orders by mid year twenty twenty five, with some initial volume shipping late this year. The 123A product line, currently supporting IoT and illumination markets, has seen opportunity funnel growth in the medical battery pack assembly area, both domestic and international customers. We have recently increased the high temperature capability of this product with some targeted design improvements that will transition into production in mid-twenty twenty five. Our improved thionyl chloride product, targeting monitoring telemetry applications, continues application and field testing with several customers. Interest in our flagship 19 amp hour D cells continues to grow with multiple customers now testing the product, and we expect production orders in 2025.

Speaker 2

With the addition of the Electrochem business on October 31, I expect the collaboration and sales opportunities to continue to expand in the thionyl chloride space. The conformal wearable battery, initially developed as part of the IVAS system, has continued to advance as a commercial version as an internal development project. We have quoted multiple international production opportunities and expect small volumes to start shipping in Q1 twenty twenty five. We continue our key gross margin initiatives and expect to see steady improvement as CapEx investments, lean projects and material efforts continue to enter our production lines. Regarding the Electrochem acquisition, we expect its main integration activities, including the ERP carve out, to be completed in the first half of twenty twenty five.

Speaker 2

As stated in the opening, with the added key resources in critical areas to support future growth, a pipeline of new products primed for sale across a variety of valued markets for both businesses, the expanded aperture of our sales funnel, plus revenue and scale of the acquired electrochem business, I look forward to a strong 2025. Thanks, everyone. That concludes the prepared remarks for today. We'll go back to the operator for questions.

Operator

Thank you. Our first question comes from Josh Sullivan with The Benchmark Company. Your line is open.

Speaker 4

Hey, good morning.

Speaker 3

Good morning, Josh. Good morning.

Operator

So if

Speaker 4

we just look at electrochem, where are you guys ahead of schedule? And then where are the major hurdles at this point?

Speaker 2

I missed your first piece there, Josh, if you could just repeat that first.

Speaker 4

Yeah, sorry, it was just where are you maybe ahead of schedule with electrochem and some of the positive ads, and then on the other side of the ledger, where are the major hurdles and timelines?

Speaker 2

Right now, on the electrochem side of the business, the ahead piece I would say is we are already a customer of electrochem, we already utilize their cells in some of our packs with some customers on our oil and gas business. So it's really moving in those cells into some other sales opportunities and some already sell through business that will immediately impact the bottom line. You know, that's where I would say we're ahead. I would say we're you know, the biggest hurdles right now is really just getting, you know, total control over the business and getting it out of, you know, their previous parent. Even this call is weeks later than we expected it to be because they're working on closing their own books as well as trying to close the books for us.

Speaker 2

We may or may not be a priority, I'm not gonna go down that path. But they have things they need to do. So there's some delays there, we wanna be able to control our destiny, so to speak.

Speaker 4

Got it. And then, as far as the comments just on the industrial sales timing, what part of that is just a push out? And then, what part of that is more macro related or any industry market weakness that might be out there?

Speaker 3

Josh, it's all push out.

Speaker 4

Okay. Got

Speaker 3

it. Yeah, we don't see any economic trends. I mean, if you look at the markets we operate in, think we're in what I would call the right market.

Speaker 2

Yeah, mean, I think some of our customers overbought a little bit early in the year and they're trying to manage their year end inventories and spend and cash flow And they pushed into 2025 where they didn't necessarily need it.

Speaker 4

Okay. And then on the thin cell medical opportunity, as far as initial production, what do you kind of foretell as what that might look like this year, and then what might that ramp look like next year? Well,

Speaker 2

yeah, that's great question, Josh. I mean, this customer, we've been in this journey for multiple years. I won't even mention how many because it has been a long time. I think since the first time we talked, you know, it's still been a few years. So we're expecting, you know, we have about a million dollars in our plan for this customer and I think they'll hit that this year, maybe a little more.

Speaker 2

The follow on years, it's large growth trajectory, but it's really all about hospital adoption and capex spend as well. So we'll see how the overall macroeconomics work over the next twelve months, and how quickly the adoption happens.

Speaker 4

Got it. Okay, thank you for the time.

Speaker 2

Thank you.

Operator

Again, ladies and gentlemen, if you have a question or a comment at this time, please press 11 on your telephone. And I'm not showing any further questions at this time. I'd like to turn the call back over to Mike.

Speaker 2

Alright. Well, thanks everyone for listening to today's call. We look forward to talking to you next time during the q one twenty twenty five earnings call, and we will keep you posted on time and date for that. Thanks, everyone. Bye now.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

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Earnings Conference Call
Ultralife Q4 2024
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