Ultralife Corporation (ULBI) Q3 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Ultralife Corporation Third Quarter 2012 Earnings Conference Call. At this time, for opening remarks and introductions, it's my pleasure to turn the call over to Ms. Jody Burfening. Please go ahead ma’am.

Thank you, operator, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the third quarter of fiscal 2012. With us on today’s call are Mike Popielec Ultralife’s President and CEO; and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning, anyone who has not yet received a copy, I invite you to visit the company's website at www.ultralifecorp.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. These include uncertain global economic conditions, increased competitive environment, pricing pressures, disruptions related to restructuring actions and order delays. 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. Further information on these factors and other factors that could cause Ultralife's financial results, to differ materially is included in Ultralife's filings with the Securities and Exchange Commission, including our 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 metrics that differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that I would now like to turn the call over to Mike. Good morning Mike.

Thank you, Jody, and thank you, everyone, for joining the call this morning. Today, I will start by making some overall comments about our third quarter, 2012 operating performance. Then I will turn the call over to Phil who would take you through the detailed financial results for the quarter. After Phil has finished, I will provide a progress report on our top 2012 priorities, and gives some final thoughts on the full-year financial outlook for 2012, before opening up for questions. The third quarter 2012, was a fairly clean quarter for us and we were able to see the impact of our variable and base cost productivity initiatives, implemented throughout the first half of the year, starting to hit the ledger. Also, we were able to convert some Communication Systems orders into Q3 sales that were originally expected in Q2, as referred to in our last call. Our Communication Systems revenue was further boosted by the shipment of $3.4 million of SATCOM products, which provided additional operating P&L leverage, and contributed to a Q3 Communication Systems gross margin of 36.1%, versus the 22.1% reported in Q2. Revenues in Communication Systems were up 200% from the second quarter and 50% year-over-year. For the Battery & Energy products business, where revenue is still behind last year by 38% year-to-date by aggressively addressing our manufacturing overhead costs, and focusing on higher margin product lines, we achieved a Q3 gross margin of 28.7% which is 450 basis points improvement over Q2, and a 910 basis points improvement over Q1. We are pleased to see this favorable productivity trend continue in the face of lower revenue. As one would expect due to the continued market uncertainties in U.S. government budget constraints were pragmatically looking at present revenue levels containing costs while improving variable cost…

Thank you, Mike, and good morning, everyone. Earlier this morning we released our third quarter results for the period ended September 30, 2012. As noted in our recently filed Form 8-K, the Company completed the sale of RedBlack Communications on September 28. The purchase price was $2,533,000 plus a post closing working capital adjustment which we expect to be completed by year-end. The results of RedBlack, and the divestiture costs are reported in discontinued operations. Accordingly, I will provide you revenue, gross profit, operating expenses and operating results, from continuing operations for the 2012 third quarter, compared to the 2011 third quarter. Consolidated revenues for the third quarter totaled $26.2 million, a 26% decline from the $35.2 million we reported for the third quarter of 2011. Revenues from our Battery & Energy Products segment were $16.6 million, a decrease of $12.2 million, or 42% from last year. This decrease is primarily attributable to the continued slowdown in the U.S. government, and defense order rate for rechargeable and non-rechargeable batteries and charger systems. Partially offsetting this decline was an order for our M1 battery products to service an allied Country’s Department of Defense. Communication Systems sales of $9.6 million, increased by $3.2 million or 50% from the prior year. This increase was attributable partly to shipments of SATCOM units to a large prime, which services the U.S. Department of Defense, and partly to continued solid global demand for our 20-watt amplifier products. We also fulfilled several of the amplifier orders, which we told you last quarter had been delayed. Our consolidated gross profit was $8.2 million, compared to $9.4 million for the third quarter of 2011. As a percentage of total revenues, consolidated gross margin was 31.4% versus 26.6% for last year’s third quarter, an increase of 480 basis points. The…

Thanks, Phil. For 2012, our top 3 priorities have been number 1, optimizing the Company’s profitability; number 2, executing on our growth game plan; and number 3, leveraging our China operations for global growth and improved cost competitiveness. To improve our profitability, over the last 1.5 years, we have made several adjustments to our portfolio, our moving pieces not viewed to be compatible with our 30, 5, 5, 10, 10 business model. The model we are working towards shows that if we can achieve 30% gross margins while spending 5% of sales on R&D and new product development, 5% of sales on selling expense and cap G&A expense at 10%, we will deliver an operating margin of 10%, our interim goal. To-date, we have exited our Energy Services business, discontinued some legacy product lines and just recently completed the divestiture of the RedBlack business. Each of these actions when combined with our ongoing company-wide Lean implementation have led to the improvements we are seeing in both variable and base cost productivity. Looking specifically at the results reported today, you can see solid progress towards 30% gross margin metric and we are getting closer to our overall operating expense goal 20% whereas we did reduce our year-over-year operating expenses by 17% from the prior year third quarter. We are still deliberately spending more on selling expense and new product development, which will increase slightly in Q4 and an effort to drive our growth game plan, which I’ll comment on shortly. Getting into gross margins a little deeper, the return to the higher margin rates that we expect from our Communication Systems business helps swing our overall company margins over the 30% level. We will continue to seek incremental margin gains in our Communication Systems highly differentiated product line by improving our…

[Operating Instructions] And at this time, we have no questions. I’ll turn the conference back over to Mr. Popielec for any additional comments or closing remarks.

Great, well, thank you all for joining us for our third quarter conference earnings call. We know it’s a very busy week given recent events. Once again, we look forward to meeting up with several of you in personal over the next week or so, and to sharing with you our quarterly progress on each quarter’s conference call in the future. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect.