Ultralife Corporation (ULBI) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ultralife Fourth Quarter 2012 Earnings Release. For opening remarks and introductions, it is my pleasure to turn the call over to Jody Burfening. Please go ahead, ma’am.

Thank you, Lyon. Good morning everyone. This is Jody Burfening of LHA. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the fourth quarter 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 and if anyone 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 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. These include potential reductions in US military spending, uncertain global economic conditions and acceptance of the company’s new products on a global basis. 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 affect Ultralife’s financial results is included in Ultralife’s filings with the SEC 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 metrics that differs 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.

Good morning and thank you everyone for joining the call this morning. Today, I plan to start by making some high level observations about our fourth quarter and total year operating performance and then I will turn the call over to Phil who will take you through the detailed financial results for the quarter and year. After Phil has finished, I'll take the call back to provide a recap of the achievements towards the top 2012 priorities that we laid out at the beginning of last year and then talk about what expectations we have along those lines for 2013. Lastly, I'll share with you our thoughts on the full year financial outlook for 2013 before opening it up for questions. Regarding the fourth quarter 2012, we were pleased to deliver a profitable quarter for the second quarter in a row. Productivity initiatives and favorable mix drove gross margin at 32.3%, an increase of 230 basis points year-over-year and favorable year-end customer demand led to revenue levels enabling positive base comp leverage and an operating margin achievement of 8%, up 200 basis points. Overall, company revenue was essentially flat, with Communications Systems revenue up 85% while Battery & Energy Products revenues continued to be sluggish 21%. We said last quarter that we expected to return to profitability for the last half of the year 2012, but not at a magnitude required to offset the operating losses in the first two quarters of the year. We did just that. In the first half, the company posted an operating loss of $4.2 million on revenue of $46.2 million, get swung back $8.3 million in the second half to a positive operating profit of $4.1 million, where revenue also increased 20% from the first half and was $55.5 million. A strong fourth quarter…

Thank you, Mike and good morning everyone. Earlier this morning, we released our fourth quarter and full year results for our year ended December 31, 2012. For purposes of reviewing our fourth quarter financial results, I will discuss operating results from continuing operations for 2012 compared to 2011. As noted in our earnings release, we recorded some exit costs in both continuing and discontinued operations related to our decision not renew the lease for our UK manufacturing facility which expires on March 24th. I will provide you with the background of these costs in a moment. Consolidated revenues for the fourth quarter totaled $29.3 million, essentially flat with the $29.5 million we reported for the fourth quarter of 2011, with declines in the Battery & Energy Products business equally in strong gains in Communications Systems. Revenues from our Battery & Energy Products segment were $18.8 million, a decline of $5 or 21% 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 as well as the completion of some large orders in 2011. Partially offsetting this decline was another order for our M1 battery products to service in allied countries’ Department of Defense. Communication Systems sales of $10.4 million increased by $4.8 million or 85% from the prior year. This increase was attributable to shipments of 20 watt amplifiers and accessories for solider modernization programs undertaken by two allied countries and continued strong demand for these products by U.S. Special Forces. Our consolidated gross profit was $9.5 million compared to $8.9 million for the fourth quarter of 2011. As a percentage of total revenues, consolidated gross margin was 32.3% versus 30.0% for last year’s fourth quarter, an increase of 230 basis points.…

Thank you, Phil. At the start of my tenure in early 2011, we established specific priority to drive efficient operational execution and to reposition the company for growth. These priorities which included one, improving profitability; two, implementing a growth game plan and three, leveraging our China operations for growth in cost competitiveness were further focused in 2012. At this time, I would like to update you on the progress that has been made against each item and provide some commentary on our 2013 plans. The cornerstone of our first priority of improving profitability with the adoption two years ago of our 30, 5, 10 equals 10 business model, simply, if we can achieve 30% gross margins allocate 5% to sales spending for each of new product development and selling expenses, and keep G&A costs at 10% to sales, we can achieve our interim goal of a 10% operating margin. This brainwork has guided both the company portfolio and day-to-day business decisions that enabled us to achieve the 8% operating margin in the fourth quarter on flat volume. Equally important is that allowed for us to achieve this profitability without sacrificing our future organic growth opportunities by keeping us focused on ample yet efficient spending on our new product development and sales force productivity efforts. With the exist of the energy services business, the divesture of RedBlack, the elimination of unprofitable product lines in customers and the elimination of redundant facilities like the one in UK announced today. We have good visibility to what the remaining components of the company are capable of achieving. In 2013, we will increase our focus on the overall sales and operations planning process to gain better inventory efficiency, cycle time reduction and continued variable cost productivity. Regarding our second priority, with company profitability and product…

Thank you. (Operator Instructions) And it looks our first question today comes form Walter Nasdeo with Ardour Capital. Please go ahead.

I wanted to just go several back to the defense spending, I know its pulling back and it has been a challenging area for you over the last number of quarters. Are you seeing and maybe its both, but are you seeing the order size getting smaller or the order volume getting smaller or both?

It maybe different than that, I mean, right now in our operating plan, we have funded, approved and award the winner of projects that are just being held, given some of the overall certainty of the budgeting cycle. So that is certainly influencing and maybe it may gets little timid about our revenue projections in the case, and as it relates to communication systems primarily. In the case of B&E products, there were really no orders last year from DLA as the troop withdrawals occurred and with some of our new products, we are very optimistic about the opportunity continuing to provide battery packs in the future but there's open (inaudible) that there aren't orders being placed against the overall orders activity is just a lot slower and so I don't look at it as being a bunch of small orders versus a bunch of large orders that's just an overall sluggishness of demand.

Are you seeing that in some of the European defense part that you were working with also?

Somewhat but in most international activities rather than just try to be everything to everyone, I think the teams have done a really good job on focusing on projects where we had some type of competitive advantage and that the project is actually funded. So there may not be as many different opportunities we are looking at but the ones we are looking at have a higher probability of actually going through.

(Operator Instructions) We will take our next question from Jim McIlree with Dominick & Dominick. Please go ahead. Jim McIlree - Dominick & Dominick: Can you help me understand why the operating margin in 2013 is expected to go down versus the second half operating margin, it looks like volumes are up modestly, so why would margins contract?

We still see a pretty reasonable front half to back half revenue trends and even though our spending for selling expense and most notably now in the first half of 2013 for new product development and completing some of our projects that we are trying to get completed into production are head of sort of the revenues that we would expect to achieve in those projects. So when you look at the overall 2012, it was actually a loss in the first and second quarter, improvement on higher volumes in the third and fourth quarter. As I indicated in my comments, we are expecting a little bit softer in the first half of next year but we'd still be at the spending rates associated with new product developments. And overall, when you look at the total year and you look at the operating margin impact that would suggest that the fourth quarter 8% operating margin target isn't something that’s sustainable for every quarter through next year. Jim McIlree - Dominick & Dominick: And are you willing to put a split on the first half versus second half revenues in terms of what percent?

I think it’s been more like 45-55. Jim McIlree - Dominick & Dominick: And you think that will be round about the same area in 2013?

Yeah, that would be round about. So we are anticipating a little bit better revenues in the back half and a little bit less rich spending than we are in the first half. Jim McIlree - Dominick & Dominick: And can you provide depreciation and amortization as well as CapEx for the quarter?

Sure, we will be happy to Jim. We've been running historically around $900,000 to $1 million in depreciation, that's been pretty consistent and that's what we see in the fourth quarter. CapEx is approximately the same in the fourth quarter. CapEx for the total year will be slightly less than $3 million. Jim McIlree - Dominick & Dominick: And are there any cash closing costs for the UK facility?

Outside of what we discussed with the remediation project that would be a cash outflow. Jim McIlree - Dominick & Dominick: Okay.

$950,000.

(Operator Instructions) We will take our next question from Gary Siperstein with Eliot-Rose Asset Management.

Mike, can you give us some color on, you mentioned, starting to look for M&A activities. With cash at 10 million now and a debt free balance sheet, what's your thinking on that for the first potential acquisition? Are you going to start small and see if you can do them successfully and then go from there? And what size would be the first potential deal?

I don’t know if I can [burn] it specifically, but in the 13 or so successful integration acquisitions that I’ve done, I've learned that small ones are as much work as big ones, and so we’d want to make sure that even though the first one we don’t want to bit up more than we can chew that it would still have a meaningful impact in our overall revenue increase. So does that mean there is a minimum of $10 million of revenue? Perhaps. If there was unique technology that there was fantastic opportunity for long-term revenue growth, we would maybe use something smaller than that, but for an existing ongoing operation, I sort of like to make sure we're at least of $10 million and when I look at that relative to our overall revenue base, at least we get some meaningful top line growth associated with it. And what I’ve done in the past is done a reasonably smaller strategic acquisition, make sure that we learn and can do a good job integrating it and build some confidence there and then easily take a second bit at it and go much bigger.

Phil great job on the inventory reduction in the quarter and the corresponding increase in cash. With the ability to move revenues forward as you forecast this year, is that about it on inventory in terms of reduction or do you feel there is more some more room there.

Gary my answer to your question is adamant no, there is more room there and that is our best opportunity for further financing.

Could you not to pin you down, but could you get another 5 million out of inventory over the next 12 months?

Yes.

Mike in your formal remarks you mentioned a lot of new product activity. You mentioned penetration into the medical space, actually coming to fruition. I know you have been working on it for a long time. That was a very long list and very exciting with the potential. Is that finally the fruits of the sales force. You know it’s been tweaked each year for the past few years, do you feel you got the right people now and starting to bear fruit?

Yeah look at it holistically, Gary. When I look at organic revenue growth [dials], I feel that people and products we have spent a lot of time in making sure we are the right people in place and we can leverage that. We spent time developing the right tools and we talked a little bit last call about the targeting. I think we are missing some go-to-market especially for new product leadership. Now we feel bad, so with the people, the products, the tools, targets and the leadership, I feel pretty good about our ability to maximize the opportunities that are out there, and by adding some layer of acquisition activity on top of that, I feel good about our growth prospects.

During this transition and restructuring and government freeze on the military side certainly for the last, maybe two or three years, you guys are going dark in terms of IR. With the last two profitable quarters and your forecast for this year, with cash doubling book around 420 selling at half revenue, you guys getting ready now to go out and tell the story to the street?

It’s always a balance, and Garry, we try to make ourselves available if not in large audiences and small audiences as you are well aware, especially after the earnings call. In most of our investors it’s interesting, they like first to be out there selling the story and we see the benefits of that. But we get an equal amount of push back from some of the same investors like, don't waste your time with me and go and fix the business and give to grow and good things will come. So we are always trying to balance that. At this point we are probably hearing in the side of trying to get the business fixed and given revenue growth, probably a little bit underwhelming some of the IRPR activities.

(Operator Instructions) There are no additional questions in the queue. I would like to turn the call back over for any additional remarks.

Thank you once again everybody for joining us for our fourth quarter 2012 earnings call. Once again I look forward to meeting up with several of you over the next couple of weeks or so and to sharing with you our quarterly progress on each quarter’s conference call in the future. Thanks again for participating and Happy Valentine’s Day.

Thank you ladies and gentlemen. That will conclude today's presentation.