Earnings Call Transcript - ULBI Q1 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Ultralife Corporation First Quarter 2025 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 that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Alex Villalta of Alliance Advisors IR. Please go ahead.

Alex Villalta, IR Representative

Thank you, operator, and good morning everyone. Thank you for joining us for Ultralife Corporation's earnings conference call for the first quarter of fiscal 2025. With us on today's call are Mr. Mike Manna, Ultralife's President and CEO; and Mr. 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 ultralife.com, where you'll find the release under the 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 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 uncertain global economic conditions, reductions in revenues from key customers, delays or reductions in U.S. and foreign military spending, acceptance of our new products on a global basis and disruptions or delays in the supply of raw materials and components due to business conditions, global conflicts, weather or other 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. Further information on these factors and other factors that could affect Ultralife's financial results is included in the company's filings with the SEC included in the latest quarterly report on Form 10-Q. 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 could be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike Manna. Good morning, Mike, please go ahead.

Mike Manna, CEO

Good morning. Welcome to our call on Ultralife's Q1 operating results. Earlier this morning, we reported Q1 sales of $50.7 million with an operating income of $3.4 million which resulted in $0.11 EPS on a GAAP basis and $0.13 on an adjusted basis. Q1 was the first full reporting quarter in which our latest acquisition, Electrochem, was fully included in our results. I'm pleased to say they were a positive addition in Q1, even with some remaining one-time costs as we work through the transition of their systems from their previous parent, which is on track to complete in Q2 of this year. I want to briefly cover the major subject of tariffs and the expected impact. We have a diverse business with multiple supply chain flows, each with multiple levels of tariffs and duties depending on which product it is. So we do expect some impact due to the tariff situation. We have a detailed evolving analysis of the major suspected impacts and are passing along the known full tariff cost as a surcharge. Specifically reviewing our China location produced end products, typically 10% to 15% ships directly to the United States with most other sales being the other international locations. We are executing our mitigation plan which includes reviewing sources of supply, managing inventory flow to reduce upfront expenses at the border and examining our manufacturing locations. Being heavily involved in medical and government markets, it is often not quickly possible to change supply source without requalification and customer involvement, which also creates competitive barriers to entry. We believe our North American-based manufacturing locations will give us long-term strategic advantages, especially in the government and defense and the oil and gas markets and provide future opportunities for growth. We are committed to continued investment in NPD projects and increasing marketing efforts, both of which are required to continue our targeted growth goals. I will now turn it over to Phil to talk through the detailed numbers.

Phil Fain, CFO

Thank you, Mike, and good morning everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31, 2025. We have also updated our investor presentation in the Investor Relations section of our website and will file our Form 10-Q with the SEC on Monday. Consolidated revenues totaled $50.7 million compared to $41.9 million for the first quarter of 2024. Revenues from our Battery & Energy Products segment were $46.3 million compared to $35 million last year. Excluding third-party sales for Electrochem, which we acquired on October 31, 2024, sales for the segment increased 10.6% year-over-year. This organic growth was driven by very strong performance in our government-defense sales which increased 53.6%, partially offset by a 12.3% decrease in medical battery sales. The sales split between commercial and government defense for our battery business was 64-36 compared to 69-31 reported for the 2024 quarter and the domestic to international split was 78-22 compared to 58-42 for the 2024 period representing the inclusion of Electrochem in the heightened demand for our government defense products by U.S. primes. Revenues from our Communications Systems segment of $4.4 million declined 36.2% from the $6.9 million we reported last year, primarily attributable to large shipments in the prior year of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor. The year-over-year comparison was compounded by a follow-on Leader Radio order received in October 2024 which we pushed out beyond the first quarter due to material lead times. On a consolidated basis, the commercial-to-government defense sales split was 58-42 for both the 2025 and 2024 first quarters. Our total backlog with high-confidence orders exiting the first quarter was $95 million and remains diverse in nature across our commercial and government-defense customer base. The replenishment rate remains high, especially after a $50 million-plus sales quarter and the backlog represents a healthy 55% of trailing 12-month sales. Our consolidated gross profit was $12.7 million, up 11.1% from the 2024 period. As a percentage of total revenues, consolidated gross margin was 25.1%, a 230-basis point decline from the 27.4% reported for last year's first quarter, primarily reflecting product mix. Gross profit for our Battery & Energy Products business was $11.4 million compared to $9 million last year, an increase of 27.3%. Gross margin was 24.7% compared to 25.7% last year and represents a 130-basis point sequential improvement over the fourth quarter. The year-over-year reduction resulted from product mix and nonrecurring severance costs for the closure of one of our assembly plants in Canada. For our Communications Systems segment, gross profit was $1.3 million compared to $2.5 million for the year-earlier period. Gross margin was 29.5% compared to 35.8% last year, primarily due to product mix and lower factory volume. Operating expenses were $9.3 million, an increase of $1.9 million or 26.2% from the year-earlier quarter. The year-over-year increase is comprised of $1.1 million related to the inclusion of Electrochem, a 24% increase in new product development costs related to continued investments in our product offering, the strengthening of our sales and marketing leadership to expedite organic growth and certain one-time nonrecurring expenses which include costs related to our acquisition of Electrochem. As a percentage of revenues, operating expenses were 18.4% compared to 17.7% for last year's first quarter. Operating income was $3.4 million compared to $4.1 million last year, reflecting the 36.2% decline in Communications Systems sales and the one-time acquisition costs and related GAAP purchase accounting adjustments totaling $0.4 million. Accordingly, operating margin decreased to 6.7% for the first quarter compared to 9.7% in for the 2024 first quarter. Other expense reported below operating income was $0.9 million for the quarter compared to $0.5 million 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 first quarter was $0.6 million compared to $0.7 million for the 2024 quarter, computed on a GAAP basis at statutory rates. Net income was $1.9 million or $0.11 per share on a GAAP fully diluted basis. This compares to net income of $2.9 million or $0.18 per share for the 2024 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 fully diluted EPS was $0.13 per share for the first quarter of 2025 compared to $0.21 for the 2024 period. Adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense and one-time acquisition and other costs as well as noncash purchase accounting adjustments not reflective of our ongoing operations, was $5.4 million or 10.7% of sales compared to $5.2 million or 12.5% for the prior-year quarter. Adjusted EBITDA on a TTM basis is $16.7 million or 9.6% of sales. Turning to our balance sheet. We ended the first quarter with working capital of $70 million and a current ratio of 3.2 compared to $67.9 million and 3.3 for the 2024 year-end. Our liquidity remains solid and we are positioned to pay down the principal on our acquisition debt quicker than the bank's amortization schedule. I'm happy to report that on April 1, we received $1.5 million of our Employee Retention Credit, including interest under the Coronavirus Aid, Relief and Economic Security Act filed with the IRS in June 2023. These funds, in their entirety, were used to reduce our acquisition debt just subsequent to the conclusion of Q1. And we just received the remaining ERC of $344,000 which will also be applied to our debt as an advance payment. Going forward, our backlog, diversified government-defense, medical and oil and gas end markets, the sheer volume of our growth initiatives, the further actions now underway to improve our gross margins, the vertical integration opportunities associated with our acquisition of Electrochem and our new sales, marketing and product innovation leadership position us well to realize the leverage of our business model. I will now turn it back to Mike.

Mike Manna, CEO

Thank you, Phil, for the detailed review of the Q1 2025 results. As mentioned in the last call, we have some new priorities to accomplish in 2025. First, complete the transition of the Electrochem acquisition into the Ultralife back office which includes such items as cloud storage, email, and the main one being the ERP system. These are 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 using some of our current pack assemblies and expands our addressable market for products like pipeline inspection, seismic telemetry, and sonobuoys. Secondly, we need to improve our sales opportunity pipeline to support growth throughout 2025; we have made a concerted effort to improve our marketing through search engine optimization, targeted ads, and contact engagements at specific customers initially focused on our transformational projects. Third, we need to improve and stabilize gross margin through pricing, material cost deflation, and lean productivity projects in both the Battery & Energy and Communications businesses. We made the decision in Q1 to close our smallest manufacturing location in Mississauga and move that production into various other facilities. All production activity in Mississauga was completed by the end of April. This move will eliminate some fixed costs and redundant operations as well as improve the engineering support for the products going forward. Pricing was adjusted as we moved into Q1 for both the Battery & Energy business and the Communications business to offset known inflationary cost increases and regain gross margin parity on products. We continue to work on various lean projects in the facilities with one major lean initiative completed in Q1 in Newark and several new projects identified for Q2 at the Electrochem facility. The evolving tariff situation in Q1 was a distraction that delayed projects that were planned for operational efficiency gains in our supply chain group as we diverted resources to understand tariff impact and work mitigation plans. 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 Communications Systems business is expanding the ruggedized server case portfolio to service new programs and server variants which will provide greater opportunity to expand our market share. Our newest 3U portable server case is complete and finalizing verification with an initial low volume order expected to be delivered in Q2. Our recently launched DC power supply supporting various server platforms where no AC power is available, most notably tactical vehicles, is now undergoing final customer testing prior to expected contract awards. The newly developed 21 amplifier which provides radio agnostic functionality to support international markets remains on track for preproduction sampling in June. We developed this amplifier to further support the needs of the warfighter with what we believe is the smallest, lightest and most power-efficient 20-watt manned portable amplifier in the marketplace. Meanwhile, we are advancing the design of our next high-performance amplifier, targeting advanced radio platforms with the latest advanced high-speed waveforms. This advanced amplifier continues our heritage of small, high-power, high-efficiency, man-worn and vehicular amplification products with the next variant expected to be available in late 2025. Lastly, the Comms group has developed a handheld radio mount upgrade kit which allows the installed base of single-channel radio mounts to be enhanced for compatibility with the newer 2-channel handheld radios. An initial low volume order was received for the development and launch of this kit which is available for general sale in Q2 of 2025. On the Battery & Energy side of the business, we are excited about the opportunity funnel growth across a variety of new and existing products and are optimistic we'll see incremental orders in 2025. As mentioned earlier, we have established initial production capabilities for our ThinCell technology to support customers in the medical wearable sector and various item tracking applications. The sales pipeline continues to strengthen with several projects now in the qualification phase. I'm pleased to report that a key partner, whom we worked with for several years on a medical wearable product, successfully received both FDA and EU MDR certifications for their back office system in Q4. This milestone enables hospital deployment and marks a significant step towards full product commercialization. We anticipate receiving production orders by mid-2025, with limited volumes of shipments beginning later this year. Our 123A product line which currently serves the IoT and illumination markets is seeing growing interest in medical battery pack assemblies for both domestic and international customers. We've recently enhanced the product's high-temperature performance through targeted design improvements which will be implemented in production by mid-2025. Meanwhile, our advanced thionyl chloride technology aimed at monitoring and telemetry applications is progressing through customer qualification and field testing. Demand for our flagship 19-amp hour D cell continues to grow with several customers currently evaluating the product and production orders expected in 2025. Following the acquisition of Electrochem on October 31, we foresee expanded collaboration and new sales opportunities in the thionyl chloride segment. The conformal wearable battery originally developed for the Integrated Visual Augmentation System, or IVAS, continues to evolve as a commercial product to our internal development efforts. We have quoted several international production opportunities and begun initial low volume shipments in Q1. Our key gross margin improvement initiatives are making steady progress and we expect continued gains as capital investments in lead projects are rolled out across our production lines. To accelerate results and identify additional opportunities for sustainable gross margin gains, we have engaged an external firm for a series of assessments and support activities in Q2, starting in our Newark location. In parallel, we are executing targeted supply chain strategies to reduce material costs and actively manage tariff developments to mitigate impacts. Regarding the Electrochem acquisition, we expect the main integration activities, including the ERP carve-out to be completed in the first half of 2025. Exiting Q1 with a strong increase in revenue of 21% year-over-year and a healthy 11% increase in our Battery Products business, excluding our acquisition of Electrochem, a 7% inventory reduction from the end of year and a healthy backlog entering Q2, we have a strong foundation to build upon through the rest of the year. I believe our North American-based manufacturing locations coupled with our strong pipeline of new products will give a strategic advantage in the government and defense and oil and gas markets and will provide increased opportunities going forward. Now, back to the operator for questions.

Operator, Operator

And our first question comes from Josh Sullivan of the Benchmark Company.

Josh Sullivan, Analyst

Just given the qualification realities and the barriers of your products, how have the conversations with customers on tariff pass-throughs evolved? I imagine they're thinking of their own pass-throughs at this point as well. But curious on where you are in those conversations.

Mike Manna, CEO

Well, obviously, no one is excited about the fact that these tariff situations are in play right now. Overall, I think everyone understands that it's a cost that everyone is going to bear at some level. We're trying our best to reduce tariff impacts where we can. But overall, the customers, from the conversations I've had, they're really more worried about the cash flow and the amount of cash being consumed at the border bringing product in. I mean, whether it's us or them with some of their suppliers, it's a definite impact on the upfront cash and that could have impacts later on what you are going to spend your cash on. You need to keep your business flowing, you need production to keep flowing. But if you're spending it on tariffs at the border, it becomes harder to spend it on some of your product development and other things you need to invest in. That's kind of how some of the conversations have gone with me.

Phil Fain, CFO

And Josh, it's been a complex situation. I think between our supply chain and our customers, we are all questioning the same things. We're all discussing the same topics. The letters and the commentary reflect similar sentiments. It's not a price increase; it's a variable surcharge that could increase, decrease, or potentially be removed. So we're all somewhat apprehensive, but being in this position where we face the same challenges fosters a sense of camaraderie and understanding as we navigate through it.

Josh Sullivan, Analyst

Got it. Got it. And then just on Electrochem, you mentioned some of the ERP carve-out and some of the milestones. What are the major milestones left here? Are you confident in that 2Q close and ending of it? And then you mentioned some of the vertical integration advantages in the prepared remarks there. Can you just expand on those and highlight those?

Mike Manna, CEO

Yes. I can start. We have been making progress with the systems over the last 13 to 14 weeks. The networks are operational at all facilities, and we are deploying new laptops along with the necessary administrative support. The key challenge right now is completing the setup of the Ultralife ERP with Electrochem's products. All the necessary data has been transferred, but we need to finalize additional setups for our ERP system, such as work centers. We are currently addressing that. As of now, everything is on track, and I do not foresee any major obstacles. There may be minor system issues that extend into the third quarter, but they are not critical for business operations and are not significant cost concerns at this moment. Regarding integration activities, we purchase a large number of cells for our oil and gas sector, and Electrochem was not a primary supplier for us before the acquisition. There is considerable potential to incorporate their cells into our products. We still have supply agreements with our previous partners, who are reliable as well, so we need to find a balance. However, we expect to start realizing some benefits as we move into the third and fourth quarters.

Phil Fain, CFO

And Josh, I'll just add this from a financial standpoint; Electrochem's contribution margin is very, very favorable. And what I'm most excited about is recognizing that contribution margin through the internal use through pure vertical integration, recognizing that into our P&L. It's very accretive.

Josh Sullivan, Analyst

Got it. And then regarding the commercial options for the IVAS battery, which markets or products would those include?

Mike Manna, CEO

Well, I wouldn't necessarily say they're commercial, Josh. I would say they're foreign military, more than U.S. military at this point. There are some commercial engagements going on but we really believe the main sales focus is still going to be military in nature, just offshore to begin with.

Josh Sullivan, Analyst

Got it. Mike, you mentioned in the press release an increased confidence in profitable growth. Could you elaborate on that, especially in light of the current macroeconomic conditions and uncertainties?

Mike Manna, CEO

We are making progress with our transformational projects, and although it feels like we're continuously qualifying, validating, and field testing, we are approaching the conclusion of some of these processes. We do see some positive developments ahead. The first quarter turned out to be better than expected and stronger than anticipated. Currently, the outlook for the second quarter is also positive, suggesting that our business is in a solid position. In the first quarter, we noticed a significant drop in medical sales compared to last year, but we expect that trend to reverse in the latter half of the year due to the cyclical nature of battery replacements and other production factors. We feel optimistic about 2025. The most uncertain aspect remains our Comms Systems business, which relies heavily on government contracts that we cannot predict in terms of order flow and timing.

Operator, Operator

Our next question comes from Justin Mechetti of Sidoti & Company.

Justin Mechetti, Analyst

Can you provide detail on the current trends you're seeing across key end markets, particularly in government, defense and medical and how those dynamics are shaping your expectations for backlog and overall demand visibility?

Mike Manna, CEO

I can provide some insights from my perspective. On the medical side, many of the applications we are involved in are essential, and numerous products we support have established replacement cycles regarding battery life and their field duration. We are approaching a time when some of the recently deployed COVID devices will likely require battery replacements. Overall, the medical segment is steady at this moment, with some quarter-to-quarter fluctuations, but I don't anticipate it diminishing significantly. In the government and defense sector, we sell extensively to primes and occasionally directly to the U.S. military. While there is some cyclicality, the business has remained robust through the first quarter. We have a strong backlog in Q2, and the customers we are currently engaging with do not foresee a decline in 2025. Observing the global landscape, we are not in the safest of environments, with conflicts emerging in various regions. Therefore, we do not expect our government and defense business to be adversely affected; in fact, we anticipate potential increases from conflict zones and a rise in NATO spending over the next 18 to 24 months to make up for delays.

Justin Mechetti, Analyst

Great. And then on free cash flow, can you discuss how you expect free cash flow to trend over the remainder of 2025?

Phil Fain, CFO

Yes. Free cash flow, we expect that to be very consistent also. We look at last year, Justin and the first half of last year was absolutely fantastic. In the first half of last year, we paid down $20 million of debt and things got a little bit softer in the latter half of the year. And then you learn from your past. So the lessons learned are very clear. It's level loading, level loading across the board from purchase of your supplies to your production, even through your sales results in exactly what we're looking for, more consistency in the cash flows. And right now, our positive cash GAAP receivables greater than payables is in very, very good shape. That's why I made the comment that we're looking at being in a position, continuing to pay down our debt in advance of the bank's amortization schedules. And I expect, based on what I'm seeing right now with the backlog and certain other things that Mike and I are privy to, we expect cash flow to be even throughout the year based on what we're seeing right now.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn it back to Ultralife management for closing remarks.

Mike Manna, CEO

All right. Thanks for listening to today's call. We look forward to talking to you next time during the Q2 2025's earnings call. Bye everyone.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.