Ultralife Corporation

Good day, and thank you for standing by. Welcome to the Ultralife Corporation first quarter 2025 results. At this time, all participants are listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. You will then hear automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your first speaker today, Alex Vialta of Alliance Advisors IR. Please go ahead.

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 and 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. 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 US 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.

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 gap 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 am 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 tariff 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 to 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 defense and the oil and gas markets, and provide future opportunities for growth. We are committed to continue investment in NPD projects and increase 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.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31st, 2025. We have also updated our investor presentation in the investor relations section of our website, and we'll file our form 10-2 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 and energy product segment were $46.3 million compared to $35 million last year. Excluding third party sales for Electrochem, which we acquired on October 31st, 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 communication 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 and 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 non-recurring severance costs for the closure of one of our assembly plants in Canada. For our communication system 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 non-recurring 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 communication system sales and the one-time acquisition costs in related gap purchase accounting adjustments, totaling 0.4 million. Accordingly, operating margin decreased to 6.7% for the first quarter compared to 9.7% 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 11 cents per share on a GAAP fully diluted basis. This compares to net income of 2.9 million or 18 cents per share for the 2024 quarter. Excluding the provision for non-cash U.S. taxes expected to be fully offset by our net operating loss carry forwards and other tax credits adjusted fully diluted EPS was 13 cents per share for the first quarter of 2025 compared to 21 cents for the 2024 period. Adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense in one-time acquisition and other costs as well as non-cash 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 in a current ratio of 3.2 compared to $67.9 million in 3.3 for 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 1st, 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.

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 electrocam 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 used in some of our current pack assemblies and expands our addressable market for products like pipeline inspection, seismic telemetry, and sonobuies. 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 and energy and communications businesses. We made the decision in Q1 to close our smallest manufacturing location in Misagua and move that production into various other facilities. All production activity in the Misagua 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 and energy business and the communications business to offset known inflationary cost increases and regain gross margin parity on products. We continue to work 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 communication 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 pre-production 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 man 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 two 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 and energy side of the business, we're 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've established initial production capabilities for our thin cell 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 31st, we foresee expanded collaboration and new sales opportunity in the final 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 began initial low volume shipments in Q1. Our key gross margin improvement initiatives are making steady progress and we expect continued gains as capital investments and 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 electric M 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 electric M, 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 in oil and gas markets and will provide increased opportunities going forward. Now back to the operator for questions.

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Josh Sullivan of The Benchmark Company. Your line is now open.

Hey, good morning.

Good morning, Josh.

Good morning. 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 on those conversations.

Well, obviously no one's 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's going to bear at some level. We're trying our best to reduce tariff impacts where we can. But over all 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 are you going to spend your cash on? You need to keep your business flowing. You need your 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 went with me.

Josh, it's been circuitous, I think, between our supply chain and our customers. We're all asking ourselves the same questions. We're all asking each other the same questions. And the letters and the commentary, it's really, it's all the same. It's not, it's quote unquote, not a price increase. It's a variable surcharge that will absolutely, it could go up, it could go down, it could be eliminated. So we're all kind of holding our breath. But being in this situation where we're all facing the same hurdle brings some camaraderie and some understanding along the way.

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

Yeah, I can start off. Basically, we've been kind of knocking down things in their system side over the last, well, 13, 14 weeks to begin with. We have the networks up and running at all the facilities. We're rolling out new laptops. The mail and office and all the back stuff is actually set up. It's just a matter of transitioning all the people in over to it. And really the biggest transition piece is really finishing all the setup of the ultralight ERP with the electrochem items. We've got the data, all the data has been transitioned, but there's other things that need to be set up specifically for the ERP system we use, like work centers and certain things like that. We're working through that now, but right now it looks like we're on track. I don't see any big hurdles to that. There may be some smaller side system things that linger in the Q3, but they're not the priority to run the business and they're not the big cost items that we need to worry about right now. As far as the integration activities go, we buy a lot of cells in our oil and gas business. Electric Chem was a not a main supplier to us prior to the acquisition. Um, so there's obviously a, a, a world of opportunity there with what they weren't supplying to move, uh, their cells into some of those packs, you know, so we're working through that, but, you know, we do have supply agreements with, you know, the old, uh, partners and, you know, they're good partners as well that we don't necessarily want to just totally move away from. So, you know, it's a balancing act, but, you know, we'll start seeing some of those benefits as we go into Q3 and Q4.

And, Josh, I'll just add this from a financial standpoint. Electric Chem'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.

Got it. And then just on the commercial options for the IBAS battery, what markets would those be or products would those be?

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 and nature just offshore to begin with.

Got it. And then Mike, you noted in the press release, you know, increased confidence and profitable growth and, you know, just wanting to hear you expand on that, just, you know, given some of the macros and uncertainties out there.

Well, you know, we, we're, we're progressing, you know, it's, it's, you know, we talk a lot about a lot of our transformational projects and all these, these calls. And, you know, it seems like we're in a never ending state of, of, uh, qualification and validation and field testing and whatnot. But we are coming to the end of some of those. So we do see some light at the end of the tunnel there. Q1 actually was a better quarter than we anticipated. And it was stronger. Q2 right now seems good. So at least right now, I think our business is in a pretty good place. And our first quarter, you saw the medical sales were down year over year quite a bit. You know, we expect that to come full circle back in probably the back half of the year. That's a little bit of a cyclicality with battery replacement cycles and some of the production items going on there. So, you know, I think we're comfortable in 2025 here. You know, the biggest probably wild card is really our comm systems business, which has still got quite a bit of business involved with government contracts, which is you know, flow as they flow. You know, we don't have a lot of control over those orders and that timing.

Got it. All right. I'll leave it there. Makes good time.

Okay. Thank you. All right. Thank you.

Thank you. One moment for our next question. Again, as a reminder to ask a question, you'll need to press star one, one on your telephone. And our next question comes from a line of Justin Machete of Sedodium Company. Your line is now open.

Good morning. Thank you for taking questions.

Good morning, Justin. Sure.

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?

Yeah, I can give you some color from my seat. I mean, on the medical side, You know, a lot of the applications that we're in are what I would call necessary applications. And a lot of the products that we support have, you know, known replacement cycles as far as the battery life and how long it's allowed to be in field. So we're actually coming up on a period where some of the late fielded COVID devices will probably need battery or will need battery replacements. So the medical side, it's relatively steady at this point. It has some quarter-to-quarter variation, but I don't see it just going away at all. On the government defense side, we sell a lot to primes. We sell a little bit direct to the U.S. military. Again, a little bit of cyclicality, but Overall, it's still been pretty strong through the first quarter. We have a pretty good backlog in Q2. And right now, at least the customers that we're talking to don't seem to see really any fall off in 2025. And you look around the world right now, we're not in necessarily the safest environment. And it seems like conflicts are breaking out in a lot of different areas. So we don't expect our government defense business to really suffer much. If anything, we expect to possibly see some increases from the conflict areas and also some increased NATO spend, which we expect to happen over the next 18 to 24 months to catch up.

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

Yeah, 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 of your supplies to your production even through your sales Results in in in exactly what we're looking for more consistency in the cash flows And you know right now our positive cash gap receivables greater than payables is 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 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.

Very helpful. Thank you. I'll turn it back.

Okay. Thank you. I'm showing no further questions at this time. I'll now turn it back to Ultra Life Management for closing remarks.

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.

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