Ultralife Corporation ($ULBI)

Good day, and thank you for standing by. Welcome to the Ultralife Corporation First Quarter 2026 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jody Burfening. Please go ahead.

Thank you, Marvin, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's Earnings Conference Call for the first quarter of fiscal 2026. With us on today's call are Mike Manna, 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, ultralifecorp.com, where you'll 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 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 our 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 cause or 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-K. 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 would now like to turn the call over to Mike. Good morning, Mike.

Good morning. Welcome to Ultralife's Q1 2026 Earnings Call. Earlier today, we announced Q1 revenue of $47.4 million with an operating profit loss of $0.2 million, which resulted in a loss of $0.03 per share. We had a challenging start to the year on both sides of the business due to several factors, including order shipment timing, shipment delays to our Middle East customers, plant shutdowns for reorganization and weather events and consultation fees. We have a growing backlog and product portfolio due to new product releases that we need to support this year. So we have added and trained direct labor resources in our Random and Newark facilities to staff lines for the increased demand expected in 2026. This expense comes free revenue is critical given the nature of our products to ensure product quality. We now have new experienced plant leadership in both of those locations to drive manufacturing efficiencies and gross margin initiatives. Our Communication Systems business, which I acknowledge had another underwhelming quarter, has multiple new products and projects underway to grow the baseline revenue and stabilize the business. We believe in the upside of this business and continue to invest in product development to capture large, sustained revenue opportunities. A large part of the communications business continues to be government-related with long development and procurement cycles for the products we sell. We exited the quarter with a record backlog of $115.1 million with over $12 million of backlog from products released within the last year. These new product launches are dependent on the launch schedules of our customers' product and often we incur training and ramp costs prior to revenue capture. We continue our brand realignment under the Ultralife brand, which will bring clear concise messaging to our customers that we design and deliver critical RF and portable power products. I will 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 31, 2026. We have also filed our Form 10-Q with the SEC. Consolidated revenues totaled $47.4 million compared to $50.7 million for the first quarter of 2025. Revenues from our Battery & Energy Products segment were $44.2 million compared to $46.3 million last year, a 4.7% decrease. The year-over-year decrease reflects a 5.5% decline in commercial sales attributable to oil and gas customers and a 2.7% decline in government defense sales relative to the shipment of a very large order for an allied country last year. Medical sales increased 5.9% for the 2026 quarter. The sales split between commercial and government defense for our battery business was 69-31 compared to 64-36 reported for the 2025 quarter, and the domestic to international split was 66-34 compared to 78-22 for the 2025 period, reflecting the global demand for our products. Revenues from our Communications Systems segment of $3.3 million declined 25.7% from the $4.4 million we reported last year, resulting from the timing of expected orders. On a consolidated basis, the commercial to government defense sales split was 64-36 compared to 58-42 for the 2026 and 2025 quarters, respectively. Our total backlog exiting the first quarter was $115.1 million, the highest level in the company's history and representing a $20.1 million or a 21.1% increase over the comparable 2025 period. The backlog remains diverse in nature across our commercial and government defense customer base and the replenishment rate remains high, representing 61% of trailing 12-month sales. Our consolidated gross profit was $10.1 million, down 20.7% from the 2025 period. As a percentage of total revenues, consolidated gross margin was 21.3%, a 380 basis point decline from the 25.1% reported for last year's first quarter. Gross profit for our Battery & Energy Products business was $9.4 million compared to $11.4 million last year, a decrease of 18.2%. Gross margin was 21.2% compared to 24.7% last year. The year-over-year reduction primarily resulted from nonrecurring events resulting in lost production days in the 2026 period, negatively impacting gross margin by approximately $0.8 million. This included 3-plus days due to the failure of the substation that provides power to our Newark facility and 16 days equivalent to over 25% of the total Q1 production days for our Ranum facility for multiple reasons. including the preparation, execution and reconciliation of our initial wall-to-wall physical inventory with full integration into the new ERP system, the disposal of fully reserved obsolete inventory and overall realignment to minimize our use of costly outside warehousing, all of which was further compounded by severe weather. In addition to the aforementioned, also impacting gross margin were higher energy costs experienced in our Northeast facility and our sales mix, which resulted in higher net tariff costs. For our Communications Systems segment, gross profit was $0.8 million compared to $1.3 million for the year earlier period. Gross margin was 21.2% compared to 29.5% last year, primarily due to lower factory volume and product mix. Operating expenses were $10.3 million, an increase of $1 million or 10.5% from the year earlier quarter. The majority of the year-over-year increase is comprised of onetime costs exceeding $0.8 million related to certain consulting fees to help expedite our gross margin improvement in our 2 largest manufacturing facilities, litigation expenses incurred for our cybersecurity claim and the final costs for our Random systems transition. In addition, new product development costs increased 23.3% related to the continued investment in our product offering and vertical integration opportunities within our portfolio. As a percentage of revenues, operating expenses were 21.8% compared to 18.4% for last year's first quarter. We incurred an operating loss of $0.2 million compared to income of $3.4 million last year, primarily reflecting the lost production days and onetime costs in our Battery & Energy Products segment and the 25.7% decline in Communication Systems sales. Other expense reported below operating income was $0.4 million for the quarter, primarily comprised of interest expense from the financing of our Electrochem acquisition, partially offset by the first quarter estimated portion of a refundable tax credit for certain qualifying battery cells and packs we manufacture under the 45x advanced manufacturing production tax credit. This tax credit was established by the Inflation Reduction Act and runs through 2032. This compares to expense of $1 million for the year earlier period, reflecting the acquisition financing. Our resulting tax benefit for the first quarter was $0.2 million compared to a provision of $0.6 million computed on a GAAP basis at statutory rates. Net loss was $0.5 million or $0.03 per share compared to income of $1.9 million or $0.11 per share on a GAAP basis. Adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense and onetime acquisition and other nonrecurring costs, not reflective of our ongoing operations was $3.2 million or 6.8% of sales compared to $5.4 million or 10.7% for the prior year quarter. Adjusted EBITDA on a TTM basis is $15 million or 8% of sales. Turning to our balance sheet. We ended the first quarter with working capital of $67.1 million and a current ratio of 2.6 compared to $68.5 million and 2.8 for 2025 year-end. Looking beyond our first quarter results, our backlog, the sheer number of our growth initiatives, including our conformal wearable battery order now in hand, upgraded leadership in our 2 largest manufacturing facilities focused on gross margin improvement, progress with our vertical integration opportunities and the transition of our various sub-brands to the Ultralife master brand keep us positioned 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 2026 results. For 2026, we have 4 distinct priorities underway. Our first priority is to improve the revenue capture of the Communication Systems business. We have several new products in the commercial capture phase with initial orders received and multiple new products slated for release this year. We're actively working with multiple partners on long-term programs of record and long-term projects that we believe will bring recurring baseline revenue back into the business over the next year. The second priority, which is in our Battery and Energy business is improved gross margin with the initial target being our Newark operation. We have identified a corrective action for the largest contributor of scrap, which has been implemented and will start eliminating the issue midyear as we work through existing parts supply with ongoing efforts to identify root cause and corrective actions and other major scrap contributors. We continue to work lean and process improvements at all facilities to existing lines and on new product lines is added in the facilities. We continue to add -- expand vertical integration opportunities enabled by the acquisition of Electrochem, allowing us to incorporate Electrochem cells into existing pack assemblies and broaden our addressable pack assembly market. We have combined the like entities into a single subdivision within the Battery & Energy Products business, now internally known as the Telemetry Power Systems business. We expect to more than double the use of our own cells internal packs this year as customer qualifications are completed. Lastly, we are focused on the company-wide branding alignment, which is well underway and will be completed this year, clarifying our customer messaging and market positioning. Switching to development projects. We continue to invest in products on both sides of the business to drive revenue and opportunities for organic growth. Our Communication Systems business continues to expand our global military vehicle business, highlighted by a recent $4 million multiyear award from an international partner for our universal vehicle adapter, a handheld radio charger supporting legacy and current radios. We're integrating multiple HPE server products and configurations to expand opportunity in the ruggedized computing market. We received several smaller orders and are pursuing additional program awards with expected Q2 deliveries while continuing customer engagements to capture voice of customer feedback and improve the performance and adaptation of these kits. We received funding from a special operations organization to develop and field initial prototypes of a vehicle-based tactical network hub, Strike Hub, integrating HPE servers, switches and power management. Strike Hub is a potential solution for the emerging next-gen command and control NGC2 tactical network requirements initiative. Our new 20-watt amplifier has received multiple orders with deliveries expected in Q2 and Q3 2026. We are engaging radio manufacturers to pair the amplifier with OEM radios to drive pull-through sales. Later this year, we plan to introduce an advanced variant, a 20-watt amplifier that supports the newest high-speed single-channel and frequency hoppening mini waveforms in a compact body warm form factor. We are developing new radio mounts that integrate our amplifiers with various handheld radios, providing a cost-effective adaptical vehicle mounting solution, which is planned for availability later in 2026. Our crushing small form factor wearable AI compute solution continues to advance. We have assembled a strong partner team supporting hardware development, integration and software tools to capture voice of customer requirements and accelerate the progress toward initial prototypes expected in 2026. On the Battery and Energy side of the business, we are focused on new business growth through our transformational projects and OEM partnerships. We have multiple OEM projects ongoing to bring new customer bespoke products to market over the coming years and with existing customers to revise existing products to increase performance and/or refresh designs. On the conformal wearable battery used to power dismounted soldier systems, I am pleased to say we shipped our first order in full and have current backlog in excess of $8 million. This backlog is expected to ship in 2026, and we have quoted multiple large volume opportunities mainly for international customers. This is the first larger transformational project revenue stream and shows the potential that all of our development projects have. Our 19 amp power, final cell has passed all performance validation testing requirements, and we're now waiting on our customers' device certification and initial production planning to complete. We've begun new product development activities with an OEM powering a remote surveillance system with a rechargeable power pack. This development is anticipated to complete in Q3 with anticipated production deliveries beginning late year. As mentioned in the last call, we received production orders for a battery pack to provide power backup for a new pump application for a major medical OEM. This project started with them over 7 years ago, and their product is now finally launching. These orders are scheduled to start shipping in mid-2026 concurrently as our customer ramps their device manufacturing. We have established initial production capabilities for our thin cell technology to support customers in the medical wearable sector in various item tracking applications. The sales pipeline continues to strengthen with several projects now in the qualification phase. These smaller thinner designs will enable a more discrete wearable sensor than typically available in today's marketplace, allowing better patient experience and longer device life. Investing in new product development is essential to continuing to diversify and strengthen our product portfolio, driving future growth and building on our legacy of delivering critical power products. Our priorities remain converting long-term development efforts into revenue, advancing vertical integration where possible and maintaining a strong focus on operational efficiency initiatives. With a hefty backlog, including over $12 million of new products as we exit Q1, I believe we are well positioned for future revenue growth. Our focus remains on increasing product offering and sales engagement for our Communication Systems business increased gross margin and revenue in our Battery Energy business, along with vertical integration opportunities in our Telemetry Power Systems business. I will now pass it back to the operator for questions.

[Operator Instructions] And I'm showing no questions at this time. I'll now turn it back to Mike Manna for closing remarks.

All right. Thanks for listening today's call, everyone. We look forward to talking to you next time during the Q2 2026 earnings call. Bye now.

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