ULBI

Ultralife Corporation (ULBI)

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Ultralife Corporation (ULBI)

Q3 2008 Earnings Call Transcript

October 30, 2008, 10:00 am ET

Executives

Jody Burfening – IR, Lippert/Heilshorn & Associates

John Kavazanjian – President and CEO

Bob Fishback – VP of Finance and CFO

Bill Schmitz – COO

Analysts

Ted Kundtz – Needham

Jim McIlree – Collins Stewart

Richard Baxter – Ardour Capital

Colin Rusch – Broadpoint AmTech

Jimmy Kim – RBC Capital Markets

Steve Sanders – Stephens Inc.

Presentation

Operator

Good day and welcome to this Ultralife Corporation third quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to Ms. Jody Burfening. Please go ahead.

Jody Burfening

Thank you, operator. Good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us for the Ultralife Corporation earnings conference call for the third quarter of fiscal 2008. The earnings press release was issued earlier this morning and if anyone has not yet received a copy, I invite you to visit the Ultralife website at www.ultralifebatteries.com, where you will find the release under Investor News in the Investor Relations section.

In a minute, I’ll turn the call over to John Kavazanjian, Ultralife's President and CEO, who along with Bob Fishback, Ultralife's Chief Financial Officer, will provide their formal remarks. Management will then take questions until 11 o’ clock Eastern Time.

Before turning the call over to John, 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 worsening global economic conditions, increased competitive environment and pricing pressures, and disruptions related to restructuring actions and 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. A more detailed description of the risks and uncertainties is contained in the company's filings with the Securities and Exchange Commission such as the company's Annual Report on Form 10-K for the period ended December 31, 2007.

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 John. Good morning, John.

John Kavazanjian

Thank you, Jody. Good morning and welcome to the Ultralife Corporation conference call for the third quarter of 2008. Joining me today are Bob Fishback, our Chief Financial Officer; Julius Cirin, our Vice President of Corporate Marketing and Technology; and Bill Schmitz, our Chief Operating Officer.

Today we reported revenue of $68 million for the third quarter of 2008. These results put us on track to achieve our guidance of $130 million in revenue for the second half of 2008. Operating profit was $5.3 million with an adjusted EBITDA of $7.1 million. Adjusted EBITDA is a non-GAAP financial measure, for which the reconciliation with GAAP financials is on our website and in our 10-K report.

The third quarter revenue includes $41 million in sales in our communication systems business. This represents the substantial completion of more than $120 million in orders that we received in the second half of 2007 for advanced communication systems, along with sales in other parts of the communications business. Gross margin in the segment was 28%, an increase over the second quarter margin of 27%. We expect similar margins in this segment for the remainder of the year and improvements next year as we enhance our sourcing agreements and start to reflect in our pricing the materials and logistics cost increases that have occurred since the beginning of the year.

Rechargeable product revenue was $8 million and gross margin grew slightly from the second quarter to 22%. The worldwide shortage in rechargeable cells has caused significant price increases from suppliers, an exerted pressure on margins before we were able to take pricing actions. We expect this segment to grow in revenue for the fourth quarter and next year and margins to grow toward a target range of 25% to 30% over that timeframe.

Non-rechargeable products revenue was down from the second quarter to $16 million and gross margin was down due to cost connected with the refocusing of activities in our UK operation and a product line transition in our China operation. In the UK, we are in the process of our changeover to an assembly distribution and service operation. Expect to see financial improvement from this in the first half of 2009.

In China, we’re enhancing our product line and our production operations. While we will incur additional cost for this in the fourth quarter, this is factored into our guidance for the year. We will be introducing new versions of our ABLE thionyl chloride products – lithium-thionyl chloride products in the first half of 2009 with improved performance. Capital improvements in key areas of our process will also result in products that will be more robust with higher performance. These changes will enable significant increases in volume and profit in 2009.

Design and installation services accounted for $3.6 million in revenue. Gross margins ran at 19% as we made further investments to grow this business. Our defense and government business remained strong both domestically and internationally. During the quarter, we sold over $3 million in chargers, solar panels, and rechargeable batteries to the government of Mexico and over $1 million in smart rechargeable batteries to the UK MoD. Both of these are for second half of 2008 delivery. We sold over $2 million in communications power accessories to a major US prime defense contractor for delivery next year. And with CERDEC, the R&D arm of the Army Communications Command, we entered a $2.1 million contract to further develop in conjunction with Mississippi State University, an advanced soldier hybrid portable power system.

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