Ultralife Corporation 2026 Q2 Earnings Call

Good morning, everyone. Thank you for joining us for Ultralife Corporation's earnings conference call for the second 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. If anyone has not yet received a copy, I invite you to visit the company's website, www.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 new products on a global basis, and disruptions or delays in supply of raw materials and components due to business conditions, global conflicts, weather, or other factors not under the company's 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 Securities and Exchange Commission, including 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 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 Q2 2026 earnings call. Earlier today, we announced Q2 revenue of $47.9 million with operating profit of $3.4 million, which resulted in an EPS of $0.15 per share. We made positive progress on several fronts during the second quarter. We continue to build a strong and growing backlog, supported by an expanding product portfolio as recent product developments transition from development into commercialization. In addition, our new plant leaders in Newark and Raynham are continuing to gain experience and drive operational improvements. Their teams are executing key gross margin initiatives, which have begun to deliver measurable benefits and are expected to contribute further improvements as these efforts gain traction. Our Communications Systems business is gaining momentum, supported by multiple new product releases, a growing opportunity funnel, and active development programs focused on expanding revenue and improving business stability.

We remain confident in the long-term upside of this business and are continuing to invest in product development, customer engagement, and project that position us to pursue large, sustained revenue opportunities. With defense spending continue to emphasize force modernization and advanced network capabilities, our product portfolio remains closely aligned with emerging program requirements. We believe this favorable spending environment will support incremental program awards and long-term growth opportunities. We exited the quarter with a record backlog of $117.5 million, with over $14 million of the backlog from products released within the last year, including the conformal wearable battery and updated manpack radio battery for a NATO partner, new amplifiers, new speakers, and new battery packs for medical and safety customers.

We expect our brand realignment to complete over the back half of the year, consolidating under the Ultralife master brand, which will bring clear, concise messaging to our customers that we design and deliver critical RF and portable power products. 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 second quarter results for the quarter ended June 30th, 2026. We have also updated our investor presentation in the investor relations section of our website, and our Form 10-Q was filed with the SEC earlier this morning. Consolidated revenues totaled $47.9 million, compared to $48.6 million for the second quarter of 2025. Overall, government defense sales increased 5%, while commercial sales decreased 4.7%. Revenues from our Battery & Energy Products segment were $44.2 million, compared to $45.9 million last year, a 3.7% decrease. The year-over-year decrease reflects a 4.7% decline in commercial sales, primarily attributable to lower oil and gas sales, reflecting geopolitical factors, offsetting a 7.2% increase in medical battery sales. Government defense sales declined 1.4% due to the shipment of a very large order for an allied country last year.

The sales split between commercial and government defense for our battery business was 68/32, identical to that reported for the 2025 quarter, and the domestic to international split was 59/41, compared to 73/27 for the 2025 period, reflecting the heightened global demand for our products. Revenues from our Communications Systems segment of $3.8 million increased 39.3% from the $2.7 million we reported last year, due primarily to the timing of orders. On a consolidated basis, the commercial to government defense sales split was 62/38 compared to 65/35 for the 2025 second quarter. Our total backlog exiting the second quarter was $117.5 million, the highest level in the company's history, and representing a $33 million or 39% 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 63% of trailing 12-month sales.

Our consolidated gross profit was $13.9 million, an increase of 19.5% over the 2025 period. As a percentage of total revenues, consolidated gross margin was 28.9%, a 500 basis point increase from the 23.9% reported for last year's second quarter. The increase resulted from favorable sales product mix for both business segments and the net refund of IEEPA tariffs, which had been recognized as costs in previous periods. The net tariff refund in the second quarter of 2026 was $1.1 million and accounted for 230 basis points of the year-over-year increase in gross margin. Gross profit for our Battery & Energy Products business was $12.5 million compared to $10.8 million last year, an increase of 15.4%. Gross margin was 28.3%, a 470 basis point increase over 23.6% last year due to sales mix and the tariff net refund. With this refund accounting for 250 basis points of the year-over-year increase.

Accordingly, gross margin excluding the net tariff refund was 25.8%. For our Communications Systems segment, gross profit was $1.4 million compared to $0.8 million for the year-earlier period. Gross margin was 36.3% compared to 28.4% last year, primarily due to favorable sales mix. Operating expenses were $10.4 million, an increase of $1.1 million or 10.6% from the year-earlier quarter. New product development costs increased 39.1% related to the continued investment in our product offering and vertical integration opportunities within our portfolio. In addition, we incurred one-time costs of $0.9 million relating to litigation expenses for our cyber insurance claim and the completion of certain consulting fees to help expedite gross margin improvement at our two largest manufacturing facilities. As a percentage of revenues, operating expenses were 21.8% compared to 19.8% for last year's second quarter.

Operating income was $3.4 million compared to $2.3 million last year, reflecting the overall increase in gross margin to 26.6% when excluding the tariff refund. Operating margin increased to 7.2% compared to 4.7% for the 2025 second quarter. Other expense reported below operating income was $0.5 million for the quarter, primarily comprised of interest expense from the financing of our Electrochem acquisition, partially offset by the second 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, established by the Inflation Reduction Act, runs through 2032. Other expense for the year-earlier period was $1.1 million, reflecting the acquisition financing. Our tax provision for the second quarter was $0.5 million compared to $0.2 million for the 2025 quarter, computed on a GAAP basis at statutory rates.

Net income was $2.5 million or $0.15 per share on a GAAP fully diluted basis. This compares to net income of $0.9 million or $0.05 per share for the 2025 quarter. Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense and one-time costs not reflective of our ongoing operations, was $6.1 million or 12.8% of sales, compared to $4.1 million or 8.5% for the prior year quarter. Adjusted EBITDA on a TTM basis is $17.1 million, or 9.1% of sales. Turning to our balance sheet, we ended the second quarter with working capital of $69.8 million and a current ratio of 2.9, compared to $68.5 million and 2.8 for 2025 year-end.

Looking beyond our second quarter results, our backlog, the sheer number of our growth initiatives, our continued focus 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.