Ultralife Corporation — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; comparisons are with FY 2016. The filing is an annual report, and the supplied text does not provide a separate fourth-quarter income statement. Dollar figures below are in millions unless stated otherwise.
Business context
Ultralife designs and manufactures battery and energy products, and military communications systems and accessories, for commercial, government and defense customers. It reports two segments: Battery & Energy Products and Communications Systems. The business is geographically diversified, but remains materially exposed to government and defense demand.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $85.531 | $82.460 |
| Gross profit / margin | $26.232 / 30.7% | $25.108 / 30.4% |
| Operating income | $6.476 | $3.763 |
| Income before taxes | $6.295 | $3.580 |
| Net income attributable to Ultralife | $7.648 | $3.509 |
| Diluted earnings per share | $0.48 | $0.23 |
| Cash from operating activities | $7.270 | $7.653 |
- Battery & Energy Products revenue was $69.789, up 7.8%; segment gross profit was $19.659, with a 28.2% margin versus 30.2% in 2016.
- Communications Systems revenue was $15.742, down 11.1%; segment gross profit rose to $6.573, with a 41.8% margin versus 31.2% in 2016.
- Operating expenses fell 7.4% to $19.756. Operating income increased 72%, reflecting higher gross profit and lower expenses.
- Reported net income included a $1.939 non-cash tax benefit from the U.S. tax-rate change. Excluding that item, management reported 2017 operating-performance EPS of $0.37 basic and $0.36 diluted; reported EPS was $0.49 basic and $0.48 diluted.
- Year-end cash was $18.330 including restricted cash of $0.099, up $7.624 from the prior year. Capital expenditures were $1.392. Inventory increased to $26.326 from $23.456, principally to support higher backlog.
- No debt was outstanding at year-end. The company had approximately $30 million available under a senior secured revolving facility expiring May 2020 and reported compliance with its covenants. Current assets were $61.916 and current liabilities $14.239.
Changes, outlook and material items
- Revenue grew 3.7%. Government and defense sales rose 7.6% to $44.741, or 52% of revenue; commercial sales were approximately flat. One defense contractor accounted for 18% of 2017 revenue, versus 12% in 2016.
- Communications Systems revenue declined mainly because VIPER shipments fell to $2.895 from $10.291. Excluding VIPER, core communications products grew $5.431, or 73.3%.
- Order backlog was $39.086 at year-end, up 49.3% from $26.174. Management cited stronger medical, defense and core communications demand and said it entered 2018 with higher backlog. Backlog is not a guarantee of future shipments.
- The company received multi-year Defense Logistics Agency awards with maximum potential values of $21.4 million for BA-5390 batteries and $49.8 million for BA-5790/BA-5795 batteries; production deliveries were expected to begin in the first half of 2019. These maximum contract values are not equivalent to committed orders. A January 2018 DLA order of $3.348 million was disclosed for legacy BA-5390 batteries.
- Management expressed confidence in extending profitable growth, but provided no specific revenue or earnings guidance. It expected R&D spending to remain broadly consistent with 2017.
- The ongoing Ethiopian Airlines Dreamliner litigation seeks $42 million plus unspecified damages. The company is defending the claim with its insurers and stated it did not believe a material financial exposure was reasonably possible.
- Principal risks include customer concentration, dependence on military spending and government procurement timing, supplier and raw-material constraints, China operations, currency movements, battery safety and fire exposure, product warranty claims, cybersecurity, competition, and possible impairment of goodwill or intangible assets. No impairment was identified in the 2017 annual tests.
- The independent auditor issued an unqualified opinion on the financial statements. The auditor did not audit or express an opinion on internal control effectiveness; management concluded its controls were effective.
Key facts for investors to verify
- Whether the higher backlog converts to timely shipments and cash, particularly the defense awards whose planned production deliveries begin in 2019.
- How sustainable segment margins are, including the 2017 Battery & Energy margin decline and Communications Systems’ improvement from product mix.
- Underlying earnings and tax position excluding the $1.939 million one-time tax benefit, including realization limits and expiration dates for U.S. net operating losses.
- Customer concentration and exposure to government budgets, procurement delays, contract protests and order cancellations.
- Developments in the Dreamliner litigation, insurance coverage, and any resulting change in the company’s assessment of potential exposure.