Ultralife Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 26, 2016. Dollar amounts are in thousands, except per-share data. Comparisons are with the periods ended June 28, 2015 unless noted.
Business context and results
Ultralife designs and supplies battery and energy products and communications systems to commercial, government and defense customers. It reports two segments: Battery & Energy Products and Communications Systems. The January 13, 2016 acquisition of U.K.-based Accutronics added smart batteries and charger systems, expanding commercial and European OEM exposure.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $20,371 | $18,955 | $41,204 | $38,132 |
| Gross profit / margin | $5,900 / 29.0% | $5,859 / 30.9% | $12,305 / 29.9% | $11,866 / 31.1% |
| Operating income / margin | $499 / 2.4% | $817 / 4.3% | $981 / 2.4% | $1,639 / 4.3% |
| Net income attributable to Ultralife | $446 | $788 | $745 | $1,321 |
| Diluted EPS | $0.03 | $0.05 | $0.05 | $0.08 |
| Adjusted EBITDA (non-GAAP) | $1,457 | $1,725 | $2,963 | $3,272 |
Reported revenue rose 7.5% in Q2 and 8.1% year to date, with Accutronics and higher Communications Systems shipments contributing. Accutronics contributed $5,033 of six-month revenue and an operating loss of $210. On the filing’s unaudited pro forma basis, six-month 2015 revenue would have been $44,635, versus $41,204 in 2016; those pro forma results are informational and exclude expected synergies.
Segment and period changes
- Battery & Energy Products: Q2 revenue declined 1.3% to $15,759; six-month revenue was nearly flat at $32,199. Higher commercial sales, including Accutronics, were offset by weaker prior-year-comparable demand and lower government and defense sales. Segment gross margin improved to 29.6% in Q2 and 30.7% for six months, supported by product mix and Accutronics.
- Communications Systems: Q2 revenue grew 54.6% to $4,612 and six-month revenue grew 53.0% to $9,005, primarily on VIPER system shipments. Gross margin fell to 26.8% in Q2 and 26.9% year to date, reflecting unfavorable product mix. Some core-product orders were delayed by customer closing and funding timing and were expected to ship in subsequent quarters.
- Consolidated gross margin declined 190 basis points in Q2 and 120 basis points year to date. Operating income and net income attributable to Ultralife were lower in both comparison periods despite higher reported sales. Diluted weighted-average shares fell, mainly due to repurchases.
Cash, liquidity and capital
- Cash and cash equivalents fell to $3,120 at June 26 from $14,393 at year-end 2015. Operating activities used $802 in the first six months, compared with providing $4,745 a year earlier; the 2016 use reflected working-capital needs, including higher receivables and inventory and lower payables and other liabilities.
- Investing activities used $10,745, principally for the Accutronics acquisition; financing activities provided $300. Capital expenditures were $888.
- Current assets were $45,990 and current liabilities $11,873. Inventory was $26,553, up from $23,814 at year-end.
- The secured PNC revolver has a $20,000 facility and expires May 24, 2017. At quarter-end, borrowings were $831, reported available borrowing capacity was approximately $11,021, and the applicable rate was 2.45%. Management said operating cash flow and available borrowing were expected to meet funding needs for the foreseeable future.
- The company spent $607 repurchasing shares in the first six months. Its repurchase program expired June 2, 2016; cumulative purchases under the program were 2,592,095 shares for $10,480.
Outlook, notable items and risks
- Management maintained its aim of delivering profitable growth in 2016, citing gross margins and liquidity as support for continued product-development investment. No numerical revenue or earnings guidance was provided.
- Accutronics’ purchase price was $11,161, funded from corporate funds. The preliminary allocation included $4,116 goodwill and $4,776 identifiable intangible assets; the allocation remained subject to change. Goodwill is not tax-deductible. Acquisition-related expenses and purchase-accounting effects affected reported results.
- The Dreamliner-related lawsuit seeks $42,000 plus unspecified damages. Ultralife is defending the ongoing case with insurers and counsel; management stated it did not believe a material financial exposure was reasonably possible. The company also disclosed purchase commitments of approximately $662 for production equipment.
- Risks identified include customer and defense-spending concentration, order timing, product safety and warranty exposure, supply disruptions, foreign exchange, China operations, regulation, cybersecurity, intellectual-property protection, taxes and potential impairment of goodwill or intangibles.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether delayed Communications Systems orders ship as expected, and whether VIPER-related and other sales sustain segment growth without further margin pressure.
- Accutronics’ ongoing contribution, integration costs, purchase-price allocation and effect on cash generation; reconcile the filing’s acquisition-cost descriptions, including $251 of direct costs, $96 of inventory purchase-accounting cost, and the MD&A’s stated $343 of acquisition-related effects.
- Working-capital trends, especially receivables, inventory and payables, alongside the low cash balance, borrowing-base availability and May 2017 revolver maturity.
- Developments in the Dreamliner litigation, insurance coverage and any change in management’s assessment of possible exposure.
- How reported growth compares with the filing’s pro forma comparison, and whether future results reflect expected commercial diversification and profitable growth.