Ultralife Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 27, 2015; comparisons are with the quarter ended September 28, 2014. Unless noted otherwise, amounts are in millions of dollars. The company designs and sells battery and energy products and communications systems to government, defense, and commercial customers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $19.044 | $16.062 | $57.176 | $46.546 |
| Gross profit / margin | $5.900 / 31.0% | $4.486 / 27.9% | $17.766 / 31.1% | $13.033 / 28.0% |
| Operating income (loss) | $1.173 | $(0.055) | $2.812 | $(2.475) |
| Net income (loss) attributable to Ultralife | $1.047 | $(0.323) | $2.367 | $(2.969) |
| Diluted EPS | $0.07 | Not applicable due to loss | $0.14 | Not applicable due to loss |
| Adjusted EBITDA, continuing operations | $2.055 | $0.815 | $5.324 | $0.577 |
- Q3 revenue grew 18.6%; nine-month revenue grew 22.8%. Battery & Energy Products and Communications Systems both contributed to growth. Q3 segment revenue was $16.390 million and $2.654 million, respectively.
- Management attributed improved gross margins to favorable product mix, higher production volume and factory-overhead absorption, and productivity improvements. Nine-month operating expenses fell 3.6% to $14.954 million; Q3 R&D expense increased while selling, general and administrative expense was slightly lower.
- Cash flow: Operating activities provided $7.428 million in the first nine months, versus $0.505 million in the prior-year period. Investing activities used $1.298 million; financing activities used $9.189 million, principally reflecting $9.266 million of treasury-stock repurchases. Cash declined $3.126 million to $14.585 million.
- Liquidity and debt: No borrowings or letters of credit were outstanding under the $20 million asset-based facility. Available borrowing capacity was approximately $9.666 million. Current assets were $51.548 million and current liabilities $11.498 million. Total liabilities were $16.177 million.
- Balance sheet changes since year-end 2014: Inventory declined $2.734 million to $23.352 million; total assets declined $6.290 million to $81.352 million. The company repurchased 2,225,437 shares for $9.162 million, excluding fees and commissions, during the nine-month period.
Material changes and management outlook
- Government and defense shipments drove much of the growth. Nine-month Battery & Energy Products government and defense sales increased 51.5%; Communications Systems revenue increased 30.4%.
- Management said its plans to achieve revenue and earnings growth for 2015 were “within reach,” citing new products gaining traction and a widening opportunity set. The filing provides no quantified revenue or earnings guidance.
- The company reported a $130,000 Q3 tax provision and a $312,000 nine-month provision. The nine-month effective tax rate was 11.7%; U.S. alternative minimum taxes and foreign tax liabilities contributed. A federal tax examination settlement eliminated $7.296 million of reported unrecognized tax benefits and increased domestic NOL carryforwards by $21.4 million. The company reported approximately $85.2 million of domestic and foreign NOL carryforwards.
- The repurchase authorization was increased to 3.4 million shares and extended; 957,809 shares remained authorized as of October 28, 2015. Repurchases reduced cash and weighted-average shares.
Risks, contingencies and unusual items
- Dreamliner litigation: Ethiopian Airlines sued Ultralife and other suppliers in the UK over the 2013 aircraft fire, seeking $42 million plus unspecified damages. The investigation report attributed the fire to circumstances involving an emergency locator transmitter made and installed by another company. Ultralife referred the claim to its insurers, is defending the action, and stated it did not believe material financial exposure was reasonably possible.
- Arista Power litigation: Ultralife’s 2011 trade-secret and contract action remains in discovery. The company says the outcome and any potential recovery cannot be predicted.
- Other identified risks include reliance on key customers, defense-spending and procurement uncertainty, customer volume expectations, Chinese operations, foreign currency movements, supply disruptions, warranty costs, intellectual-property protection, tax attributes and regulatory compliance.
- Warranty reserves were $358,000 at quarter-end. The company had approximately $358,000 of production-equipment purchase commitments. A $177,000 insurance receivable remained related to a 2011 China facility fire.
- The filing states disclosure controls were effective and reports no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth—particularly government and defense demand and the contribution of key customers—continues, and whether margin improvements persist.
- The pace and price of further share repurchases, and their effect on cash, shares outstanding and per-share results.
- Developments in the Dreamliner and Arista litigation, including insurance coverage and any change in management’s exposure assessment.
- Cash generation, inventory levels, borrowing-base availability and the use of committed capital expenditures.
- Tax provisions, realization and potential limitations of NOL carryforwards, and the effects of foreign operations and currency movements.
- The filing’s Q3 operating-expense figures differ: the financial statements report $4.727 million, while MD&A cites $4.725 million in one discussion and $4.725 million elsewhere. Confirm the intended figure against the filed statements.