Ultralife Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 29, 2014; comparisons are to the periods ended June 30, 2013. Financial statement amounts are in thousands of dollars, except per-share data.
Business context
Ultralife designs and supplies battery and energy products and communications systems to government, defense and commercial customers. It reports two segments: Battery & Energy Products and Communications Systems.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $15,199 | $17,279 | $30,484 | $38,298 |
| Gross profit | $4,212 | $4,522 | $8,547 | $10,901 |
| Gross margin | 27.7% | 26.2% | 28.0% | 28.5% |
| Operating loss | $(1,324) | $(1,874) | $(2,420) | $(1,499) |
| Net loss attributable to Ultralife | $(1,360) | $(2,073) | $(2,646) | $(1,639) |
| Loss per share | $(0.08) | $(0.12) | $(0.15) | $(0.09) |
| Adjusted EBITDA from continuing operations | $(174) | $(802) | $(229) | $675 |
- Q2 revenue declined 12.0%; first-half revenue declined 20.4%. Q2 gross margin improved 1.5 percentage points, while the first-half margin fell 0.5 points.
- Operating expenses were $5,536 in Q2 and $10,967 for the first half, down 13.4% and 11.6%, respectively, year over year.
- Cash and cash equivalents were $17,160 at June 29, 2014, up $671 from year-end and $5,588 from the prior-year second-quarter balance. First-half operating cash flow was $986, versus $2,045 in 2013; capital spending was $398.
- The company had no borrowings or letters of credit under its $20 million asset-based credit facility, with approximately $12,361 of additional borrowing capacity. Total liabilities were $15,312 and shareholders’ equity was $71,619.
- Current assets were $55,890 and current liabilities $10,862 at June 29, 2014. Inventory was $27,079, compared with $26,053 at year-end.
Material changes and management commentary
- Management attributed lower revenue chiefly to continued reductions in government and defense spending. In Q2, Battery & Energy Products revenue fell 17.0%, as a 19% increase in its commercial sales was outweighed by a 53% decline in government and defense shipments. Communications Systems revenue rose 15.7%, including fulfillment of a $1,895 Universal Vehicle Adaptor order.
- For the first half, Battery & Energy Products revenue fell 5.9%; commercial sales rose 23.5%, while government and defense shipments declined 29.9%. Communications Systems revenue fell 58.5%, reflecting slower U.S. government order activity.
- Q2 Communications Systems gross margin rose to 44.0% from 39.3%, attributed to higher production volumes and favorable product mix. First-half Battery & Energy Products margin improved to 25.6% from 23.8%, while overall first-half gross margin declined due to a lower mix of higher-margin Communications Systems sales.
- Management reduced its outlook: it expects full-year revenue approximately 10% below the prior year and a slight operating loss of 2%–3% of sales. Order and shipment timing may cause quarterly variability.
Risks, contingencies and unusual items
- The China facility lease will not be extended beyond October 2014. A replacement Shenzhen facility was leased for five years. The company estimates relocation costs, net of expected local government reimbursements, of $400–$500 in Q3 and Q4 2014, and plans to build output ahead of the move to limit disruption.
- Ultralife’s Wayne County litigation against Arista Power and a former employee remains ongoing, with discovery in process. Arista’s separate claims against Ultralife and an employee were discontinued with prejudice in March 2014.
- The company has approximately $64.7 million of domestic and foreign net operating loss carryforwards, but maintains a full valuation allowance against deferred tax assets related to U.S. and U.K. historical losses. Unrecognized tax benefits were $7,296; management did not expect a significant change over the next 12 months.
- Product warranty costs could exceed estimates; warranty liability was $529 at June 29, 2014. The company also had approximately $518 in production machinery and equipment purchase commitments.
- A share repurchase program authorizes purchases of up to 1.8 million shares over no more than 12 months; none had been made through June 29, 2014. Repurchases are subject to credit-facility liquidity conditions.
- Management cited risks including reliance on key customers, further defense-spending reductions, China operations, supply disruptions, warranty claims, foreign currency fluctuations, and potential limits on use of tax loss carryforwards. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Whether reduced government and defense orders persist, and whether commercial growth can offset them.
- Whether management’s full-year revenue and operating-loss outlook is achieved.
- Whether the China relocation proceeds on schedule and within the estimated net cost, without material customer or production disruption.
- Whether cash generation and working-capital trends remain adequate despite continuing losses; the company’s reported operating cash flow benefited from receivables collections.
- Developments in the ongoing Arista litigation, warranty exposure, and tax-loss carryforward availability.