Ultralife Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 29, 2013; filed November 8, 2013. Unless stated otherwise, financial amounts are in thousands of dollars. The company makes batteries, power products, and communications systems for government, defense, and commercial customers.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $20,361 | $26,181 | $58,659 | $72,388 |
| Gross profit | $6,127 | $8,219 | $17,028 | $19,279 |
| Gross margin | 30.1% | 31.4% | 29.0% | 26.6% |
| Operating income (loss) | $652 | $1,754 | $(847) | $(2,468) |
| Net income (loss) attributable to Ultralife | $644 | $1,679 | $(995) | $(2,991) |
| Diluted earnings (loss) per share | $0.04 | $0.10 | $(0.06) | $(0.17) |
| Adjusted EBITDA from continuing operations | $1,798 | $3,003 | $2,473 | $1,413 |
Adjusted EBITDA is a non-GAAP measure. Q3 continuing-operations net income was $607, compared with $1,468 a year earlier; nine-month continuing-operations net loss was $1,185, compared with $3,200. Discontinued operations contributed net income of $15 in Q3 and $159 year to date in 2013.
Cash flow: Nine-month cash provided by operating activities was $1,401, versus cash used of $229 in 2012. Continuing operations provided $2,399, while discontinued operations used $998. Investing activities used $556; financing activities provided $12. Cash and cash equivalents were $10,365 at September 29, up $709 from year-end. Restricted cash was an additional $420.
Balance sheet and debt: Total assets were $88,675; current assets were $56,140 and current liabilities $11,083. The company reported no borrowings under its secured revolving facility. The $20 million facility had approximately $12,781 of borrowing availability, in addition to $10,365 of unrestricted cash; the company reported compliance with covenants. The facility is secured by substantially all assets and includes a quarterly fixed-charge coverage covenant.
Material changes versus prior comparable periods
- Revenue declined 22.2% in Q3 and 19.0% for the first nine months. Battery & Energy Products revenue fell 18.8% in Q3 and 21.1% year to date; Communications Systems revenue fell 28.2% in Q3 and 13.4% year to date.
- Management attributed lower sales to slower U.S. government and defense orders, delayed government spending and procurement, and the absence of large M-1 battery and SATCOM shipments made in Q3 2012.
- Q3 gross margin decreased to 30.1%, primarily from lower overhead absorption in Battery & Energy Products, partly offset by favorable Communications Systems product mix. Year-to-date margin improved to 29.0%, reflecting productivity improvements, mix, and prior-year property-tax credits.
- Operating expenses fell 15.3% in Q3 and 17.8% year to date, reflecting cost controls, reduced discretionary spending, and more focused product-development investment. Despite the year-to-date operating loss, that loss narrowed from the prior-year period.
- Cash from operations improved from an outflow in the first nine months of 2012 to an inflow in 2013; management cited working-capital discipline, cost reductions, and inventory reduction.
Outlook, management commentary, and risks
- For 2013, management expected an approximately 20% year-over-year revenue decline and results ranging from operating breakeven to a modest operating loss. Communications Systems revenue was expected to decline in a comparable range to the company overall. Management said government budget challenges and delays made conversion timing for Communications Systems opportunities less predictable, despite a growing project pipeline.
- The U.K. manufacturing lease was not renewed; sales and service operations moved to a smaller facility. Management expected annualized net savings of approximately $500 beginning in Q2 2013. A lower-than-estimated facility restoration cost generated a $241 discontinued-operations gain in Q1.
- NYSERDA terminated its agreement for a large grid-connected energy-storage project. The company wrote off $56 of costs without identifiable future use, recorded no impairment on remaining capitalized costs, and planned to continue the project internally with smaller-form batteries.
- The company was assisting a downstream customer and regulators with an investigation into a fire involving an unoccupied, parked Boeing 787 aircraft. The filing does not state a quantified exposure or a conclusion regarding the investigation.
- Arista Power litigation was ongoing, with discovery underway. Ultralife said it was pursuing its own claims and considered Arista’s claims meritless; Arista sought damages exceeding $60 million and injunctive relief. The filing does not provide a clear estimate of potential financial exposure.
- Other identified risks include reduced defense spending, customer and project concentration, order timing, competition, product liability and warranty claims, Chinese operations, raw-material supply, and impairment risk. The company also disclosed tax-loss carryforwards and a valuation allowance against its U.S. deferred tax assets.
Important facts for investors to verify
- Whether forecast government and defense orders convert as expected, and whether the stated 2013 revenue and operating-result outlook is achieved.
- Whether cash generation and inventory management remain sustainable as revenue declines; year-to-date inventory turnover was approximately 2.0 times annualized, versus 2.3 times in 2012.
- Available borrowing capacity under the asset-based facility, covenant headroom, and the effect of the facility’s collateral and borrowing-base provisions.
- Developments in the Arista litigation and the Boeing 787 fire investigation, including any change in potential exposure.
- Future warranty claims and whether the $713 warranty reserve is adequate; the filing notes actual claims may differ from estimates.
- Progress and impairment assessments for the energy-storage project and the McDowell Communications Systems trademark; no trademark impairment was recorded in the quarter-end review.