Ultralife Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are to the periods ended October 2, 2011. Amounts are in millions of dollars unless noted.
Business context and reporting period
Ultralife designs and sells battery and energy products and communications systems for government, defense and commercial customers. Its continuing operations comprise Battery & Energy Products and Communications Systems. RedBlack Communications was sold on September 28, 2012 and is reported as a discontinued operation; the Energy Services business was previously exited.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $26.181 | $35.204 | $72.388 | $106.231 |
| Gross profit / margin | $8.219 / 31.4% | $9.360 / 26.6% | $19.279 / 26.6% | $25.334 / 23.8% |
| Operating income (loss) | $1.754 | $1.545 | $(2.468) | $0.646 |
| Income (loss) from continuing operations | $1.468 | $1.348 | $(3.200) | $0.247 |
| Net income (loss) attributable to Ultralife | $1.679 | $1.363 | $(2.991) | $(3.888) |
| Diluted EPS, total | $0.10 | $0.08 | $(0.17) | $(0.22) |
Third-quarter adjusted EBITDA from continuing operations, a non-GAAP measure, was $3.052 million versus $3.000 million. For the nine months it was $1.519 million versus $5.095 million. Management cautions that this measure excludes items including working-capital needs, capital spending, interest and taxes and should not replace GAAP results.
For the first nine months, cash from operating activities of continuing operations was $1.904 million, while discontinued operations used $2.133 million; total operating cash use was $0.229 million. Total investing cash use was $0.128 million and financing activities provided $0.115 million. Cash and cash equivalents were $4.959 million at September 30, down $0.361 million from year-end 2011. Capital expenditures were $2.011 million.
At September 30, current assets were $61.355 million and current liabilities were $19.659 million. No borrowings were outstanding under the secured revolving credit facility; reported additional borrowing capacity was approximately $14.574 million, including outstanding letters of credit of $0.413 million. The fixed-charge coverage ratio was 1.95 to 1.00, above the 1.20 minimum. Total debt is reported as zero, but the credit facility matures February 17, 2013.
Material changes versus comparable periods
- Quarterly revenue declined 25.6%. Battery & Energy Products revenue fell 42.3% to $16.633 million, primarily amid weaker U.S. government and defense orders; Communications Systems revenue rose 49.9% to $9.548 million, supported by SATCOM shipments and amplifier demand.
- For the nine months, revenue fell 31.9%. Battery sales were affected by the absence of prior-year DLA battery shipments, completion of large non-recurring telematics orders, and slower defense demand. Communications Systems sales declined 8.0%.
- Gross margin improved in both the quarter and year-to-date comparison. Management cited manufacturing productivity, scrap reductions, improved 9-volt margins and sales mix; comparisons also benefited from prior-year charges, including a $1.1 million legacy-amplifier write-off in Q3 2011 and a $2.73 million government-contract settlement charge in 2011.
- Quarterly operating expenses declined 17.3% to $6.465 million, reflecting headcount reductions, spending controls and lower commissions. Year-to-date expenses declined 11.9%, but the lower revenue base raised operating expenses to 30.0% of revenue from 23.2%.
- RedBlack was sold for stated consideration of $2.533 million: $2.133 million cash at closing, $0.250 million held in escrow for up to one year and $0.150 million allocated for employee retention. A working-capital adjustment remained pending.
Guidance, management commentary, risks and unusual items
Management reaffirmed its 2012 outlook: high-single- to low-double-digit year-over-year revenue growth for Communications Systems and China operations, but a 20%–30% year-over-year sales decline for the larger Battery & Energy Products segment amid uncertain government and defense orders. Management expected a return to operating profitability in the second half, with low- to mid-single-digit operating margins, while still expecting an operating loss for full-year 2012 because of the first-half loss.
- Credit-facility availability and refinancing are important liquidity considerations: the facility matures February 2013. Management said it expected to fund the next 12 months primarily from internal funds or existing facility availability, but gave no assurance that alternative financing would be available if needed.
- Goodwill and indefinite-lived intangibles were reviewed early after a market-valuation decline triggered an impairment assessment; no impairment was recorded. Goodwill was $16.337 million at quarter-end.
- RedBlack sale terms include customary indemnities and two-year restrictions on competing for its current customers and soliciting its personnel. The final sale proceeds remain subject to a working-capital adjustment.
- Ultralife disclosed ongoing litigation with Arista Power, including Arista’s claim seeking damages in excess of $60 million; the company said it considered the claim meritless and was defending the matter. Discovery was ongoing. Separately, a Japanese battery warranty dispute was settled for approximately $0.125 million, with no admission of liability.
- A $2.7 million U.S. government settlement related to past contract pricing was being paid in installments; the first three payments had been made, with the final $0.566 million principal payment plus accrued interest scheduled for December 1, 2012.
- The company reported $6.779 million of unrecognized tax benefits and said U.S. and foreign tax returns remained subject to examination. It also cited risks from defense spending and order levels, customer concentration, China operations, competition, raw-material availability, warranty claims and business disruptions.
- A 2011 China manufacturing-facility fire caused an estimated $1.584 million loss. The company had received approximately $1.017 million in insurance proceeds and reported a further $0.432 million receivable at September 30, 2012.
Most important facts for investors to verify
- Whether the February 2013 credit facility was renewed, replaced or repaid, and the borrowing capacity and covenant position after quarter-end.
- Whether defense and government battery orders stabilized and whether the stated segment revenue and operating-margin outlook was achieved.
- Final RedBlack working-capital adjustment, escrow release and any post-sale indemnity or other obligations.
- Cash generation and working-capital trends, particularly given the year-to-date total operating cash outflow and substantial revenue decline.
- Developments in the Arista litigation, the final government-settlement payment, and any changes to tax exposures or insurance recoveries.