Ultralife Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended October 2, 2011; comparisons are to periods ended September 26, 2010. Amounts are in U.S. dollars, thousands, except per-share data. Ultralife makes battery and energy products and communications systems. Following its decision to exit Energy Services, it reports two continuing segments: Battery & Energy Products and Communications Systems.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $36,006 | $50,812 | $108,017 | $120,928 |
| Gross profit / margin | $9,639 / 26.8% | $15,125 / 29.8% | $25,974 / 24.0% | $33,970 / 28.1% |
| Operating income | $1,584 | $6,051 | $327 | $8,825 |
| Net income (loss) attributable to Ultralife | $1,388 | $4,526 | $(3,863) | $4,833 |
| Diluted EPS | $0.08 | $0.26 | $(0.22) | $0.28 |
| Adjusted EBITDA from continuing operations | $3,063 | $7,918 | $4,846 | $13,465 |
Q3 continuing-operations net income was $1,377; nine-month continuing-operations loss was $106. The nine-month total loss includes $3,796 of after-tax discontinued-operation losses. Nine-month cash from operations was $6,818, versus $8,842 a year earlier; investing used $1,351 and financing used $6,137. Cash and cash equivalents were $4,493 at October 2, down $148 from year-end 2010.
At October 2, current assets were $64,200 and current liabilities $25,030. Revolver borrowings were $2,481, with approximately $15,252 of additional borrowing capacity, including outstanding letters of credit; letters of credit totaled $413. The facility matures February 2013. The company reported a 1.51 fixed-charge coverage ratio against a 1.20 minimum and compliance with its financial covenants. Total assets were $101,347 and shareholders’ equity $71,094.
Material changes versus comparable periods
- Q3 revenue fell 29.1%, chiefly because of lower SATCOM system sales; excluding SATCOM, revenue increased 18.9%. Battery & Energy Products revenue rose 27.1% to $28,834, while Communications Systems revenue fell 74.5% to $7,172.
- Nine-month revenue declined 10.7%. Battery & Energy Products grew 16.5% to $84,321, while Communications Systems fell 51.2% to $23,696. SATCOM sales were $7,549 versus $26,328 in the prior-year period.
- Reported gross margin was pressured by a $2,700 first-quarter reduction in revenue for a U.S. government contract settlement and an approximately $1,100 non-cash write-off of legacy amplifier components in Q3. Excluding the Q3 write-off, management reported Q3 gross margin of 29.7%.
- Operating expenses decreased 11.2% in Q3, but rose 2.0% for the nine-month period, reflecting increased R&D, sales-force investment, facility relocation costs and severance. Interest expense fell as average revolver borrowings declined.
Outlook, commentary, and risks
- Management reduced 2011 guidance to revenue of approximately $150 million from $162 million and operating income of approximately $5.5 million from $7.8 million. The revenue reduction was attributed to lower Communications Systems expectations. Management expected high-single-digit year-over-year growth in Battery & Energy Products, citing rechargeable battery and charger demand and China business; timing of government funding for large radio programs remained uncertain.
- The Energy Services exit was completed by the end of Q2 2011. It involved about 40 job eliminations and closure of five facilities. Nine-month exit costs were approximately $2,924, including $1,984 cash costs.
- A June 2011 fire damaged inventory at the China facility. The plant resumed full operation without customer supply disruption. The company recorded a $1,437 insurance receivable, net of an approximately $132 deductible, against an estimated total loss and related expenses of $1,569.
- A U.S. government settlement for exigent contracts was finalized at $2,700 plus interest, payable in installments through December 2012; the first principal payment had been made by October 2. A Japanese customer’s 9-volt battery warranty lawsuit seeks approximately $1,100; Ultralife disputes the claim and had recorded no accrual because exposure could not be assessed.
- Principal business risks include reduced U.S. defense spending, delays or changes in government procurement and funding, uncertain demand for SATCOM and radio programs, competition, product and technology changes, raw-material availability, and potential warranty claims. Management stated it believed available internal cash generation and financing could fund operations over the next 12 months, but gave no assurance of access to additional financing if needed.
Important facts for investors to verify
- Whether Communications Systems revenue and margins recover as government-funded radio programs proceed, and whether further SATCOM orders materialize.
- Progress against the revised 2011 revenue and operating-income guidance, including the effects of the government settlement and amplifier inventory write-off.
- Cash conversion and working-capital trends, available borrowing capacity, covenant headroom, and scheduled settlement payments.
- Resolution and potential exposure from the Japanese battery litigation, and sufficiency of warranty reserves.
- Whether the China fire insurance claim is collected in full and whether operations remain uninterrupted.