Ultralife Corporation — Q2 2018 Form 10-Q
Business context and period: Ultralife designs and manufactures battery, energy, communications and electronics products for commercial, government and defense customers. The quarter ended July 1, 2018; comparisons are with the three and six months ended July 2, 2017. Dollar figures are in thousands except per-share data.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $22,864 | $19,939 | $45,933 | $41,974 |
| Gross profit / margin | $6,550 / 28.6% | $6,221 / 31.2% | $13,832 / 30.1% | $13,111 / 31.2% |
| Operating income | $1,632 | $1,322 | $3,988 | $3,163 |
| Net income attributable to Ultralife | $1,627 | $1,094 | $3,777 | $2,749 |
| Diluted EPS | $0.10 | $0.07 | $0.23 | $0.17 |
| Adjusted EBITDA | $2,537 | $2,296 | $5,509 | $4,772 |
- Quarterly revenue increased 14.7%; first-half revenue increased 9.4%. Operating income and net income attributable to Ultralife rose in both comparisons.
- Gross margin declined year over year, which management attributed primarily to product mix. Operating expenses were nearly flat in Q2 and down 1.0% for the first half.
- First-half operating cash flow was $1,818, versus $4,028 in 2017. The decrease reflected, among other items, a $4,177 cash outflow from accounts payable and other liabilities, partly offset by lower inventory. Capital expenditures were $999.
- Cash and restricted cash totaled $20,749 at July 1, 2018, up $2,419 from the start of the year. Balance-sheet cash alone was $20,285; restricted cash was $464.
- Total liabilities were $14,777 and shareholders’ equity was $84,068. The company had no borrowings or letters of credit outstanding under its $30 million revolving facility and reported compliance with its covenants.
Material changes and management commentary
- Communications Systems revenue rose 64.5% in Q2 and 42.8% for the first half, driven by vehicle power and amplifier-adapter shipments for U.S. Army programs through a defense prime contractor. Segment gross margin fell substantially year over year, to 32.3% in Q2 and 35.6% for the first half, mainly due to product mix and competitively priced defense contracts.
- Battery & Energy Products revenue increased 5.6% in Q2 and 2.0% for the first half. Higher government/defense and medical shipments were partly offset by weaker commercial industrial and 9-Volt sales.
- Government/defense sales represented 55% of Q2 revenue and 57% of first-half revenue, compared with 46% and 52%, respectively, in the prior-year periods.
- Management said a strong first half, expanding revenue opportunities and adherence to its business model positioned the company to deliver “another year of profitable growth” in 2018. No specific full-year financial targets were provided.
- The company is investing up to $4.3 million to modernize its Newark facility for premium 3-volt primary batteries targeting IoT and smoke-detector markets. Qualification-build production was expected to start in the second half of 2018, with higher-volume U.S. production expected in early 2019.
Risks, contingencies and unusual items
- Management identifies risks including dependence on key customers, defense-budget uncertainty, demand and forecast variability, supply interruptions, foreign-currency movements, China operations, product safety and warranty exposure, and the ability to protect intellectual property and use tax-loss carryforwards.
- First-half tax provision was $133, with a 3.4% effective tax rate versus 8.8% in 2017. Accounting for certain Tax Cuts and Jobs Act effects remained provisional; the company had not reasonably estimated or recorded deferred taxes for GILTI.
- A $397 China government grant was received to fund specified R&D; proceeds were restricted and had not been recognized as income because eligible expenditures had not yet been incurred.
- The company had approximately $2,381 in production machinery and equipment purchase commitments. Management said operating cash flow and available credit were expected to meet funding needs for the foreseeable future.
- The Dreamliner-related lawsuit was terminated in February 2018 without financial consequences to the company. A July 25, 2018 modification to the CEO’s stock option was expected to generate approximately $182 of compensation cost in Q3.
- Foreign-currency movements contributed to Q2 miscellaneous income; foreign-currency translation produced a $1,177 comprehensive loss for the quarter.
Investor verification points
- Whether defense-program shipments and customer demand persist, and how contract and product mix affect gross margins.
- Whether operating cash conversion improves after the first-half working-capital outflow, and the timing and scale of capital spending for the 3-volt battery project.
- Progress toward expected product qualification and early-2019 higher-volume production, and whether the investment delivers the targeted commercial opportunities.
- Final tax accounting, including provisional Tax Act amounts, GILTI treatment and realizability of deferred tax assets.
- Compliance with revolving-credit covenants and any changes in liquidity, customer concentration, supply, currency or product-safety risks.