Ultralife Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended April 2, 2017; compared with the three months ended March 27, 2016. Dollar figures below are in millions unless noted. The interim financial statements are unaudited. Ultralife supplies battery and energy products and communications systems to commercial, government, and defense customers.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $22.035 | $20.833 |
| Gross profit / margin | $6.890 / 31.3% | $6.405 / 30.7% |
| Operating expenses | $5.049 | $5.923 |
| Operating income / margin | $1.841 / 8.4% | $0.482 / 2.3% |
| Net income attributable to Ultralife | $1.655 | $0.299 |
| Diluted EPS | $0.11 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $2.477 | $1.506 |
| Cash from operating activities | $2.739 | $(2.875) |
Revenue rose 5.8%. Battery & Energy Products revenue increased 6.3% to $17.479 million; Communications Systems revenue increased 3.7% to $4.556 million. Consolidated gross margin improved 60 basis points, although Battery & Energy Products margin fell 350 basis points to 28.2%; Communications Systems margin rose 1,600 basis points to 43.0%, largely reflecting product mix.
Operating expenses declined 14.8%, attributed to discretionary cost reductions, Accutronics acquisition synergies, and prior-year acquisition-related costs. The 2016 quarter included $0.342 million of Accutronics-related one-time costs, including purchase-accounting charges. The effective tax rate was 5.0%, versus 23.8% a year earlier; the company cites its tax-jurisdiction mix and valuation allowances against deferred tax assets.
Cash, debt, and liquidity
Cash was $13.595 million at April 2, up $2.966 million from year-end. Operating cash generation reflected earnings and a $0.771 million inventory reduction, partly offset by a $0.537 million increase in receivables. Capital expenditures were $0.581 million. Current assets were $52.150 million and current liabilities $11.406 million.
The company had no borrowings or letters of credit outstanding under its $20 million secured revolving facility and reported approximately $10.789 million of borrowing capacity. The facility was scheduled to expire May 24, 2017. Management believed operating cash flow and available borrowing capacity would meet funding needs for the foreseeable future. Production-equipment purchase commitments were approximately $0.329 million.
Changes, outlook, and risks
Management said stronger sales, improved consolidated gross margin, lower operating expenses, and cash generation were encouraging indicators for another year of profitable growth in 2017. No numerical full-year guidance was provided. Management attributed sales growth to higher government/defense and commercial battery sales and shipments of power supplies to a large defense contractor. Adjusted EBITDA is a non-GAAP measure; the filing cautions that it does not capture, among other things, capital spending, working-capital needs, debt service, or taxes.
Key risks identified include customer concentration, changes in military spending, demand variability, raw-material and component supply, foreign-currency movements, product safety and warranty exposure, regulatory and cybersecurity risks, and potential goodwill or intangible-asset impairment. U.S. and foreign tax authorities may examine returns; U.S. tax attributes include approximately $70.976 million of net operating losses, substantially reserved for accounting purposes.
Contingencies: The company is defending a U.K. lawsuit concerning the 2013 Ethiopian Airlines Boeing 787 fire. The suit seeks $42 million plus unspecified damages; Ultralife says the investigation identified circumstances involving another company’s emergency locator transmitter as the primary cause, the matter is insured, and it does not believe material financial exposure is reasonably possible. A separate Arista Power case is not actively being pursued against the bankrupt company.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced before its May 24, 2017 expiration, and the borrowing availability under any amended terms.
- Whether the favorable Communications Systems product mix and Battery & Energy Products margin pressure persisted beyond Q1.
- Whether Q1 cash generation and inventory reduction were sustainable, given the receivables increase and planned capital spending.
- Developments in the Dreamliner litigation, including insurer coverage, potential damages, and any change in management’s exposure assessment.
- Progress toward the stated 2017 profitable-growth outlook; the filing provides no quantified revenue or earnings guidance.