Ultralife Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended July 2, 2017; comparisons are with periods ended June 26, 2016. Dollar amounts are in thousands, except per-share data.
Business context and key results
Ultralife designs, manufactures and supports battery, power, communications and electronics products for commercial, government and defense customers. It reports Battery & Energy Products and Communications Systems segments.
- Q2 revenue: $19.939 million, down 2.1%. The prior-year quarter included $3.019 million of VIPER program shipments; excluding those shipments, revenue increased 15%.
- Q2 profitability: Gross profit was $6.221 million and gross margin 31.2%, versus $5.900 million and 29.0%. Operating income was $1.322 million, compared with $0.499 million. Net income attributable to Ultralife was $1.094 million, or $0.07 per diluted share, versus $0.446 million, or $0.03.
- First-half revenue: $41.974 million, up 1.9%. Net income attributable to Ultralife was $2.749 million, or $0.17 per diluted share, versus $0.745 million, or $0.05.
- First-half margins and operating costs: Gross margin was 31.2%, up from 29.9%; operating expenses were $9.948 million, down 12.2%. Operating income rose to $3.163 million from $0.981 million.
- Adjusted EBITDA, a non-GAAP measure: $2.296 million for Q2 and $4.772 million for the first half, compared with $1.457 million and $2.963 million, respectively.
Segment performance and period-over-period changes
- Battery & Energy Products: Q2 revenue increased 7.1% to $16.880 million; first-half revenue increased 6.7% to $34.359 million. First-half segment gross margin declined to 28.1% from 30.7%, reflecting product mix and higher supply-chain and logistics fees. Commercial battery and charger sales, including medical products, grew.
- Communications Systems: Q2 revenue fell 33.7% to $3.059 million and first-half revenue fell 15.4% to $7.615 million, primarily because the prior-year periods included VIPER shipments. Excluding VIPER, core product sales rose 92% in Q2 and 137.7% for the first half. Segment gross margin reached 48.4% in Q2 and 45.2% in the first half, reflecting higher-value core product mix.
- Management attributed lower operating expenses to discretionary spending controls and Accutronics acquisition synergies. Q2 and first-half results included no comparable acquisition-related costs to those incurred in 2016.
Cash flow, liquidity and debt
- Cash was $14.933 million at July 2, 2017, up $4.304 million from year-end 2016. Current assets were $54.803 million and current liabilities $11.874 million; total assets were $90.265 million.
- First-half operating cash flow was $4.028 million, compared with cash use of $0.802 million in the prior-year period. Investing activities used $0.836 million, principally for capital expenditures. Financing activities provided $0.989 million from stock-option exercises.
- Inventory increased $1.034 million from year-end to $24.490 million; management said the first-half increase in inventory supported 2017 backlog.
- On May 31, 2017, Ultralife entered into a new secured, cash-flow-based revolving facility with up to $30 million of availability, including a $1.5 million letter-of-credit subfacility, expiring May 30, 2020. The company had no borrowings under the facility as of July 2 and reported covenant compliance. The facility requires a 1.15:1 fixed-charge coverage ratio and $40 million minimum tangible net worth.
Outlook, risks and unusual items
- Management cited initial signs of increased government and defense demand and continued opportunity in commercial markets, and said it remained on track to deliver another year of profitable growth. This is forward-looking and not a quantified earnings or revenue forecast.
- The company plans up to $4.3 million of investment in its Newark facility to modernize production for premium 3-volt batteries aimed at Internet of Things and other markets. Implementation and product certification are expected to be completed by the end of 2018. Near-term equipment purchase commitments were approximately $0.173 million.
- Q2 operating expenses included a $0.193 million non-cash charge from extending the expiration of the CEO’s vested stock options. The facility investment and the option charge are notable items for assessing cash requirements and reported earnings.
- Risks identified include customer and demand concentration, changes in government and defense spending, product safety and warranty exposure, supply-chain disruption, foreign currency movements, cybersecurity, regulatory compliance, intellectual-property protection, and potential goodwill or intangible-asset impairment.
- The ongoing Ethiopian Airlines Dreamliner lawsuit seeks $42 million plus unspecified damages. Ultralife is defending the case with its insurers and stated it does not believe a material financial exposure is reasonably possible. The filing also describes the Arista Power litigation; the company is not actively pursuing its claims against the bankrupt defendant.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in core Communications Systems products and commercial battery sales continues to offset the absence of VIPER shipments.
- Whether Battery & Energy Products margins recover from the first-half decline and supply-chain cost pressure.
- Progress, total spending and customer demand assumptions behind the planned $4.3 million manufacturing investment.
- Cash conversion, inventory levels, covenant headroom and the availability terms of the KeyBank facility.
- Developments in the Dreamliner litigation, insurance coverage and any change to management’s assessment of potential exposure.
- The sustainability of reported earnings growth, including the effects of stock-based compensation and foreign exchange movements.