Ultralife Corporation (NASDAQ: ULBI) — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; comparisons are with FY2015. Amounts below are in U.S. dollars; financial figures are generally shown in millions.
Business context
Ultralife designs and manufactures battery and energy products, and communications systems and accessories, for commercial, government and defense customers. In January 2016, it acquired U.K.-based Accutronics, a designer and manufacturer of smart batteries and chargers, to expand commercial and medical-market reach.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $82.46 million | $76.43 million |
| Gross profit / margin | $25.11 million / 30.4% | $23.32 million / 30.5% |
| Operating income | $3.76 million | $3.33 million |
| Net income attributable to Ultralife | $3.51 million; $0.23 diluted EPS | $2.87 million; $0.17 diluted EPS |
| Operating cash flow | $7.65 million | $8.55 million |
| Cash at year-end | $10.71 million, including restricted cash | $14.53 million, including restricted cash |
| Debt outstanding | None | None |
Revenue rose 7.9%. Battery & Energy Products revenue declined 0.8% to $64.75 million, while Communications Systems revenue increased 58.7% to $17.71 million. Operating income grew 13%; management-reported adjusted EBITDA, a non-GAAP measure, increased to $7.50 million from $6.97 million.
Cash decreased by $3.83 million, primarily reflecting the Accutronics acquisition and share repurchases. Investing activities used $11.01 million, including $9.86 million net cash paid for the acquisition; capital expenditures were $1.22 million. Current assets were $49.51 million and current liabilities $11.33 million. The company reported $9.55 million of borrowing capacity under its asset-based facility in addition to $10.63 million of unrestricted cash. The $20 million facility was due to expire May 24, 2017; the company reported covenant compliance at year-end.
Material changes and unusual items
- Accutronics contributed $10.36 million of FY2016 revenue and $0.44 million of operating income. The acquisition used $11.16 million in cash. FY2016 results included $0.25 million of direct acquisition costs and a $0.10 million purchase-accounting inventory adjustment.
- Commercial sales increased $7.52 million, while government and defense sales declined $1.49 million overall. Medical sales increased substantially, supported by Accutronics and growth in core medical sales.
- Communications Systems gross margin fell to 31.2% from 41.4%, principally because of product mix associated with high-volume VIPER deliveries. Battery & Energy Products gross margin improved to 30.2% from 28.6%.
- Income tax provision declined to $0.10 million from $0.31 million; the reported effective tax rate was 2.7%. The company maintained a full valuation allowance on U.S. and certain U.K. deferred tax assets. It disclosed approximately $71.0 million of U.S. and $12.8 million of foreign net operating loss carryforwards.
- Foreign-currency translation adjustments reduced comprehensive income by $2.17 million. No goodwill or intangible-asset impairment was recorded in 2016; the McDowell Research trademark passed its impairment test by a relatively narrow 15% margin. A $0.15 million impairment had been recorded in 2015.
- The share repurchase program expired in June 2016. During 2016, the company repurchased 156,092 shares for $0.63 million in total consideration. It has never paid cash dividends and said it did not anticipate doing so in the foreseeable future.
Outlook, risks and contingencies
Management said the improving backlog, disciplined execution, continued investment in sales reach and product development positioned the company to pursue another year of profitable growth in 2017. It expected research and development spending to remain fairly consistent with 2016. This is directional commentary, not quantified revenue or earnings guidance.
Year-end backlog was approximately $26.2 million, expected to ship throughout 2017, versus $26.9 million a year earlier. Battery & Energy Products backlog increased to $23.1 million from $18.5 million, while Communications Systems backlog declined to $3.0 million from $8.4 million. Backlog is not a guarantee of orders or shipment timing.
Key risks include dependence on major defense customers and government spending, order timing and customer purchase decisions, competition and product obsolescence, sole-source supply interruptions and raw-material costs, foreign-exchange exposure, China operating risks, lithium-battery safety and shipping regulation, and execution of growth and acquisition plans. Two defense prime contractors each accounted for 13% and 12% of FY2016 revenue; together they represented 25%.
The company is defending an ongoing U.K. lawsuit related to the 2013 Ethiopian Airlines Boeing 787 fire. The claim seeks $42 million plus unspecified amounts. The filing says the investigation attributed the fire primarily to circumstances involving another company’s emergency locator transmitter, the claim is insured and being defended, and management did not believe material financial exposure was reasonably possible. The company also disclosed ordinary-course legal matters and stated it did not expect their disposition to materially affect its financial position, results or cash flows.
The independent auditor issued an unqualified opinion on the 2016 financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain, and the auditor did not provide, an audit opinion on internal control.
Important facts for investors to verify
- Whether the PNC credit facility was renewed or replaced before its May 2017 expiration, and whether borrowing availability or terms changed.
- Whether the $26.2 million backlog converted to revenue and cash as expected, particularly the Communications Systems orders and Battery & Energy Products demand.
- Whether Accutronics delivered the expected sales synergies and commercial growth, and how its contribution compares with acquisition-related costs and purchase-accounting effects.
- Developments in the Ethiopian Airlines litigation, insurance coverage and any change to management’s assessment of potential exposure.
- Whether Communications Systems forecasts and project awards support the carrying value of goodwill and the McDowell Research trademark, given its limited impairment-test headroom.
- Customer concentration, U.S. and foreign defense spending, supplier availability, currency movements and the realization of U.S. and U.K. tax loss carryforwards.