Ultralife Corporation — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Unless indicated otherwise, amounts are in millions of dollars; the filing presents financial statements in thousands. This is an annual report, not a standalone fourth-quarter report.
Business context
Ultralife designs and manufactures battery and energy products and military communications systems for commercial, government and defense customers. It reports two segments: Battery & Energy Products and Communications Systems. On May 1, 2019, it acquired Southwest Electronic Energy Corporation (SWE), expanding its industrial battery business, including oil and gas and subsea markets.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $106.795 | $87.190 |
| Gross profit / margin | $31.165 / 29.2% | $25.583 / 29.3% |
| Operating income | $7.368 | $6.555 |
| Net income attributable to Ultralife | $5.205 | $24.930 |
| Diluted earnings per share | $0.32 | $1.53 |
| Adjusted EBITDA (non-GAAP) | $11.007 | $9.902 |
| Cash from operating activities | $(2.970) | $10.886 |
- Revenue rose 22.5%. Battery & Energy Products revenue was $83.996 million, up 19.1%; Communications Systems revenue was $22.799 million, up 36.6%.
- Segment gross profit was $22.813 million for Battery & Energy Products (27.2% margin) and $8.352 million for Communications Systems (36.6% margin).
- Operating expenses increased 25.1% to $23.797 million, including higher SWE-related costs and increased product-development spending. Consolidated gross margin eased 10 basis points.
- 2019 net income included a $1.457 million tax provision. The much higher 2018 net income reflected a one-time, non-cash $18.652 million tax benefit from releasing the U.S. deferred-tax-asset valuation allowance.
- Cash and restricted cash totaled $7.405 million at year-end, versus $25.934 million a year earlier. Working capital was $53.183 million and the current ratio was 4.1.
- Cash used in investing was $31.529 million, including $25.248 million net cash paid for SWE and $6.281 million of capital expenditures. Operating cash use reflected a $13.037 million increase in working capital, including receivables and inventory.
- Year-end debt principal was $17.316 million: $7.134 million under the term loan and $10.182 million under the revolver. The company reported covenant compliance; variable interest rates were 3.41% on the term loan and 3.56% on the revolver. There were no off-balance-sheet arrangements.
Changes, outlook and material items
- SWE contributed $18.746 million of revenue and $1.238 million of net income from acquisition through year-end. Reported revenue growth therefore includes the acquired business.
- Commercial revenue increased 45.4%, largely due to SWE; Battery & Energy Products commercial sales became 71.1% of segment sales. The filing reports a 22% decline in 9-volt sales, particularly in U.S. markets affected by tariffs on China-sourced products.
- Government and defense revenue was $47.113 million, or 44% of total revenue, compared with $46.146 million, or 53%, in 2018. Two defense prime contractors accounted for 14% and 12% of 2019 revenue.
- Year-end backlog was $42.558 million, down 16.5% from $50.944 million. Battery & Energy Products backlog increased 22.2% to $35.744 million; Communications Systems backlog fell 68.6% to $6.814 million after deliveries against prior-year awards. The reported backlog was expected to ship during 2020 and excludes potential future deliveries under certain indefinite-delivery contracts.
- Management said higher Battery & Energy Products backlog and new opportunities supported confidence in continued profitable growth in 2020. This is qualitative outlook, not quantified revenue or earnings guidance. Management expected R&D spending could rise by 10% or more from 2019 levels based on current initiatives.
- The company held $58.4 million of U.S. net operating loss carryforwards and $1.907 million of U.S. tax-credit carryforwards. Management believed the U.S. deferred tax assets were more likely than not to be realized; approximately $10.6 million of U.K. loss carryforwards remained valuation-allowed.
- The annual goodwill and trademark impairment tests found no impairment. Fair value exceeded carrying value by more than 10% for the tested reporting units and trademarks, except SWE goodwill, acquired five months earlier.
- Auditors gave unqualified opinions on the financial statements and internal control over financial reporting. SWE, representing about 12% of consolidated assets and 18% of 2019 revenue, was excluded from the company’s internal-control assessment while it was being integrated.
Risks and contingencies
- Customer and defense-budget concentration, government procurement delays or cancellations, contract protests, and the absence of guaranteed purchase volumes under some awards.
- Supply interruptions or cost increases for limited-source components; China operating, trade and tariff risks; foreign-currency exposure; and oil-and-gas market cyclicality.
- Lithium-battery fire and product-safety risks, warranty claims, shipping-rule changes, and environmental or regulatory compliance costs.
- Competition, product obsolescence, execution and capacity demands from growth, and the risk that new products or commercial markets do not achieve adoption.
- Goodwill and intangible-asset impairment, tax-asset realization, cybersecurity, intellectual-property protection, and retention of key personnel are additional disclosed risks.
- The company reported no known legal matter expected to have a material adverse effect, while acknowledging the uncertainties inherent in legal proceedings.
Most important facts for investors to verify
- How much of revenue growth and future profitability is attributable to SWE, and how integration and acquisition economics develop.
- Whether receivables and inventory convert to operating cash, given 2019 negative operating cash flow and the significant working-capital increase.
- Conversion of 2020 backlog and potential military contract awards into orders, shipments and margins; distinguish firm backlog from potential IDIQ contract amounts.
- Customer concentration, defense spending exposure, and the effect of tariffs on China-sourced 9-volt batteries.
- Debt repayment, revolver availability, covenant headroom and interest-rate exposure following the SWE acquisition.
- Assumptions supporting realization of U.S. deferred tax assets and the sensitivity of goodwill valuations, particularly for SWE.