Ultralife Corporation (NASDAQ: ULBI) — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018, compared with FY2017. This is an annual filing, not a standalone fourth-quarter report. Unless noted otherwise, dollar amounts are in thousands; per-share amounts are in dollars.
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.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $87,190 | $85,531 |
| Gross profit / margin | $25,583 / 29.3% | $26,232 / 30.7% |
| Operating expenses | $19,028 | $19,756 |
| Operating income | $6,555 | $6,476 |
| Net income attributable to Ultralife | $24,930 | $7,648 |
| Diluted EPS | $1.53 | $0.48 |
| Adjusted EBITDA (non-GAAP) | $9,902 | $9,594 |
| Cash from operating activities | $10,886 | $7,270 |
| Capital expenditures | $4,185 | $1,392 |
- Revenue grew 1.9%. Battery & Energy Products revenue was $70,497, up 1.0%; Communications Systems revenue was $16,693, up 6.0%.
- Segment gross profit was $19,574 for Battery & Energy Products and $6,009 for Communications Systems. Their respective gross margins were 27.8% and 36.0%.
- Net income included a non-cash $18,652 tax benefit from releasing the valuation allowance on U.S. deferred tax assets. Management attributed $0.40 per diluted share to operating performance and $1.17 to the tax benefit. FY2017 also included a $1,939 non-cash tax benefit; management reported operating-performance EPS of $0.37 per diluted share for that year.
- Adjusted EBITDA increased 3.2% year over year. It is a non-GAAP measure and should not be treated as a substitute for GAAP results or cash flow.
- Cash and restricted cash totaled $25,934 at year-end, versus $18,330 a year earlier. Inventory declined 13.2% year over year to $22,843. The company reported no debt and approximately $30,000 available under its revolving credit facility.
- Year-end total assets were $120,104 and shareholders’ equity was $104,534. The current balance sheet showed $67,221 of current assets and $14,947 of current liabilities.
Material changes versus FY2017
- Revenue increased $1,659, but gross profit fell $649 and gross margin contracted 140 basis points, mainly due to product mix. Communications Systems gross margin fell to 36.0% from 41.8%, while Battery & Energy Products margin declined to 27.8% from 28.2%.
- Operating expenses decreased $728, helping operating income rise modestly despite lower gross profit.
- Operating cash flow increased $3,616, supported in part by a $3,186 inventory reduction. Capital expenditures increased, primarily for automation equipment, including 3-Volt cell production.
- Year-end backlog rose 30.3% to $50,944. Communications Systems backlog increased to $21,689 from $8,073, largely reflecting October 2018 defense contract awards; Battery & Energy Products backlog declined to $29,255 from $31,013.
- U.S. customers represented 61% of revenue, compared with 56% in FY2017; non-U.S. revenue was $34,136, or 39%.
Outlook, risks and unusual items
- Management expected profitable growth in 2019, citing more than $50 million in starting backlog, new revenue opportunities and continued expense discipline. The year-end backlog was expected to ship throughout 2019, but government contracts and long-term agreements do not guarantee purchase volumes or timing.
- Management said R&D spending could increase by 20% or more over FY2018 levels to advance battery and vehicle-amplifier-adaptor programs. The company had approximately $2,848 of production machinery and equipment purchase commitments at year-end.
- The $18,652 deferred-tax valuation-allowance release depended on management’s assessment that future U.S. taxable income would be sufficient to realize deferred tax assets. U.S. NOL carryforwards were approximately $63,388, with stated expirations from 2019 through 2035; U.K. NOLs of approximately $10,220 remained valuation-allowanced.
- Key risks include reliance on a major defense contractor (16% of FY2018 revenue), military spending and government order timing, competition and product obsolescence, China operations and potential tariffs, sole-source supply interruptions and input-cost increases, lithium-battery fire and transportation risks, foreign-exchange exposure, cybersecurity, and warranty or environmental liabilities.
- The Dreamliner-related lawsuit was terminated in February 2018 without financial consequences to the company. The company reported no material adverse effect expected from ordinary-course legal proceedings.
- The board authorized repurchases of up to 2.5 million shares over 12 months. Ultralife repurchased 105,674 shares for $742 in FY2018; repurchases through February 6, 2019 totaled 372,774 shares for $2,697.
Important facts for investors to verify
- How much of reported earnings growth is sustainable after excluding the non-cash tax benefit, and whether forecast U.S. taxable income supports realization of deferred tax assets.
- Whether the $50.9 million backlog converts to revenue on schedule, particularly the large Communications Systems awards, and what margins those shipments generate.
- Whether gross margins recover from FY2018 levels, especially in Communications Systems, where program mix drove a substantial decline.
- Exposure to the major defense customer, U.S. government procurement and budget timing, and the extent to which contract awards translate into firm orders.
- Cash deployment, including planned capital spending, the remaining share-repurchase authorization and the company’s compliance with credit-facility covenants.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective as of year-end.