Ultralife Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 27, 2016; comparisons are with the three months ended March 29, 2015. Dollar amounts are in thousands except per-share data. The company designs and manufactures battery, power, communications, and electronics products for commercial, government, and defense customers.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $20,833 | $19,177 | +8.6% |
| Gross profit / margin | $6,405 / 30.7% | $6,007 / 31.3% | +6.6% profit; margin down 0.6 percentage points |
| Operating income / margin | $482 / 2.3% | $822 / 4.3% | Down 41.4% |
| Net income | $281 | $523 | Down 46.3% |
| Net income attributable to Ultralife | $299; $0.02 per share | $533; $0.03 per share | Down 43.9% |
| Adjusted EBITDA (non-GAAP) | $1,506 | $1,510 | Nearly unchanged |
| Operating cash flow | $(2,875) | $3,160 | Declined $6,035 |
Cash and cash equivalents fell to $2,759 from $14,393 at year-end, primarily reflecting the Accutronics acquisition and working-capital needs. Accounts receivable rose $3,710 and inventory rose $3,166 from December 31, 2015. Investing cash outflow was $9,926, including the acquisition; capital expenditures were $69. The company reported $1,156 of revolving-credit borrowings, approximately $11,589 of additional borrowing capacity, and a 2.43% applicable interest rate. The facility is a secured, borrowing-base line of credit and expires May 24, 2017. Current assets were $47,625 and current liabilities $13,888.
Business changes and segment performance
- Revenue growth reflected Accutronics, acquired January 13, 2016, and higher Communications Systems shipments, including VIPER systems. Accutronics contributed $2,486 of revenue and an operating loss of $275 in the quarter.
- Battery & Energy Products revenue was $16,440, up 1.0%; segment contribution was $5,217, or 31.7% of revenue, versus 29.4% a year earlier. Excluding the $91 inventory fair-value purchase-accounting charge, management said segment gross margin would have been 32.2%.
- Communications Systems revenue was $4,393, up 51.4%, but segment contribution was $1,188, or 27.0% of revenue, versus 42.2% a year earlier. Management attributed the margin decline mainly to sales mix.
- Consolidated gross margin declined primarily because acquired Accutronics inventory was written up to fair value and sold during the quarter. Operating expenses increased 14.2% to $5,923; excluding Accutronics, they declined 5.1%, which management attributed to discretionary-spending controls.
Outlook, risks, and unusual items
- Management said the company remained well positioned to deliver profitable growth in 2016, with Accutronics adding to its market opportunities. The filing provides no numerical revenue, earnings, or cash-flow guidance.
- Management believed operating cash flow and, if needed, the credit facility would meet current and long-term funding requirements for the foreseeable future. However, the quarter used substantial cash, and the company cited receivables timing and inventory to fulfill backorders as working-capital demands.
- Accutronics’ purchase-price allocation was preliminary. The company recorded $4,407 of acquisition goodwill and $4,776 of identifiable intangible assets; goodwill is not tax deductible. Pro forma results for Q1 2015, assuming the acquisition had occurred then, were revenue of $22,330 and net income of $410; the company cautioned these figures are informational and not indicative of actual or future results.
- The company reported acquisition-related purchase-accounting, direct, and financing costs. The filing cites a $91 inventory adjustment and describes total one-time costs as approximately $342–$343; the note and MD&A give differing figures for direct acquisition costs. These items affected reported earnings and warrant reconciliation.
- An ongoing Ethiopian Airlines lawsuit over the 2013 Boeing 787 fire seeks $42,000 plus unspecified damages. Ultralife is defending the action with its insurers and said it did not believe a material financial exposure was reasonably possible. The filing also describes a longstanding Arista Power lawsuit; the company does not intend to pursue its claims following Arista’s Chapter 7 filing.
- Other stated risks include customer concentration, demand and military-spending variability, China operations, product safety and warranty exposure, supply constraints, foreign-exchange movements, intellectual-property protection, regulatory compliance, and possible goodwill or intangible-asset impairment. The company reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification priorities
- Track cash conversion, receivables, inventory, backlog fulfillment, and borrowing-base availability after the acquisition-related cash decline.
- Assess Accutronics’ operating contribution, integration progress, and final purchase-price allocation, including the resulting amortization and tax effects.
- Reconcile the filing’s differing acquisition-cost descriptions and evaluate how much of the earnings decline reflects recurring operations versus one-time items.
- Monitor Communications Systems margins and the timing of delayed orders, as well as Battery & Energy Products performance excluding acquisition effects.
- Review developments in the Dreamliner litigation, insurance coverage, and the company’s exposure to other contingencies.