Ultralife Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 29, 2015; comparison is with the three months ended March 30, 2014. Dollar amounts below are in thousands except per-share data. Ultralife supplies battery and energy products and communications systems to government, defense and commercial customers.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $19,177 | $15,285 |
| Gross profit / margin | $6,007 / 31.3% | $4,335 / 28.4% |
| Operating expenses | $5,185 | $5,431 |
| Operating income (loss) | $822 | $(1,096) |
| Net income (loss) attributable to Ultralife | $533 | $(1,286) |
| Basic and diluted EPS | $0.03 | $(0.07) |
| Cash provided by operating activities | $3,160 | $2,704 |
Revenue increased 25.5%. Battery & Energy Products revenue rose 16.9% to $16,276, while Communications Systems revenue more than doubled to $2,901. Management attributed growth primarily to increased U.S. government and defense orders, including higher battery and charger shipments, and sales of new communications products. Gross margin improved 290 basis points, which management attributed to product mix, higher production volume and productivity improvements. Operating expenses declined 4.5% amid continued discretionary-spending controls.
Cash and cash equivalents were $20,133 at March 29, with $139 of restricted cash; the MD&A describes total cash including restricted cash as $20,272. The company generated $3,160 from operations, used $454 in investing activities (including $470 of capital expenditures), and used $279 in financing activities, primarily for share repurchases. Inventory fell by $1,326 during the quarter. The balance sheet reported total assets of $89,055, current liabilities of $12,208 and shareholders’ equity of $72,274.
There were no credit-facility borrowings or letters of credit outstanding. The company reported approximately $11,067 of additional borrowing capacity under its $20 million asset-based facility, which expires May 24, 2017. It also reported $412 of machinery and equipment purchase commitments, expected to be funded from operating cash flows.
Changes, outlook and notable matters
- The company moved to a replacement Shenzhen facility in late 2014. It recognized $61 of government relocation compensation as a reduction of expenses in Q1 2015; approximately $158 of related expenses remained to be incurred, primarily employee retention payments, with deferred compensation intended to offset them.
- Management said the company began 2015 on a solid note and remained positioned to generate revenue growth and profitable results for 2015. No quantified full-year guidance was provided.
- Other expense was $188, versus $63 in the prior-year quarter. Management attributed the increase mainly to currency-related transactions affected by the stronger U.S. dollar against the euro and pound sterling. It also cited higher net interest and financing expense, including costs to insure certain non-U.S. receivables.
- The board extended the share repurchase program through April 30, 2016, subject to the original aggregate authorization of 1.8 million shares. The company repurchased 78,401 shares for $298 during the quarter.
- A lawsuit against Arista Power and a former employee remained in discovery. Ultralife seeks damages and injunctive relief; the company said the outcome and any recovery could not be predicted.
- Tax matters include a full valuation allowance against deferred tax assets associated with U.S. and U.K. historical losses, approximately $65,600 of net operating loss carryforwards and $7,296 of unrecognized tax benefits. U.S. federal returns for 2011–2013 were under IRS examination.
- Risks identified include dependence on key customers, changes or delays in defense spending and procurement, demand and supply volatility, Chinese operations, foreign-exchange movements, warranty costs, intellectual-property protection, and limitations on use of tax loss carryforwards. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
- The filing gives conflicting prior-year adjusted EBITDA figures: the overview states $(45), while the detailed reconciliation reports $(85). The filing text does not provide a clear single value.
Important facts for investors to verify
- Whether higher government and defense orders, and new-product sales, continue to support revenue and margins.
- The cash-flow quality and sustainability of working-capital contributions, particularly the inventory reduction and increase in payables and other liabilities.
- The company’s actual cash position and adjusted EBITDA comparison; the filing’s cash presentation includes restricted cash in MD&A, and its prior-year adjusted EBITDA figures conflict.
- Developments in the Arista litigation, IRS examinations and uncertain tax positions, and completion and costs of the Shenzhen relocation.
- Repurchase activity, capital spending commitments, and borrowing availability under the asset-based facility.