Business context and reporting period
Ultralife Corporation’s Form 10-K covers the fiscal year ended December 31, 2015, with comparisons to 2014. The company designs and manufactures battery and energy products and military communications systems for commercial, government and defense customers. Reported amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Revenue comes from two segments: Battery & Energy Products and Communications Systems. In January 2016, after year-end, Ultralife acquired Accutronics, a U.K. smart-battery and charger designer, for approximately $11.2 million in cash.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $76.4 million | $66.5 million |
| Gross profit / margin | $23.3 million / 30.5% | $19.4 million / 29.1% |
| Operating income (loss) | $3.3 million | $(1.4) million |
| Net income (loss) attributable to Ultralife | $2.9 million | $(2.1) million |
| Basic / diluted EPS | $0.18 / $0.17 | $(0.12) / $(0.12) |
| Adjusted EBITDA, non-GAAP | $7.0 million | $2.9 million |
| Cash from operating activities | $8.6 million | $3.7 million |
- Revenue increased 14.9%. Battery & Energy Products revenue rose 15.0% to $65.3 million; Communications Systems rose 14.7% to $11.2 million.
- Gross margin improved 1.4 percentage points, reflecting product mix, higher factory volumes and productivity initiatives. Operating expenses fell 3.9% to $20.0 million; operating expenses were 26.2% of revenue versus 31.3% in 2014.
- Cash and cash equivalents were $14.5 million, including $0.14 million of restricted cash, down $3.3 million year over year. The decrease principally reflected $9.4 million of share repurchases, partly offset by operating cash generation and lower inventory.
- Capital expenditures were $2.9 million. Financing activities used $8.9 million, primarily for share repurchases. Inventory ended at $23.8 million, down from $26.1 million; inventory turnover improved to 2.1 times from 1.7 times.
- Total assets were $81.5 million and total liabilities $15.5 million at year-end. Current assets of $51.9 million exceeded current liabilities of $10.8 million.
- There was no debt outstanding under the $20 million asset-based revolving facility; reported additional borrowing capacity was approximately $8.9 million. The facility expires May 24, 2017, is secured by substantially all assets, and the company reported compliance with its covenants.
Material changes and notable items
- Ultralife returned to profitability from a 2014 loss. Net income attributable to Ultralife improved by approximately $5.0 million.
- Government and defense revenue increased to $42.7 million, or 56% of revenue, from $36.4 million, or 55%. U.S. government sales were approximately $36.7 million, or 48% of revenue, versus $27.1 million, or 41%.
- One large defense prime contractor accounted for 24% of revenue, up from 18% in 2014. No other customer exceeded 10%.
- Year-end backlog increased to approximately $26.9 million from $14.8 million. The increase included an $8.2 million U.S. Army VIPER order through an OEM; most of the 2015 backlog was expected to ship during 2016.
- A $0.15 million non-cash impairment was recorded on the McDowell Research trademark because of delays in awarding large defense projects. No goodwill impairment was recorded; Communications Systems goodwill and net intangible assets totaled $17.9 million.
- Operating cash flow benefited from a $2.1 million inventory reduction. The company repurchased 2.26 million shares for $9.4 million during 2015.
- Accutronics was acquired after year-end for approximately $11.2 million in cash. Management cited commercial diversification, geographic expansion and expected cross-selling opportunities; the final purchase-price allocation was not complete at filing.
Outlook, risks and contingencies
Management said it entered 2016 positioned to pursue profitable growth through product development and market opportunities, and expected future R&D spending to be fairly consistent with 2015. The filing provides no quantified revenue or earnings guidance. Management expected a significant portion of acquisition-related cash use to be restored during 2016 through operating cash flow and working-capital management.
- Key risks include dependence on the largest customer and government/defense spending, uncertain timing or cancellation of contract awards and purchase orders, and the possibility that backlog may not convert to revenue as expected.
- Other disclosed risks include competition and product obsolescence; lithium-battery fire and transportation safety; warranty claims; limited-source suppliers; foreign exchange exposure; China operating and regulatory risks; cybersecurity; environmental and trade compliance; and the ability to protect intellectual property and retain key personnel.
- A lawsuit related to the 2013 Boeing 787 fire sought $42 million plus unspecified damages. The filing says the regulatory investigation identified circumstances involving another company’s emergency locator transmitter and that Ultralife believed there was not a reasonable possibility of material financial exposure; the case remained ongoing and was referred to insurers.
- Ultralife reported approximately $86.8 million of U.S. and U.K. net operating loss carryforwards and $1.6 million of tax credits, but maintained a full valuation allowance on applicable U.S. and U.K. deferred tax assets. Certain domestic NOLs begin expiring in 2019.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to opine on internal control effectiveness.
Important facts for investors to verify
- Whether the concentrated defense-customer relationship and government contract pipeline sustain revenue growth, and whether the $26.9 million backlog ships on schedule.
- Accutronics’ final purchase-price allocation, post-acquisition cash requirements and actual contribution to sales and profitability.
- Whether improved operating cash flow and margins persist after the 2015 inventory reduction and favorable product-mix effects.
- The status and potential financial effect of the $42 million Dreamliner-related claim, including insurance coverage and any developments in the litigation.
- Availability under the borrowing-base facility, covenant compliance and the effect of future share repurchases on cash and share count.
- Future impairment assumptions for Communications Systems goodwill and intangible assets, and the realizability and expiration profile of tax attributes.