Ultralife Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 28, 2015; comparisons are to periods ended June 29, 2014. Dollar amounts are in thousands except per-share data. Ultralife makes batteries, power products, and communications systems, reported in Battery & Energy Products and Communications Systems segments.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $18,955 | $15,199 | $38,132 | $30,484 |
| Gross profit / margin | $5,859 / 30.9% | $4,212 / 27.7% | $11,866 / 31.1% | $8,547 / 28.0% |
| Operating income (loss) | $817 | $(1,324) | $1,639 | $(2,420) |
| Net income (loss) attributable to Ultralife | $788 | $(1,360) | $1,321 | $(2,646) |
| EPS attributable to common shareholders | $0.05 | $(0.08) | $0.08 | $(0.15) |
| Adjusted EBITDA from continuing operations (non-GAAP) | $1,725 | $(174) | $3,272 | $(269) |
- Revenue drivers: Q2 Battery & Energy Products revenue rose 31.3% to $15,972, led by U.S. government and defense shipments; Communications Systems revenue was down 1.7% to $2,983. For the first half, the segments increased 23.6% to $32,248 and 33.8% to $5,884, respectively.
- Cash flow: First-half operating cash flow was $4,745, versus $986 in 2014. Investing used $872, primarily for property and equipment. Financing used $5,813, mainly for $5,887 of treasury-stock repurchases. Cash declined $1,922 to $15,789.
- Balance sheet and debt: At June 28, cash was $15,789; current assets were $52,637 and current liabilities $10,606. Total liabilities were $15,234 and total equity $67,701. No revolving-credit borrowings or letters of credit were outstanding; reported additional borrowing capacity was approximately $11,409 under the $20 million secured facility.
Material changes and management commentary
- Q2 revenue grew 24.7%, gross margin improved 320 basis points, and operating expenses fell 8.9%; the company moved from an operating loss to operating profit. Management attributed the improvement to stronger sales, favorable product mix, higher production volumes, productivity gains, and expense control.
- First-half revenue increased 25.1%, and Ultralife returned to attributable net income from a loss in the prior-year period. Operating expenses decreased 6.7%.
- Management said first-half revenue growth of 25.1% and EPS improvement of $0.23 increased its confidence in top-line growth and profitable results in 2015. The filing provides no quantified full-year forecast.
- The board expanded the share-repurchase authorization by 1.6 million shares on June 2, 2015. Ultralife repurchased 1,476,855 shares during the first half for $5,805 excluding fees; these buybacks were the primary reason cash declined. The program is discretionary and does not require further repurchases.
- A federal tax examination concluded successfully, increasing reported domestic NOL carryforwards by $19.9 million. Unrecognized tax benefits fell from $7,296 to $518 following a $6,778 settlement-related reduction. The company reported $86.2 million of domestic and foreign NOL carryforwards and a full valuation allowance against certain U.S. and U.K. deferred tax assets.
Risks, contingencies, and unusual items
- Dreamliner litigation: Ethiopian Airlines sued Ultralife and other suppliers over the 2013 aircraft fire, seeking $42 million plus unspecified damages. The company says preliminary findings implicated another manufacturer’s emergency locator transmitter, has referred the matter to its insurers, and believes a material financial exposure is not reasonably possible.
- Arista Power litigation: Ultralife’s action alleging misuse of confidential information and trade secrets remains in discovery. The outcome and any potential recovery cannot be predicted.
- Management cites customer concentration, defense-budget uncertainty, demand and supply risks, Chinese operations, foreign-exchange movements, warranty costs, intellectual-property protection, and tax attributes among risks that could affect results.
- China relocation payments were complete by June 28, 2015. The filing reports compensation recognized as expense reductions, but the note and MD&A give differing six-month amounts; this disclosure is not clear from the filing text.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The company was evaluating the impact of the new revenue-recognition standard, then expected to take effect January 1, 2017, subject to a proposed delay.
Important facts for investors to verify
- Whether defense-related orders and the large international prime contractor’s demand persist, given their importance to Battery & Energy Products growth.
- The reconciliation of China relocation compensation: the note reports $219 for the six months, while MD&A reports $61.
- The status, insurance coverage, and potential exposure of the Dreamliner lawsuit, notwithstanding management’s stated assessment.
- Repurchase authorization and remaining shares: the filing gives different remaining amounts for different dates and scopes (1,706,391 at June 28 in the quarterly table; 1,458,309 at July 29 in the note).
- Cash generation, inventory turnover, and working-capital trends, as well as utilization and terms of the asset-based credit facility.