Business context and reporting period
Ultralife Corporation filed this unaudited Form 10-Q for the quarter ended September 28, 2014. The company designs and manufactures battery and energy products and communications systems for commercial, government, and defense customers. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $16.062 | $20.361 | $46.546 | $58.659 |
| Gross profit / margin | $4.486 / 27.9% | $6.127 / 30.1% | $13.033 / 28.0% | $17.028 / 29.0% |
| Operating income (loss) | $(0.055) | $0.652 | $(2.475) | $(0.847) |
| Net income (loss) attributable to Ultralife | $(0.323) | $0.644 | $(2.969) | $(0.995) |
| Adjusted EBITDA from continuing operations | $0.815 | $1.798 | $0.577 | $2.473 |
- Q3 basic loss per share was $0.02, versus income per diluted share of $0.04 in the prior-year quarter. Nine-month basic loss per share was $0.17 versus $0.06.
- Operating cash flow was $0.505 for the nine months, versus $2.399 a year earlier. Capital spending was $0.968; cash declined $0.918 from year-end to $15.571.
- At September 28, cash was $15.571, with no borrowings under the credit facility and approximately $11.9 of additional borrowing capacity. The facility provides up to $20 million, subject to its borrowing-base formula.
- Current assets were $56.570 and current liabilities $12.034. Inventory was $28.500, up from $26.053 at year-end; receivables were $10.470, down from $14.238.
- No material debt was outstanding. The company repurchased 160,557 shares during Q3 for $0.550 million; nine-month cash paid for treasury shares was $0.589 million.
Material changes versus prior comparable periods
- Q3 revenue declined 21.1%; nine-month revenue fell 20.6%. Management attributed the decline primarily to reduced government and defense spending and delayed Communications Systems orders.
- Communications Systems revenue fell 68.6% in Q3 and 62.5% for the nine months. Battery & Energy Products revenue rose 3.0% in Q3 but declined 3.0% year to date. Commercial battery sales grew 36.0% in Q3 and 27.4% for the nine months, partly offset by lower government and defense sales.
- Lower Communications Systems sales reduced the higher-margin segment’s share of Q3 revenue, contributing to gross margin compression. Battery & Energy Products margins improved, reflecting a greater mix of commercial products.
- Operating expenses fell 17.1% in Q3 and 13.2% for the nine months, mainly due to lower discretionary spending, sales commissions, and the timing of product-development costs. However, lower gross profit drove operating losses in Q3 and year to date.
- Q3 miscellaneous expense increased to $0.158 million from $0.008 million, primarily due to foreign-currency effects. Nine-month miscellaneous expense was $0.128 million versus $0.031 million.
Outlook, commentary, risks, and unusual items
- Management expected full-year revenue to be as much as 20% below the prior year and an operating loss of approximately 3%–4% of sales, citing weak defense spending and timing uncertainty for Communications Systems projects. It cautioned that order and shipment timing could make quarterly results variable.
- The China manufacturing facility had to relocate after its lease was not extended. A replacement Shenzhen facility was leased for five years. The company received $0.740 million in government compensation, recognizing $0.356 million as an expense reduction in Q3; relocation expenses were $0.475 million year to date, and total costs were estimated at approximately $0.900 million.
- The company’s Arista Power litigation continues, with discovery in process. Arista’s remaining claims against Ultralife and an employee in a separate action were withdrawn with prejudice.
- Other disclosed risks include dependence on key customers, further defense-budget reductions and order delays, Chinese operations and relocation disruption, warranty costs, supply interruptions, currency movements, intellectual-property protection, and possible limits on use of tax-loss carryforwards.
- Ultralife reported approximately $65 million of domestic and foreign net operating loss carryforwards and a full valuation allowance against relevant deferred tax assets. Unrecognized tax benefits were $7.296 million; management did not expect significant change over the next twelve months.
- Disclosure controls and procedures were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether defense spending and delayed government orders continue to constrain Communications Systems revenue, and whether management’s full-year outlook is achieved.
- Whether commercial battery growth and improved Battery & Energy Products margins can offset reduced government demand and a weaker segment mix.
- Cash generation, inventory levels, and available borrowing capacity, particularly as the company funds capital spending, relocation costs, and share repurchases.
- Actual China relocation costs and production/customer disruption compared with the estimated $0.900 million total expense.
- Progress and potential outcomes of the continuing Arista litigation, tax examinations, and realization or use of net operating loss carryforwards.