Ultralife Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018; nine-month results compared with periods ended October 1, 2017. Dollar amounts are in thousands except per-share data.
Business context
Ultralife designs and manufactures battery and energy products and communications systems for commercial, government, and defense customers. Its two segments are Battery & Energy Products and Communications Systems.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $20,330 | $21,047 | $66,263 | $63,022 |
| Gross profit / margin | $6,041 / 29.7% | $6,255 / 29.7% | $19,873 / 30.0% | $19,366 / 30.7% |
| Operating income / margin | $1,500 / 7.4% | $1,263 / 6.0% | $5,488 / 8.3% | $4,426 / 7.0% |
| Net income attributable to Ultralife | $1,408 | $1,098 | $5,185 | $3,848 |
| Diluted EPS | $0.09 | $0.07 | $0.32 | $0.24 |
| Adjusted EBITDA | $2,472 | $1,985 | $7,981 | $6,758 |
For the nine months, operating cash flow was $7,531 (prior year $3,657), capital expenditures were $1,994 ($971), and cash increased $7,124 to $25,454, including $441 of restricted cash. Current assets were $66,005 versus current liabilities of $12,364. The company had no revolver borrowings or outstanding related letters of credit; its $30,000 secured facility expires in May 2020. It reported compliance with credit covenants.
Changes versus prior comparable periods
- Q3 revenue fell 3.4%, mainly from lower non-U.S. government/defense and 9-Volt battery sales; lower Battery & Energy Products sales were partly offset by Communications Systems growth.
- Q3 operating income rose 18.7% as operating expenses declined 9.0% on tighter discretionary spending. Consolidated gross margin was unchanged at 29.7%.
- Nine-month revenue increased 5.1%, driven by 38.6% growth in Communications Systems, including U.S. Army-related shipments. Battery & Energy Products revenue declined 1.2%.
- Nine-month gross margin decreased to 30.0% from 30.7%, largely due to product mix; Communications Systems margin fell to 37.4% from 44.9% as competitively bid defense-contract sales increased.
- Nine-month net income attributable to Ultralife increased to $5,185 from $3,848. The effective tax rate declined to 4.0% from 8.8%.
Outlook, risks, and unusual items
- Management said it was positioned to deliver another year of profitable growth in 2018, citing recovery in U.S. defense spending and a strategy to diversify commercial and government/defense revenue. This is forward-looking, not a quantified forecast.
- Management highlighted announced Communications Systems contracts totaling $19.2 million for U.S. Army amplifier products and a $9.5 million IDIQ communications-kit contract for an undisclosed DoD branch.
- A Newark facility investment of up to $4,300 is intended to support premium 3-volt batteries for IoT and other markets. Qualification production was expected to begin in late 2018 and continue into 2019, with higher-volume U.S. production expected to ramp during 2019.
- After quarter-end, the board authorized repurchases of up to 2.5 million shares over no more than 12 months, effective November 1, 2018. The program does not require the company to buy shares.
- The CEO’s 200,000-share option award was modified and became fully vested in Q3 after the stock-price condition was met; the company recognized approximately $182 of incremental compensation cost.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The company had not estimated or recorded deferred taxes for GILTI provisions. It maintained valuation allowances on certain U.S. and U.K. deferred tax assets.
- The Dreamliner-related lawsuit was terminated in February 2018 without financial consequences. Management reported no material changes to the risk factors in its 2017 Form 10-K; cited risks include customer concentration, defense spending, supply disruption, foreign exchange, product safety, and regulation.
Important facts for investors to verify
- Whether announced defense contracts convert to shipments and revenue on expected schedules, and their effect on Communications Systems margins.
- Progress, spending, customer qualification, and 2019 production ramp for the 3-volt battery investment.
- Any share repurchases actually made and their impact on cash, share count, and capital allocation.
- Final effects of provisional tax accounting, including GILTI, and the realizability of deferred tax assets.
- Working-capital and capital-expenditure needs, and continued compliance with credit-facility covenants.