Ultralife Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended April 1, 2018; comparisons are with the three months ended April 2, 2017. Amounts are in thousands of dollars except per-share data. Ultralife designs and manufactures battery, energy, communications and electronics products, reported in Battery & Energy Products and Communications Systems.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $23,069 | $22,035 |
| Gross profit / margin | $7,282 / 31.6% | $6,890 / 31.3% |
| Operating income / margin | $2,356 / 10.2% | $1,841 / 8.4% |
| Net income attributable to Ultralife | $2,151 | $1,655 |
| Basic / diluted EPS | $0.14 / $0.13 | $0.11 / $0.11 |
| Operating cash flow | $(921) | $2,739 |
| Capital expenditures | $172 | $581 |
- Revenue increased 4.7%. Communications Systems revenue rose 28.3% to $5,845, while Battery & Energy Products revenue declined 1.5% to $17,224.
- Battery & Energy Products gross margin improved to 29.2% from 28.2%; Communications Systems gross margin fell to 38.4% from 43.0%, reflecting product mix. Consolidated gross margin increased 30 basis points.
- Operating expenses decreased 2.4% to $4,926. Management attributed higher operating income to revenue growth, improved consolidated gross margin and spending control. Adjusted EBITDA, a non-GAAP measure, was $2,973 (12.9% of revenue), versus $2,477 (11.2%).
- Operating cash use reflected working-capital needs: receivables increased $939, inventory increased $502, and accounts payable and other liabilities decreased $2,295. Cash and restricted cash totaled $18,330 at quarter-end, unchanged from year-end.
- Current assets were $63,751 and current liabilities $12,079. The company reported no outstanding borrowings or letters of credit under its $30,000 revolving facility, which expires in May 2020; it was in covenant compliance. Total liabilities were $15,984.
Changes, outlook and notable items
- Management cited higher medical and government/defense shipments as drivers of revenue growth. Medical-customer revenue in Battery & Energy Products grew 18.9%; government/defense revenue in that segment declined 6.5%, primarily due to shipment timing. Communications Systems growth reflected U.S. Army contract shipments and higher shipments of core products.
- Management described the quarter as a strong start and said backlog and adherence to its business model supported confidence in another year of profitable growth. No quantified full-year guidance was provided.
- The company is investing up to $4,300 to modernize its Newark facility for premium 3-volt batteries targeting IoT and smoke-detector markets. It expects project implementation and applicable product certification to be completed by year-end 2018. It also had approximately $2,483 of production-equipment purchase commitments.
- Tax accounting under the 2017 Tax Act remained provisional for certain items; the company had not estimated or recorded deferred taxes for GILTI provisions. The Q1 effective tax rate was 2.5%, versus 5.0%.
- Foreign-currency-related miscellaneous expense was $100, versus $25 a year earlier. The company cited currency fluctuations involving the U.S. dollar, pound sterling and euro.
- The Dreamliner-related lawsuit was terminated in February 2018 without financial consequences to the company. Management said other ordinary-course legal matters were not expected to have a material adverse effect.
- Risks identified include dependence on key customers, changing defense spending and government approvals, demand and shipment variability, supply disruptions, product safety and warranty exposure, foreign currency movements, China operations, regulatory compliance, and the ability to use tax-loss carryforwards. Management stated that disclosure controls were effective and there was no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the backlog and contract shipment timing described by management support continued growth, particularly in Communications Systems and medical batteries.
- Whether working-capital outflows reverse; operating cash flow was negative despite higher earnings.
- Progress, remaining cost and completion timing of the Newark 3-volt battery investment, including product certification and commercial demand.
- Final effects of provisional Tax Act accounting and the company’s future treatment of GILTI-related deferred taxes.
- Ongoing compliance with credit-facility covenants and funding needs for equipment commitments; the facility is secured by substantially all company assets.
- Adjusted EBITDA is non-GAAP and does not capture working-capital requirements, capital expenditures or debt-service cash needs; compare it with GAAP results and cash flow.