Ultralife Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter ended September 25, 2016; comparisons are with the quarter ended September 27, 2015. Unless otherwise noted, financial amounts below are in thousands of dollars.
Business context and reporting period
Ultralife designs and sells battery and energy products and communications systems to commercial, government, and defense customers. It reports two segments: Battery & Energy Products and Communications Systems. The January 2016 acquisition of U.K.-based Accutronics added smart batteries and charger systems, expanding commercial and European OEM exposure.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $19,631 | $19,044 | $60,835 | $57,176 |
| Gross profit / margin | $5,997 / 30.5% | $5,900 / 31.0% | $18,302 / 30.1% | $17,766 / 31.1% |
| Operating income | $1,138 | $1,173 | $2,119 | $2,812 |
| Net income attributable to Ultralife | $1,019 | $1,047 | $1,764 | $2,367 |
| Diluted EPS | $0.07 | $0.07 | $0.11 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $2,046 | $2,055 | $5,008 | $5,324 |
Cash flow: Nine-month operating cash flow was $3,568, versus $7,428 in 2015. Investing activities used $10,787, including the Accutronics acquisition; financing activities used $426. Cash and cash equivalents fell $7,743 from year-end 2015 to $6,650 at September 25, 2016.
Balance sheet and debt: Total assets were $83,557 and total liabilities were $17,004. Current assets were $47,189 and current liabilities $11,476. The company had no borrowings under its $20,000 secured revolving facility and reported approximately $10,660 of available borrowing capacity; the facility expires May 24, 2017. The applicable rate was 4.5%. Capital expenditure commitments for production equipment were approximately $493.
Material changes versus comparable periods
- Q3 revenue rose 3.1%; nine-month revenue increased 6.4%, with Accutronics and higher Communications Systems shipments contributing.
- Q3 Communications Systems revenue rose 76.6% to $4,688, primarily on VIPER system shipments. Battery & Energy Products revenue fell 8.8% to $14,943, including lower government and defense sales and weaker comparison against prior-year demand for certain batteries.
- Gross margin declined 50 basis points in Q3 and 100 basis points for the nine-month period. Management cited Communications Systems product mix; the nine-month comparison also included a one-time purchase-accounting inventory adjustment.
- Nine-month operating income and Ultralife-attributable net income declined despite higher revenue. Accutronics contributed $7,551 of revenue and an operating loss of $61 for the period, including purchase-accounting effects and acquisition-related nonrecurring costs.
- Nine-month operating cash flow decreased $3,860 year over year, reflecting lower cash generation and working-capital movements, including payments for inventory procured to service backlog.
Outlook, commentary, risks, and unusual items
- Management said Q3 operating income was more than double Q2, the company had achieved profitability for eight consecutive quarters, and it remained poised to achieve profitable growth in 2016. The filing gives no specific numerical revenue or earnings guidance.
- Management cited weak economic conditions as a constraint on revenue growth and described efforts to control discretionary spending, develop products, improve operating leverage, and reduce inventory.
- The Accutronics acquisition was funded from general corporate funds. Nine-month results included $251 of direct acquisition costs and $96 of increased cost of sales from acquired-inventory purchase accounting; the company also reported $48 of one-time acquisition-related financing costs.
- The company is defending an ongoing U.K. lawsuit related to the 2013 Ethiopian Airlines Dreamliner fire. The suit seeks $42 million plus unspecified damages. Ultralife reports insurance coverage and says it does not believe a material financial exposure is reasonably possible; the litigation remains ongoing.
- Other disclosed risks include customer and defense-spending concentration, order timing and funding delays, product safety and warranty exposure, China operations, foreign-currency changes, raw-material supply, regulation, and possible impairment of goodwill or intangibles. Tax authorities may examine U.S. and foreign returns; the company maintains valuation allowances against certain deferred tax assets.
Most important facts for investors to verify
- Whether VIPER shipments and delayed Communications Systems orders continue, and how product mix affects segment margins.
- Accutronics’ integration, profitability, expected contribution, and cash requirements following the acquisition.
- Cash conversion and working-capital needs, alongside borrowing availability under the facility expiring in May 2017.
- Developments in the Dreamliner litigation, insurance coverage, and any change in management’s assessment of potential exposure.
- Whether management’s expectation of profitable 2016 growth is achieved; no quantified guidance was provided in this filing.