Ultralife Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014; comparisons are with the three months ended March 31, 2013. Dollar amounts are in thousands except per-share data.
Business context and results
Ultralife designs and manufactures battery and energy products and communications systems for government, defense, and commercial customers. Revenue fell primarily because U.S. government Communications Systems orders remained slow.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $15,285 | $21,019 |
| Gross profit / margin | $4,335 / 28.4% | $6,379 / 30.3% |
| Operating expenses | $5,431 | $6,004 |
| Operating income (loss) | $(1,096) | $375 |
| Net income (loss) attributable to Ultralife | $(1,286) | $434 |
| Basic and diluted loss per share | $(0.07) | Basic $0.02; diluted $0.02 |
| Adjusted EBITDA from continuing operations | $(45) | $1,477 |
| Cash from operating activities | $2,704 | $(701) |
| Capital expenditures | $312 | $332 |
Material changes and financial position
- Revenue declined 27.3%. Battery & Energy Products revenue rose 6.7% to $13,922, while Communications Systems revenue fell 82.9% to $1,363.
- Battery & Energy Products gross margin improved to 27.3% from 23.7%; Communications Systems gross margin was 39.2%, down from 41.2%. The shift away from higher-margin Communications Systems sales contributed to the consolidated margin decline.
- SG&A fell 13.8% to $3,995, while R&D increased 4.9% to $1,436. Lower operating expenses did not offset the reduced gross profit.
- Cash and equivalents were $18,899 at quarter-end, up $2,410 from year-end 2013. Operating cash generation was driven chiefly by a $4,183 reduction in receivables, partly offset by the net loss, higher inventory, and lower accounts payable and other liabilities.
- Total assets were $88,369 and shareholders’ equity was $72,661. Current assets were $57,363 versus current liabilities of $11,314.
- No borrowings or letters of credit were outstanding under the $20 million secured revolving facility. Borrowing capacity was approximately $11,473. The filing reports no debt outstanding.
Outlook, risks, and unusual items
- Management maintained its 2014 outlook for mid-single-digit organic revenue growth, year-over-year operating profit improvement, and a mid-single-digit operating margin, despite constraints on global government spending. Order and shipment timing may cause quarterly variability.
- Management attributed the revenue shortfall mainly to delayed or slow U.S. government Communications Systems orders. Battery inventory was built in anticipation of government orders delayed into Q2; annualized inventory turns were approximately 1.8 versus 2.0 a year earlier.
- The company expects it will likely need to relocate its China facility when its lease expires in October 2014 because of possible local zoning changes. It is seeking alternative space and planning production ahead of a move, but had not reliably estimated relocation costs or any government contribution.
- After quarter-end, the board authorized a repurchase program of up to 1.8 million shares over no more than 12 months, effective May 1, 2014. Repurchases are discretionary and subject to credit-agreement conditions, including minimum undrawn availability and use of unrestricted cash.
- The company’s Wayne County trade-secret litigation against Arista Power and a former employee continues; discovery is in process. Arista discontinued its remaining claims against Ultralife and an employee with prejudice in March 2014.
- Other notable items: discontinued operations produced a $61 loss versus $264 income in the prior-year quarter; the prior-year income was primarily related to a final settlement concerning the former U.K. facility. The company also disclosed $7,296 of unrecognized tax benefits and a full valuation allowance against deferred tax assets related to cumulative U.S. and U.K. losses.
- Management cited risks including reliance on key customers, defense-spending uncertainty, order delays, China operations, warranty costs, supply disruptions, foreign exchange, and limits on use of tax-loss carryforwards. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether delayed government orders convert to revenue and whether Communications Systems sales recover.
- Progress toward the China facility relocation, potential operating disruption, and eventual relocation costs.
- Execution of the 2014 outlook and whether cash generation remains resilient despite reported losses.
- Any share repurchases, their effect on cash and borrowing availability, and compliance with facility conditions.
- Developments in the ongoing Wayne County litigation and any material changes in tax positions or warranty claims.