Ultralife Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. Unless otherwise noted, dollar amounts are in thousands. Ultralife makes battery and energy products and communications systems, reported in two operating segments.
Financial results and liquidity
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $21,019 | $27,501 |
| Gross profit / gross margin | $6,379 / 30.3% | $6,593 / 24.0% |
| Operating expenses | $6,004 | $7,882 |
| Operating income (loss) | $375 | $(1,289) |
| Continuing-operations net income (loss) | $164 | $(1,431) |
| Net income (loss) attributable to Ultralife | $434 | $(1,502) |
| Diluted EPS | $0.02 | $(0.09) |
| Adjusted EBITDA from continuing operations (non-GAAP) | $1,477 | $65 |
- Revenue fell 23.6%. Battery & Energy Products revenue declined 35.0% to $13,053, primarily amid weaker U.S. government and defense orders and lower 9-volt battery sales. Communications Systems revenue rose 7.4% to $7,966, supported by amplifier orders.
- Gross margin improved 630 basis points. Management cited productivity gains, improved manufacturing variances, higher Communications Systems volume and mix, and certain prior-year property-tax credits.
- Cash and cash equivalents were $8,486 at March 31, down $1,170 from year-end; restricted cash was another $422. Total cash including restricted cash was $8,908. Total assets were $92,242 and shareholders’ equity was $73,954.
- Operating cash flow was $(701) in total, including $297 from continuing operations and $(998) from discontinued operations. Capital spending was $332; financing activities provided $12. Management attributed continuing-operations cash use mainly to working-capital outflows, including lower payables and the U.K. lease settlement, partly offset by lower receivables and inventory.
- No revolver borrowings were outstanding. The company reported approximately $13,965 of borrowing capacity, a 3.00:1.00 fixed-charge ratio against a 1.20:1.00 minimum, and compliance with covenants. The $20,000 secured facility was due to mature May 15, 2013.
Material changes, outlook and risks
- Operating expenses declined 23.8%, mainly from lower general and administrative spending, focused R&D investment and lower selling costs. The operating result improved by $1,664 year over year.
- Discontinued operations contributed $264 of income, including a $241 gain from settling U.K. facility restoration costs below the prior estimate. The company expected approximately $500 of annualized savings from the U.K. facility move beginning in Q2 2013.
- Management reiterated 2013 expectations for low-to-mid-single-digit revenue growth and a mid-single-digit operating margin, with growth led by Communications Systems and modest gains in Battery & Energy Products. It cautioned that order and shipment timing could make quarterly results variable.
- The company was seeking a replacement credit facility for the May 15 maturity, targeting comparable availability and improved terms. Management expressed confidence in obtaining favorable terms but gave no assurance it could complete an acceptable refinancing.
- Other disclosed risks include constrained U.S. government spending, dependence on key customers, demand and order timing, defense procurement, competition, raw-material availability, Chinese operations, business disruptions and warranty claims. The Arista litigation remained in discovery: Ultralife pursued claims against Arista and a former employee, while Arista alleged damages exceeding $60,000; Ultralife said the claims were without merit. The filing does not quantify a probable loss or provide a clear estimate of potential exposure.
- Inventory turnover was reported at an annualized 2.0 turns versus 3.0 a year earlier. Management noted an approximately $1,900 reclassification to an inventory reserve after determining deferred revenue on specific inventory would not be realized.
Important facts for investors to verify
- Whether the replacement revolving credit facility was executed before or at the May 15, 2013 maturity, and its availability, pricing, collateral and covenant terms.
- Whether weaker Battery & Energy Products demand and lower inventory turnover persisted, and whether the inventory reserve adequately reflects the affected products.
- Whether forecast revenue growth and operating margin were achieved, given U.S. government spending constraints and variable order timing.
- Developments and any financial exposure from the Arista litigation, as well as collection of the long-term customer receivable and remaining fire-insurance proceeds.