Ultralife Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended July 1, 2012; comparative periods ended July 3, 2011. Dollar figures below are in thousands unless stated otherwise. Continuing-operations results exclude businesses presented as discontinued operations.
Business context and financial performance
Ultralife designs and manufactures batteries, power solutions, communications equipment, and related systems. Its continuing businesses are Battery & Energy Products and Communications Systems. Management decided in February 2012 to divest RedBlack Communications, which is reported as a discontinued operation.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $18,706 | $43,112 | $46,207 | $71,027 |
| Gross profit / margin | $4,467 / 23.9% | $11,560 / 26.8% | $11,060 / 23.9% | $15,974 / 22.5% |
| Operating income (loss) | $(2,932) | $3,037 | $(4,221) | $(899) |
| Net income (loss) attributable to Ultralife | $(3,167) | $439 | $(4,669) | $(5,251) |
| Diluted EPS | $(0.18) | $0.03 | $(0.27) | $(0.30) |
| Adjusted EBITDA from continuing operations | $(1,641) | $4,355 | $(1,532) | $2,095 |
Q2 Battery & Energy Products revenue was $15,523, down 50.3%; Communications Systems revenue was $3,183, down 73.2%. For the first six months, segment revenues were $35,605 and $10,602, respectively. Operating expenses fell 13.2% in Q2 and 9.4% for the half, but their share of revenue rose as sales declined.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $4,016 at July 1, down $1,304 from year-end 2011. Six-month operating cash flow was $(292), versus $4,863 generated in the prior-year period; capital expenditures were $1,546.
- The company had $357 outstanding on its asset-based revolver, approximately $9,796 of additional borrowing capacity including letters of credit, and $413 of letters of credit outstanding. The revolver bears interest at 3.24% at period-end, is secured by substantially all assets, and matures February 17, 2013.
- The fixed-charge coverage ratio was 2.00:1, above the 1.20:1 minimum covenant. The company reported compliance with financial covenants. Management said it expected to fund the next 12 months primarily through internal cash generation or available revolver financing, while noting that additional financing might be needed if those sources proved insufficient.
- Current assets were $56,506 and current liabilities $19,029 at July 1. Total assets were $92,991.
Material changes versus comparable periods
- Q2 revenue fell 56.6% year over year; first-half revenue fell 34.9%. Comparisons were affected by prior-year non-recurring DLA battery shipments, completion of a large telematics battery contract, and more than 500 SATCOM units shipped in Q2 2011.
- Management also cited a slower government and defense order rate. In Communications Systems, lower current-period shipments and an unfavorable product mix reduced Q2 gross margin to 22.1%, from 36.3%.
- Consolidated Q2 gross margin declined to 23.9% from 26.8%, while first-half gross margin improved to 23.9% from 22.5%, partly because the prior-year period included a $2,730 government-contract settlement charge and Battery & Energy Products margins improved.
- Q2 discontinued operations contributed $49, compared with a loss of $2,325 in Q2 2011. First-half discontinued operations were a loss of $22, compared with a loss of $4,178, largely reflecting prior-year Energy Services exit costs.
Outlook, risks, and unusual items
- For 2012, management expected high-single- to low-double-digit year-over-year revenue growth in Communications Systems and China operations, but forecast total company sales to decline 20%–30% because of softness in Battery & Energy Products. Management said second-half operating profitability with low- to mid-single-digit operating margins was achievable, while expecting a full-year operating loss.
- RedBlack had incurred significant operating losses since 2008. Ultralife was seeking a going-concern sale, had received non-binding interest and executed one letter of intent, and expected a divestiture within nine months of the filing. The plan anticipated approximately 30 job eliminations and transfer of the Maryland facility. The company said it could not estimate the related restructuring charges.
- A customer-requested reserve to rework and upgrade McDowell products purchased in 2008 contributed to weaker Communications Systems margins. A Japanese 9-volt battery warranty dispute was settled for approximately $125 in Q2, with no admission of liability and the plaintiff abandoning other claims.
- The Arista Power litigation includes Ultralife claims concerning alleged misuse of its confidential information and trade secrets, and counterclaims by Arista alleging unfair competition and misappropriation, with claimed damages exceeding $60,000. Ultralife disputes Arista’s claims; discovery was ongoing. The company said ordinary-course legal matters were not expected to materially affect its financial position, results, or cash flows.
- The final $566 principal installment, plus interest, under a $2,700 U.S. government settlement was due December 1, 2012; the company reported that the first three principal payments had been made by July 1.
- Other disclosed risks include defense and government procurement demand, dependence on key customers, global economic conditions, Chinese operations, competition, raw-material availability, product warranties, and potential business disruptions. The company reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether government and defense order softness persists, and whether the forecast 20%–30% full-year sales decline and second-half margin recovery are achieved.
- Progress and final terms of the RedBlack sale, including restructuring costs, timing, and operational effects.
- Cash generation, working-capital needs, revolver availability, and refinancing or replacement plans before the February 2013 facility maturity.
- Financial impact and developments in the Arista litigation, the McDowell product rework reserve, and outstanding government-settlement obligations.
- Whether warranty reserves and the remaining insurance receivable associated with the 2011 China facility fire prove adequate and collectible.