Ultralife Corporation — Q2 2011 Form 10-Q
Business context and period. The quarter ended July 3, 2011; comparative periods ended June 27, 2010. Ultralife makes batteries, power products, and communications systems for defense, government, and commercial customers. Following its decision to exit Energy Services, the company reports Battery & Energy Products and Communications Systems as continuing segments; Energy Services results are presented as discontinued operations. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Three months ended July 3, 2011 | Three months ended June 27, 2010 | Six months ended July 3, 2011 | Six months ended June 27, 2010 |
|---|---|---|---|---|
| Revenue from continuing operations | $43.555 | $33.647 | $72.011 | $70.116 |
| Gross profit / margin | $11.797 / 27.1% | $9.006 / 26.8% | $16.335 / 22.7% | $18.845 / 26.9% |
| Operating income (loss) | $2.863 | $0.986 | $(1.257) | $2.774 |
| Income (loss) from continuing operations, net | $2.563 | $0.580 | $(1.483) | $1.821 |
| Net income (loss) attributable to Ultralife | $0.439 | $0.020 | $(5.251) | $0.307 |
| Diluted EPS | $0.03 | $0.00 | $(0.30) | $0.02 |
| Operating cash flow | Not presented for the quarter | $4.843 | $3.323 |
- Q2 revenue rose 29.4% year over year; six-month revenue increased 2.7%. Q2 growth reflected higher defense demand and stronger China metering business.
- Q2 operating expenses were $8.934 million, up from $8.020 million, while expenses fell as a share of revenue to 20.5% from 23.8%. Management cited higher R&D, sales-force investment, facility relocation, and severance costs.
- Company-reported adjusted EBITDA from continuing operations, a non-GAAP measure, was $4.204 million in Q2 versus $2.158 million; for six months it was $1.783 million versus $5.547 million. The company’s reconciliation includes discontinued-operation losses.
- Six-month cash used in investing was $1.464 million, including $1.505 million of property and equipment purchases. Financing used $4.941 million, largely from revolver repayments. Cash declined $1.090 million to $3.551 million.
- At July 3, cash was $3.551 million, current assets $64.445 million, and current liabilities $27.870 million. Balance-sheet debt and capital lease obligations totaled $3.758 million, of which $3.757 million was current. The revolving facility had $3.657 million drawn and approximately $18.152 million of additional borrowing capacity, including letters of credit.
Material changes and segment performance
- Q2 Battery & Energy Products revenue increased 23.1% to $31.239 million; segment contribution was $7.253 million (23.2% margin), compared with $6.005 million (23.7%). Defense demand, resumed primary-battery shipments to the Defense Logistics Agency, and China metering sales supported growth.
- Q2 Communications Systems revenue increased 49.1% to $12.316 million; segment contribution rose to $4.544 million (36.9% margin) from $3.001 million (36.3%), mainly on defense demand and product mix.
- For six months, Battery & Energy Products revenue rose 11.7% to $55.487 million, but segment contribution declined to $10.294 million (18.6% margin) from $11.207 million (22.6%). Communications Systems revenue fell 19.2% to $16.524 million and contribution fell to $6.041 million from $7.638 million, reflecting delayed defense orders, lower volume, and mix.
- First-half gross margin was pressured by a $2.700 million charge recorded in Q1 for a U.S. government contract settlement, completion of a low-margin contract, manufacturing variances, and certain inventory write-offs. The settlement was for $2.700 million plus interest, payable in installments through December 2012; the first principal payment was made.
- Energy Services exit activities were completed by quarter-end, involving about 40 job eliminations and five facility closures. First-half discontinued-operation losses were $3.796 million, including $2.924 million of exit costs ($1.984 million cash component). A $13.793 million non-cash impairment for related assets had been recorded in Q4 2010.
Outlook, risks, and contingencies
- Management reaffirmed 2011 guidance of approximately $162 million in revenue and $7.8 million in operating income, while cautioning that order and shipment timing may cause quarterly variability.
- The $35 million secured asset-based revolving facility matures February 17, 2013. The company reported a 2.03:1 fixed-charge coverage ratio against a 1.20:1 minimum and stated it was in covenant compliance. It must maintain at least $3 million of availability.
- Management said it expects to fund operations over the next 12 months primarily with internally generated cash or currently available financing, but cautioned that additional financing may be needed if those sources prove insufficient. Planned machinery and equipment purchases were approximately $0.932 million.
- A June fire damaged inventory at the China facility. The plant resumed full operation without customer supply disruption; the company recorded a $1.225 million insurance receivable against an approximately $1.361 million loss, with the $0.136 million deductible expensed.
- A Japanese customer lawsuit alleges approximately $1.1 million of damages relating to 9-volt batteries. Ultralife disputes the claim; no accrual was recorded because potential liability could not be assessed. The U.S. government settlement resolved claims concerning historical exigent contracts. The Newark environmental remediation was administratively closed, with $0.022 million reserved.
- Key risks include dependence on U.S. military demand and possible defense-budget reductions, defense procurement and budget timing, customer demand, competition, raw-material availability, product warranties, foreign exchange, and operational disruptions. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Investor verification priorities
- Confirm the composition, timing, and cash impact of the Energy Services exit costs and whether further liabilities remain.
- Track execution against 2011 revenue and operating-income guidance, particularly defense order timing and Communications Systems recovery.
- Review the government settlement payment schedule and its effect on margins, cash flow, and working-capital capacity.
- Verify borrowing-base availability, covenant headroom, and liquidity needs alongside planned capital spending.
- Monitor insurance recovery for the China fire and developments in the Japanese battery litigation and other contingencies.