Ultralife Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended April 1, 2018. Dollar amounts are in thousands unless stated otherwise. Ultralife designs and manufactures battery and energy products and communications systems for commercial, government, and defense customers.
Financial performance
| Metric | Q1 2019 | Prior-year quarter |
|---|---|---|
| Revenue | $18,882 | $23,069 |
| Gross profit / margin | $5,084 / 26.9% | $7,282 / 31.6% |
| Operating income / margin | $548 / 2.9% | $2,356 / 10.2% |
| Net income attributable to Ultralife | $425; $0.03 per basic and diluted share | $2,151; $0.14 basic and $0.13 diluted |
| Adjusted EBITDA (non-GAAP) | $1,204 / 6.4% of revenue | $2,973 / 12.9% of revenue |
| Cash from operating activities | $(545) | $(921) |
| Capital expenditures | $2,581 | $172 |
Revenue fell 18.1%. Battery & Energy Products revenue was $15,998, down 7.1%; Communications Systems revenue was $2,884, down 50.7%. Operating expenses declined 7.9% to $4,536. The effective tax rate was 8%, versus 3%.
Liquidity, capital, and material changes
- Cash and restricted cash declined $4,694 to $21,240 at March 31, 2019. The company reported $17,028 of liabilities, principally current liabilities of $15,996; the balance sheet showed no borrowings at quarter-end.
- Operating cash use reflected a $4,963 inventory increase, primarily for Communications Systems program awards. Investing cash use was $2,581, largely for Battery & Energy Products automation, including 3-Volt cell production. Financing cash use included $1,957 of share repurchases, partly offset by $356 from option exercises.
- Inventory increased to $27,906 from $22,843; accounts receivable decreased to $13,938 from $16,015. The company had $2,363 of production machinery and equipment purchase commitments.
- During Q1, Ultralife repurchased 267,300 shares for $1,957. Since the program began in November 2018, it had repurchased 372,974 shares for $2,699 under an authorization of up to 2.5 million shares.
- Effective January 1, 2019, Ultralife adopted ASC 842 for leases. Adoption revised prior-period balance-sheet amounts; management said it did not materially affect prior-year operating results or cash flows.
Outlook, events, and risks
- Management said key amplifier shipments were increasing and cited opportunities across commercial and government/defense customers, while expressing confidence in another year of profitable growth in 2019. This is forward-looking and subject to the risks described in the filing.
- Management attributed weaker results to the timing of defense shipments, lower Communications Systems shipments versus unusually strong prior-year deliveries, product mix, and start-up costs to begin production for large program awards. It said the awards were moving into production and shipments in 2019.
- On May 1, 2019, after quarter-end, Ultralife acquired Southwest Electronic Energy Corporation for $25.0 million cash, net of cash acquired and subject to working-capital adjustments. The acquisition was funded with cash and new borrowings; purchase accounting and pro forma information were not yet complete.
- Also on May 1, the company drew the full $8.0 million five-year term loan and $6.8 million on its amended $30.0 million revolving facility. The facilities are secured by substantially all company assets and include financial covenants, including a minimum 1.15:1 fixed-charge coverage ratio and maximum 2.5:1 senior leverage ratio. Management expected operating cash flow and revolver availability to meet foreseeable funding needs.
- Disclosed risks include customer concentration and demand variability, government budget and contract timing, supply interruptions, product safety and warranty exposure, foreign currency movements, China operations, regulation, competition and technology change, and the ability to execute growth and acquisition plans. The company reported routine legal matters and stated it was not aware of matters expected to materially affect its financial position or results, while noting inherent uncertainty.
Investor verification points
- Track whether the Communications Systems awards achieve expected shipment volumes and improve segment margins after start-up costs.
- Assess inventory conversion, operating cash flow, and the funding required for capital commitments and the SWE acquisition.
- Review post-acquisition debt, covenant headroom, borrowing-base availability, and integration and purchase-accounting updates.
- Monitor commercial growth and defense-order timing, including whether revenue and profitability recover as management anticipated.
- Confirm the effect of share repurchases and outstanding authorization on cash, share count, and per-share results.