Ultralife Corporation (ULBI) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are to the periods ended July 1, 2018. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
Ultralife designs and manufactures battery and energy products and communications systems for commercial, government and defense markets. It reports two segments: Battery & Energy Products and Communications Systems. On May 1, 2019, it acquired Southwest Electronic Energy Corporation (SWE), a battery-pack and smart-battery business, to expand commercial-market reach, including oil and gas and subsea applications.
- Q2 revenue: $29.4 million, up 28.6% year over year. Battery & Energy Products revenue was $20.3 million; Communications Systems revenue was $9.1 million.
- Q2 profitability: Gross profit was $8.9 million and gross margin was 30.2%, up from 28.6%. Operating income was $3.0 million (10.3% margin), versus $1.6 million (7.1%). Net income attributable to Ultralife was $2.3 million, or $0.14 per diluted share, versus $1.6 million, or $0.10.
- First-half revenue and earnings: Revenue was $48.3 million, up 5.1%; gross profit was $13.9 million, approximately flat. Gross margin declined to 28.9% from 30.1%. Operating income was $3.6 million versus $4.0 million; net income attributable to Ultralife was $2.7 million, or $0.17 per diluted share, versus $3.8 million, or $0.23.
- Segment and demand mix: Q2 Communications Systems revenue rose 80.7%, supported by U.S. Army amplifier deliveries and Navy vehicle-adaptor shipments. Battery & Energy Products revenue rose 13.9%, including SWE, partly offset by the prior-year 5390 battery order not recurring and lower 9-Volt sales. In the first half, commercial sales increased 26.0%, while government/defense sales declined 10.9%.
- Non-GAAP measures: Adjusted EBITDA was $4.1 million in Q2 versus $2.5 million; first-half Adjusted EBITDA was $5.3 million versus $5.5 million. Adjusted EPS was $0.18 in Q2 and $0.21 for the first half, compared with GAAP diluted EPS of $0.14 and $0.17, respectively. These company-defined measures are supplemental and are not substitutes for GAAP results.
Cash flow, balance sheet and financing
- Cash was $6.8 million at June 30, 2019, down from $25.9 million at December 31, 2018. Current assets were $68.6 million and current liabilities $15.4 million.
- First-half operating cash flow was negative $4.2 million, compared with positive $1.8 million a year earlier. The filing cites working-capital investment, including increases in receivables and inventory associated with large program awards.
- Investing cash outflow was $29.0 million, including $25.2 million for SWE net of acquired cash and $3.8 million of capital expenditures. Financing provided $14.3 million, primarily through credit-facility borrowings.
- At June 30, gross debt principal was $16.0 million: $7.8 million on the term loan and $8.2 million on the revolver. The balance sheet reports $15.8 million of debt net of $0.2 million in unamortized issuance costs. The company said it was compliant with its covenants.
- The amended facilities provide an $8.0 million five-year term loan and a $30.0 million revolving facility, extended through May 31, 2022; the revolver may be increased to $50.0 million with lender approval. Availability is subject to borrowing-base limits and the facilities are secured by substantially all company assets.
Material changes, outlook and risks
- SWE acquisition: The $26.2 million purchase price was funded with cash and borrowing. SWE contributed $4.75 million in revenue and $0.10 million in net income from acquisition through June 30. The preliminary allocation includes $6.5 million of goodwill and $3.6 million of identifiable intangible assets; management said the allocation may change. SWE goodwill is not tax-deductible.
- Acquisition-related items: A $0.205 million inventory fair-value step-up reduced Q2 gross margin by about 70 basis points and first-half gross margin by about 40 basis points. The company also recorded $0.165 million of direct acquisition costs; the filing identifies $0.388 million of Q2 purchase-accounting adjustments and non-recurring costs in total. Acquisition financing increased interest expense.
- Taxes: First-half effective tax rate was 20.8%, versus 3.4%, primarily reflecting the reversal of the U.S. deferred-tax-asset valuation allowance at year-end 2018. Management expects deferred tax assets to offset U.S. taxes for the foreseeable future and estimated a 2.3% first-half cash-based effective rate. The higher reported tax provision depressed GAAP earnings relative to the company’s adjusted measures.
- Management outlook: Management said it entered the second half prepared to fulfill remaining amplifier orders and pursue new commercial-product opportunities, and remained well positioned for profitable growth in 2019, with the SWE acquisition adding to that outlook. No numerical revenue or earnings guidance was provided.
- Risks and contingencies: The filing highlights customer and demand concentration, government-budget uncertainty, supply disruptions, battery safety and regulatory risks, foreign exchange, China operations, intellectual-property protection, and risks in executing growth. Management believed ordinary-course legal matters would not materially affect the company but noted inherent uncertainty. Production-equipment purchase commitments were approximately $1.4 million. A July 2019 Shenzhen facility lease extension requires approximately $1.65 million of payments over five years.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether SWE’s preliminary purchase-price allocation, integration, and ongoing contribution support the expected diversification and growth.
- Whether amplifier and other program deliveries convert into revenue and cash, given negative first-half operating cash flow and higher receivables and inventory.
- Remaining revolver availability, borrowing-base constraints, debt service, and continued compliance with the credit covenants.
- The effect of the deferred-tax allowance reversal on reported earnings versus cash taxes, and the assumptions behind Adjusted EPS.
- Whether management’s profitable-growth outlook is borne out, considering the prior-year large battery order did not recur and first-half GAAP earnings declined.