Ultralife Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 29, 2019; comparisons are with periods ended September 30, 2018. Dollar amounts are in millions unless stated otherwise. Ultralife designs and manufactures battery and energy products and communications systems for commercial, government and defense markets. Results include Southwest Electronic Energy (SWE) from its May 1, 2019 acquisition.
Financial performance and liquidity
- Q3 revenue: $27.5 million, up 35.2%. Gross profit was $7.9 million; gross margin was 28.6%, versus 29.7%. Operating income was $1.3 million, versus $1.5 million. Net income attributable to Ultralife was $0.9 million, or $0.06 per diluted share, versus $1.4 million, or $0.09.
- Nine-month revenue: $75.8 million, up 14.4%. Gross profit was $21.8 million and gross margin was 28.8%, versus 30.0%. Operating income was $4.9 million, versus $5.5 million. Net income attributable to Ultralife was $3.6 million, or $0.22 per diluted share, versus $5.2 million, or $0.32.
- Cash flow: Operating activities used $4.8 million in the first nine months, compared with $7.5 million provided a year earlier. Investing activities used $30.1 million, including $25.2 million for SWE (net of cash acquired) and $4.8 million of capital expenditures. Financing activities provided $16.5 million.
- Cash and working capital: Cash was $7.1 million at September 29, down from $25.9 million at December 31, 2018. Receivables were $26.6 million and inventory $32.4 million, up from $16.0 million and $22.8 million, respectively, at year-end.
- Debt and liquidity: Debt principal outstanding was $17.8 million: $7.6 million under the term loan and $10.2 million under the revolver. The $30 million revolving facility runs through May 2022; availability is subject to borrowing-base limits. The company reported compliance with its debt covenants and said operating cash flow and remaining revolver availability should meet foreseeable funding needs.
- Other metrics: Adjusted EBITDA, a company-defined non-GAAP measure, was $2.3 million for Q3 and $7.6 million for the first nine months, compared with $2.5 million and $8.0 million. Total assets were $143.3 million and shareholders’ equity was $106.9 million at September 29.
Material changes versus prior periods
- Revenue growth reflected SWE and higher Communications Systems shipments supporting U.S. Army network modernization programs. Communications Systems revenue rose 61.6% in Q3 and 21.4% year to date.
- Battery & Energy Products revenue included SWE’s $7.2 million Q3 and $12.0 million nine-month contribution. This was partly offset by lower government/defense battery sales, including the absence of a large 5390 battery order completed in 2018.
- Commercial sales rose 74.6% in Q3 and 42.4% year to date, while government/defense sales declined 3.8% and 8.9%, respectively.
- Margins weakened amid new-product production transitions, late product changes and rework on Army vehicle amplifier adapter systems, and sales mix. SWE acquired-inventory purchase accounting reduced gross margin by 21 basis points in Q3 and 40 basis points year to date.
- Q3 operating expenses rose 44.3%, chiefly reflecting SWE and higher core R&D. Year-to-date operating expenses rose 17.6%; excluding SWE, they decreased 0.8%. Interest and financing expense increased with acquisition-related borrowing.
Outlook, commentary and risks
- Management did not provide numerical full-year guidance. It said it remained focused on profitable growth in 2019 through fulfillment of Communications Systems orders, solid SWE performance and new-product development.
- The May SWE acquisition cost $26.2 million and was funded with cash and credit-facility borrowings. Its purchase-price allocation remained preliminary; SWE contributed $12.0 million of revenue and $0.7 million of net income in the reported nine months, including specified purchase-accounting and acquisition-related items.
- The nine-month effective tax rate was 20.5%, versus 4.0% a year earlier, primarily reflecting reversal of the U.S. deferred-tax valuation allowance at year-end 2018. Management estimated a 3.1% cash-based effective tax rate for the nine-month period and said U.S. deferred tax assets should offset U.S. taxes for the foreseeable future.
- Key stated risks include customer concentration and demand variability, government spending and contract timing, supply interruptions, product safety and warranty exposure, foreign exchange, cybersecurity, regulatory compliance, and the ability to execute growth and integrate acquisitions. Management reported no known legal matter expected to have a material adverse effect, while noting inherent uncertainty.
- The company had approximately $1.0 million of production-equipment purchase commitments. Adoption of lease accounting in 2019 did not materially affect prior-year operating results or cash flows.
Important facts for investors to verify
- Whether higher receivables and inventory convert to cash as program shipments proceed, given negative year-to-date operating cash flow and lower cash balances.
- Remaining revolver availability and covenant headroom, including borrowing-base constraints, as acquisition debt is serviced.
- SWE’s continuing contribution, integration, and the final purchase-price allocation, which could change acquired asset and goodwill values.
- Whether Army program delivery, product rework and new-product ramp costs improve or continue to pressure Communications Systems margins.
- The sustainability of reported earnings and tax assumptions; distinguish GAAP EPS from management’s non-GAAP Adjusted EPS and Adjusted EBITDA.