Ultralife Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are to the periods ended July 1, 2012. Amounts are in thousands of dollars unless stated otherwise. Ultralife sells battery and energy products and communications systems to government, defense and commercial customers.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $17,279 | $18,706 | $38,298 | $46,207 |
| Gross profit / margin | $4,522 / 26.2% | $4,467 / 23.9% | $10,901 / 28.5% | $11,060 / 23.9% |
| Operating expenses | $6,396 | $7,399 | $12,400 | $15,281 |
| Operating loss | $(1,874) | $(2,932) | $(1,499) | $(4,221) |
| Continuing-operations net loss | $(1,956) | $(3,236) | $(1,792) | $(4,667) |
| Net loss attributable to Ultralife | $(2,073) | $(3,167) | $(1,639) | $(4,669) |
| Diluted loss per share | $(0.12) | $(0.18) | $(0.09) | $(0.27) |
Q2 adjusted EBITDA from continuing operations was $(802), compared with $(1,654) in Q2 2012. For the first half, the filing’s reconciliation reports adjusted EBITDA of $675, versus $(1,589) a year earlier. This is a non-GAAP measure and should be considered alongside GAAP results.
Cash and debt: June 30 cash and cash equivalents were $11,158, plus $414 of restricted cash. The company had no borrowings under its new PNC facility and reported approximately $13,227 of additional borrowing capacity. The $20 million secured asset-based revolver runs to May 24, 2017; substantially all assets secure the facility. The company reported covenant compliance at quarter-end. Total assets were $91,135 and shareholders’ equity was $72,266.
Cash flow, six months: Operating activities generated $2,045 overall, including $3,043 from continuing operations and $(998) from discontinued operations; the comparable total in 2012 was $(292). Investing activities used $440, primarily for capital spending, versus $1,546 used in 2012. Cash increased $1,502 from year-end. Management attributed operating cash generation mainly to lower accounts receivable; inventory turnover slowed to an annualized 2.0 turns from 2.6.
Material changes and operating drivers
- Q2 revenue declined 7.6%. Battery & Energy Products revenue fell 5.6% to $14,656, mainly from timing of rechargeable-battery orders; 9-volt battery shipments rose 12%. Communications Systems revenue fell 17.6% to $2,623 because several large contract sign-offs and orders were delayed.
- For the first half, revenue declined 17.1%, driven mainly by a 22.2% decrease in Battery & Energy Products revenue to $27,709 amid slower U.S. government and defense orders. Communications Systems revenue was nearly flat at $10,589.
- Gross margin improved year over year in both periods, reflecting product mix and productivity initiatives. Communications Systems Q2 gross margin increased to 39.3% from 22.1%; Battery & Energy Products Q2 margin eased to 23.8% from 24.2%. First-half margins were 40.7% and 23.8%, respectively.
- Operating expenses fell 13.6% in Q2 and 18.9% in the first half, reflecting cost reductions and more focused research and development spending. Management said products introduced in the prior three years generated about 42% of first-half Battery & Energy sales and 32% of Communications Systems sales.
Outlook, risks and unusual items
- 2013 outlook: Management lowered its expectation to a 10%–12% year-over-year revenue decline, citing slower government spending and contracting. It expected Battery & Energy revenue to decline 15%–20%, Communications Systems revenue to be flat to low-single-digit growth, and the company to remain profitable with a low-single-digit operating margin, supported by further discretionary spending reductions and productivity gains.
- Management identified approximately $5,000 of delayed funded Communications Systems projects; it reported receiving approximately $3,000 of Communications Systems orders in July. The filing described the funded project pipeline as strong but timing uncertain.
- The U.K. facility exit produced a $241 first-quarter gain in discontinued operations after restoration costs came in below the prior estimate. Management expected annualized savings of approximately $500 beginning in Q2 2013. A $118 Q2 loss from discontinued operations related mainly to the RedBlack sale’s post-closing working-capital adjustment.
- NYSERDA terminated a collaborative large grid-storage project. Ultralife said it would pursue a smaller-battery version internally; it wrote off $56 of costs with no identified future use and reported no impairment of the remaining capitalized costs. NYSERDA was to reimburse certain eligible costs through termination.
- The company was providing technical assistance to an investigation by a downstream customer and regulators into a fire involving an unoccupied, parked Boeing 787. The filing does not quantify a potential financial exposure.
- Other disclosed risks include slower defense procurement and reliance on key customers, warranty claims, competition, raw-material availability, Chinese operations, and ongoing litigation with Arista Power. Ultralife said it considered Arista’s claims meritless and was pursuing its own claims; the filing does not provide a clear estimate of possible outcomes or exposure.
- Tax expense continued despite pretax losses, primarily because of deferred tax liabilities related to goodwill and intangibles and income in China. The company reported $7,508 of unrecognized tax benefits and said it did not expect a significant change over the next twelve months.
Important facts for investors to verify
- Whether delayed funded projects converted to shipments and whether July orders and the broader pipeline supported the revised 2013 outlook.
- Whether cost reductions and productivity improvements sustained gross margins and delivered the projected low-single-digit operating margin.
- Whether cash generation remained durable as receivables changed, inventory turnover slowed, and the company funded committed equipment purchases of approximately $461.
- Available borrowing capacity and covenant headroom under the secured PNC facility, particularly if operating results or eligible collateral weaken.
- Developments in the Boeing 787 fire investigation, Arista litigation, warranty claims, and the NYSERDA project reimbursement and continuation.
- The recoverability and practical use of tax-loss carryforwards, given ownership-change limits, valuation allowances, and continuing tax examinations.