Ultralife Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012; comparable period ended April 3, 2011. Dollar amounts are in thousands unless stated otherwise. Ultralife makes battery and energy products and communications systems for defense, government and commercial customers. Continuing operations comprise Battery & Energy Products and Communications Systems.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $27,501 | $27,915 |
| Gross profit / margin | $6,593 / 24.0% | $4,414 / 15.8% |
| Operating loss | $(1,289) | $(3,936) |
| Net loss attributable to Ultralife | $(1,502) | $(5,690) |
| Diluted loss per share | $(0.09) | $(0.33) |
| Adjusted EBITDA from continuing operations (non-GAAP) | $109 | $(2,260) |
| Operating cash flow | $(1,200) | $2,066 |
| Capital expenditures | $209 | $492 |
Revenue declined 1.5%. Battery & Energy Products revenue fell 17.2% to $20,082, while Communications Systems revenue more than doubled to $7,419, primarily reflecting higher amplifier shipments. Gross margin improved substantially, reflecting higher Communications Systems sales and the prior-year $2,730 charge related to a government contract settlement; lower battery production caused unfavorable manufacturing variances. Communications Systems gross margin rate eased to 35.7% from 37.4%, partly due to volume pricing on large projects.
Operating expenses declined 5.6% to $7,882. The company reported a $71 loss from discontinued operations, compared with $1,853 in the prior-year quarter. Prior-year comparisons also include Energy Services operating losses; RedBlack Communications was classified as discontinued beginning in Q1 2012.
Balance sheet, liquidity and debt
At April 1, 2012, cash and cash equivalents were $4,136, down from $5,320 at year-end 2011. Total assets were $94,664 and shareholders’ equity was $72,312. Inventory decreased to $31,788 from $34,967; accounts receivable decreased to $18,469 from $19,903. Operating cash use reflected the net loss and working-capital movements, including decreases in receivables, payables and inventory.
Debt outstanding under the secured revolving credit facility was $19, versus zero at December 31, 2011. The facility matures February 17, 2013; the company reported approximately $13,369 of additional borrowing capacity, including outstanding letters of credit, and $413 of letters of credit. The fixed-charge coverage ratio was 3.50:1.00 against a 1.20:1.00 minimum, and the company was in covenant compliance. It must maintain at least $3,000 of availability. The company also had approximately $560 of production-equipment purchase commitments.
Outlook, risks and notable matters
- Management reaffirmed its outlook for year-over-year revenue growth approaching double digits, with operating income growth expected to outpace revenue growth and an operating margin of approximately 7.0%–7.5%. Management cautioned that order and shipment timing may make quarterly results variable.
- Ultralife decided to divest RedBlack Communications, which had incurred significant operating losses since 2008. It was seeking a going-concern sale and expected the divestiture within 12 months, with approximately 30 jobs eliminated and the Maryland facility transferred. The company could not estimate related restructuring charges.
- The Arista Power litigation includes Ultralife’s claims concerning alleged misuse of confidential information and Arista’s counter-suit alleging trade-secret misuse and seeking damages exceeding $60,000. Discovery was ongoing; the filing states Ultralife considers Arista’s claims without merit. The ultimate outcome is uncertain.
- A Japanese customer’s 9-volt battery lawsuit seeks approximately $1,100; Ultralife disputes the allegations and had made no accrual because it could not assess potential liability.
- Under a 2011 government settlement, remaining principal payments of $567 were due June 1, 2012 and December 1, 2012, plus accrued interest. The settlement followed a prior-year $2,730 revenue charge.
- Other stated risks include defense-spending and government-order changes, customer concentration, competition, raw-material supply, Chinese operations, product warranties, and execution of the RedBlack divestiture. The company reported effective disclosure controls and no material change in internal controls.
Investor verification priorities
- Track whether the promised revenue growth and 7.0%–7.5% operating margin outlook are supported by subsequent results, particularly given weak Battery & Energy Products sales and shipment-timing variability.
- Assess the quality and sustainability of the gross-margin improvement, separating the prior-year government settlement charge from ongoing operating performance and monitoring battery production variances.
- Monitor operating cash conversion, working capital, cash levels and compliance with the revolving facility’s availability and covenant requirements ahead of its February 2013 maturity.
- Verify progress, costs and proceeds from the RedBlack sale, including any restructuring charges not estimable in this filing.
- Follow developments and potential exposure from the Arista litigation, the Japanese battery claim and remaining government-settlement payments.