Ultralife Corporation — Q3 2017 Form 10-Q
Business context and reporting period. Ultralife designs and supplies battery and energy products and communications systems to commercial, government and defense customers. This unaudited report covers the fiscal quarter and nine months ended October 1, 2017; comparisons are to the periods ended September 25, 2016. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $21.047 | $19.631 | $63.022 | $60.835 |
| Gross profit / margin | $6.255 / 29.7% | $5.997 / 30.5% | $19.366 / 30.7% | $18.302 / 30.1% |
| Operating income / margin | $1.263 / 6.0% | $1.138 / 5.8% | $4.426 / 7.0% | $2.119 / 3.5% |
| Net income attributable to Ultralife | $1.098 | $1.019 | $3.848 | $1.764 |
| Diluted EPS | $0.07 | $0.07 | $0.24 | $0.11 |
| Adjusted EBITDA, non-GAAP | $1.985 | $2.046 | $6.758 | $5.008 |
Cash flow and liquidity. Nine-month operating cash flow was $3.657 million, versus $3.568 million a year earlier. Capital expenditures were $0.971 million; cash from option exercises was $1.120 million. Cash increased by $3.978 million to $14.607 million from December 31, 2016. At October 1, current assets were $57.953 million and current liabilities were $13.067 million. The company had no borrowings under its $30 million secured revolving credit facility.
Balance sheet and debt. Total assets were $93.341 million, total liabilities $18.799 million, and shareholders’ equity $74.542 million. The credit facility, entered into in May 2017 and expiring May 2020, includes a $1.5 million letter-of-credit subfacility. The company reported compliance with its covenants at quarter-end, including a 1.15:1 fixed-charge-coverage requirement and $40 million minimum tangible net worth requirement.
Material changes and management commentary
- Q3 revenue rose 7.2%. Battery & Energy Products revenue increased 24.6% to $18.616 million, while Communications Systems revenue fell 48.2% to $2.431 million, largely reflecting $2.270 million of VIPER shipments in Q3 2016. Excluding those prior-year shipments, management said consolidated revenue rose 21% and Communications Systems core-product sales were essentially flat.
- Nine-month revenue increased 3.6%. Battery & Energy Products grew 12.4%; Communications Systems declined 26.6% as VIPER shipments fell from $8.219 million in the 2016 period to $0.133 million in 2017. Excluding VIPER, Communications Systems core-product sales increased $4.438 million, or 81.1%.
- Q3 gross margin declined 80 basis points, primarily due to product mix and supply-chain variances, including new-product startup and manufacturing variances in Battery & Energy Products. Nine-month gross margin improved 60 basis points, with favorable Communications Systems product mix offsetting lower Battery & Energy Products margins.
- Nine-month operating expenses fell 7.7%, reflecting cost reductions, Accutronics synergies and prior-year acquisition-related costs. Q3 expenses increased 2.7%, primarily due to an executive variable-compensation accrual. Nine-month net income more than doubled, while Q3 adjusted EBITDA declined about 3% year over year.
- Management stated it was positioned for another year of profitable growth. It cited a $21.4 million BA-5390 IDIQ award, a $4.7 million VIPER contract and a $49.8 million BA-5790/5795 CFx IDIQ award as indicators of future growth potential; these awards are not reported as guaranteed revenue.
Outlook, investments, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management said operating cash flow and, if needed, available credit were expected to meet funding requirements for the foreseeable future.
- The company plans to invest up to $4.3 million to modernize its Newark facility for premium 3-volt batteries targeting the wireless IoT market and other applications. Project implementation and product certification were expected to be completed by the end of 2018. It also had approximately $0.640 million of production-equipment purchase commitments at quarter-end.
- Management identified risks including reliance on key customers, changes in government and defense demand, customer volume shortfalls, raw-material and supply-chain disruption, foreign exchange, product safety and warranty exposure, cybersecurity, regulatory compliance, and potential goodwill or intangible-asset impairment.
- The ongoing Ethiopian Airlines Dreamliner lawsuit seeks $42 million plus unspecified damages. Ultralife is defending the action with its insurers and stated it did not believe a material financial exposure was reasonably possible. The filing says the investigation attributed the fire primarily to circumstances involving another company’s emergency locator transmitter.
- In April 2017, the company extended the expiration of the CEO’s fully vested options covering 300,000 shares; it recognized $0.193 million of incremental compensation expense. The filing also reports a $0.529 million nine-month stock-based compensation expense.
Important facts for investors to verify
- Whether the announced defense awards convert into orders and shipments on the expected timetable, and how much is actually recognized as revenue.
- Whether Battery & Energy Products margins recover from mix, supply-chain and new-product startup pressures.
- Progress, total cost and certification timing for the planned 3-volt battery facility investment.
- Working-capital demands: receivables rose $2.412 million and inventory rose $1.221 million in the first nine months, partly attributed to shipment timing and service backlog.
- Status and insurance coverage of the Dreamliner litigation, and continued compliance with credit-facility covenants.
- Whether management’s profitable-growth outlook is achieved; interim results are not necessarily indicative of full-year performance.