ULTRALIFE CORP - Quarter Report: 2018 April (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended April 1, 2018

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                           to

Commission File Number 0-27460

ULTRALIFE CORPORATION

(Exact name of registrant as specified in its charter)

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   Registrant's telephone number, including area code: (315) 332-7100

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]  No [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ X ]

The number of shares outstanding of the registrant’s common stock was 15,913,644, net of 4,019,711 treasury shares, as of May 1, 2018.

ULTRALIFE CORPORATION AND SUBSIDIARIES

INDEX

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

ULTRALIFE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands – except share and per share amounts)

(Unaudited)

Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, our reliance on certain key customers; potential costs because of the warranties we supply with our products and services; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; our efforts to develop new commercial applications for our products; possible breaches in security and other disruptions; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; potential disruptions in our supply of raw materials and components; variability in our quarterly and annual results and the price of our common stock; our inability to comply with changes to the regulations for the shipment of our products; safety risks, including the risk of fire; possible impairments of our goodwill and other intangible assets; negative publicity of Lithium-ion batteries; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; our exposure to foreign currency fluctuations; our customers’ demand falling short of volume expectations in our supply agreements; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to utilize our net operating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals” possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2017 to reflect new information or risks, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and the Risk Factors and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2017.

The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts.

General

We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. We continually evaluate ways to grow, including through the design, development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as seeking opportunities to expand through acquisitions.

We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTITM, ABLETM, ACCUTRONICS™, ACCUPRO™,  and ENTELLION™ brands. We have sales, operations and product development facilities in North America, Europe and Asia.

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance.  As such, we report segment performance at the gross profit level and operating expenses as Corporate charges.

Overview

Consolidated revenues of $23,069 for the three-month period ended April 1, 2018, increased by $1,034 or 4.7%, from $22,035 during the three-month period ended April 2, 2017, due to higher medical and government/defense shipments.

Gross profit for the three-month period ended April 1, 2018 was $7,282 or 31.6% of revenues, compared to $6,890 or 31.3% of revenues, for the same quarter a year ago. The 30 basis point improvement in gross margin resulted from the favorable product mix of our 2018 shipments.

Operating expenses decreased to $4,926 during the three-month period ended April 1, 2018, compared to $5,049 during the three-month period ended April 2, 2017. The decrease of $123 or 2.4% was attributable to continued tight control over discretionary spending.

Operating income for the three-month period ended April 1, 2018 was $2,356 or 10.2% of revenues, compared to $1,841 or 8.4% for the year-earlier period. The increase in operating income resulted from revenue growth, improvement in gross margin and reduction in operating expenses.

Net income attributable to Ultralife was $2,151, or $0.14 per share – basic and $0.13 per share – diluted, for the three-month period ended April 1, 2018, compared to $1,655, or $0.11 per share – basic and diluted, for the three-month period ended April 2, 2017.  Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $2,973 or 12.9% of revenues in the first quarter of 2018 compared to $2,477 or 11.2% of revenues for the first quarter of 2017. See the section “Adjusted EBITDA” beginning on page 21 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

A strong start to the year, backlog, and strict adherence to our business model parameters gives us confidence that we will deliver another year of profitable growth.

Results of Operations

Three-Month Periods Ended April 1, 2018 and April 2, 2017

Revenues. Consolidated revenues for the three-month period ended April 1, 2018 amounted to $23,069, an increase of $1,035, or 4.7%, from the $22,035 reported for the three-month period ended April 2, 2017.

Battery & Energy Products revenues decreased $254, or 1.5%, from $17,479 for the three-month period ended April 2, 2017 to $17,224 for the three month period ended April 1, 2018. Commercial revenues for the first quarter of 2018 comprised 56% of total revenues for the segment and increased 2.9% over the prior year period. This increase primarily resulted from 18.9% revenue growth attributable to our medical customers, partially offset by a reduction in the sales of our 9-Volt batteries.   Government and defense sales decreased 6.5% primarily due to the timing of shipments to a large non-U.S. global defense prime contractor and the U.S. Department of Defense.

Communications Systems revenues increased $1,289, or 28.3%, from $4,556 during the three-month period ended April 2, 2017 to $5,845 for the three-month period ended April 1, 2018. This increase is attributable to shipments of our Vehicle Amplifier-Adapters for the U.S. Army’s Special Force Assistance Brigades under a contract awarded in December 2017 and an increased shipment of our core products, such as 20-watt amplifiers and universal vehicle adapters. 

Cost of Products Sold. Cost of products sold totaled $15,787 for the quarter ended April 1, 2018, an increase of $642, or 4.2%, from the $15,145 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 68.7% for the three-month period ended April 2, 2017 to 68.4% for the three-month period ended April 1, 2018. Correspondingly, consolidated gross margin was 31.6% for the three-month period ended April 1, 2018, compared with 31.3% for the three-month period ended April 2, 2017, primarily reflecting sales mix.

For our Battery & Energy Products segment, gross profit for the first quarter of 2018 was $5,036 or 29.2% of revenues, an increase of $106 or 2.2% from gross profit of $4,930, or 28.2% of revenues, for the first quarter of 2017. Battery & Energy Products’ gross margin as a percentage of revenues increased for the three-month period ended April 1, 2018 by 100 basis points, reflecting product mix.

For our Communications Systems segment, gross profit for the first quarter of 2018 was $2,246 or 38.4% of revenues, an increase of $286 or 14.6%, from gross profit of $1,960, or 43.0% of revenues, for the first quarter of 2017. The 460 basis point decrease in gross margin as a percentage of revenue during 2018 is driven by product mix.

Operating Expenses. Total operating expenses for the three-month period ended April 1, 2018 totaled $4,926, a decrease of $123 or 2.4% from the $5,049 reported during the three-month period ended April 2, 2017. The decrease resulted from continued tight control over discretionary spending in 2018.

Overall, operating expenses as a percentage of revenues were 21.4% for the quarter ended April 1, 2018 compared to 22.9% for the quarter ended April 2, 2017. Amortization expense associated with intangible assets related to our acquisitions was $102 for the first quarter of 2018 ($64 in selling, general and administrative expenses and $38 in research and development costs), compared with $105 for the first quarter of 2017 ($65 in selling, general, and administrative expenses and $40 in research and development costs). Research and development costs were $1,101 for the three-month period ended April 1, 2018, a decrease of $37 or 3.3%, from $1,138 for the three-months ended April 2, 2017. The decrease primarily reflects the timing of development and testing costs associated with new products. Selling, general, and administrative expenses decreased $86 or 2.2%, to $3,825 during the first quarter of 2018 from $3,911 during the first quarter of 2017. The decrease is attributable to continued tight control over discretionary administrative spending.

Other Expense. Other expense totaled $133 for the three-month period ended April 1, 2018 compared to $93 for the three-month period ended April 2, 2017. Interest and financing expense decreased $35, from $68 for the first quarter of 2017 to $33 for the comparable period in 2018. The decrease is due to the more favorable terms of our Revolving Credit Agreement which was executed on May 31, 2017. Miscellaneous expense amounted to $100 for the first quarter of 2018 compared with $25 for the first quarter of 2017, primarily due to transactions impacted by foreign currency fluctuations between the U.S. dollar relative to Pounds Sterling and the Euro.

Income Taxes. The tax provision for the 2017 first quarter was $55 compared to $87 for the first quarter of 2017. See Note 9 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.

Net Income Attributable to Ultralife. Net income attributable to Ultralife was $2,151, or $0.14 per share – basic and $0.13 per share – diluted, for the three-month period ended April 1, 2018, compared to $1,655, or $0.11 per share – basic and diluted, for the three-month period ended April 2, 2017.  Average weighted common shares outstanding used to compute diluted earnings per share increased from 15,656,288 in the first quarter of 2017 to 16,202,314 in the first quarter of 2018.  The increase in 2018 is attributable to stock option exercises since the first quarter of 2017 and an increase in the weighted average stock price to compute diluted shares from $5.47 for the first quarter of 2017 to $8.17 for the first quarter of 2018.

Adjusted EBITDA

In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ use of operating performance comparisons from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the book amortization of intangible assets (affecting relative amortization expense), the age and book value of facilities and equipment (affecting relative depreciation expense) and other significant non-operating expenses or income. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Net income (loss) attributable to Ultralife; the most comparable financial measure under U.S. generally accepted accounting principles (“U.S. GAAP”).

We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as income (loss) from operations. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by limiting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.

The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Adjusted EBITDA is calculated as follows for the periods presented:

Liquidity and Capital Resources

As of April 1, 2018, cash totaled $18,330, consistent with the cash balance at the beginning of the year.  During the three-month period ended April 1, 2018, we used cash in our operations of $921, as compared to $2,739 of cash generated from operations during the three-month period ended April 2, 2017, a decrease of $3,660.  Cash used in operations in 2018 consisted of net income of $2,168 and non-cash expenses (depreciation, amortization and stock-based compensation) totaling $734.  This was more than offset by an increase in accounts receivable of $939 primarily due to the timing of payments from a large customer, an increase in inventory of $502 to service 2018 backlog, and a net decrease in accounts payable and other working capital of $2,382 largely attributable to timing of inventory receipts and payments. 

Cash provided by operations for the three-month period ended April 2, 2017 included net income of $1,661 plus non-cash expenses (depreciation, amortization and stock-based compensation) totaling $666, and a decrease in inventory of $771 resulting from the usage of inventory to service the 2017 backlog, partially offset by a $537 increase in accounts receivables due primarily to the timing of sales during the first quarter of 2017, and a net increase in accounts payable and other working capital items of $178 due in large part to procuring inventory associated with servicing backlog.    

Cash used in investing activities for the three-month periods ended April 1, 2018 and April 2, 2017 consisted of capital expenditures of $172 and $581, respectively.

Cash provided by financing activities for the three months ended April 1, 2018 consisted of stock option exercise proceeds of $939.  Cash provided by financing activities for the three months ended April 2, 2017 consisted of stock option exercise proceeds of $741. 

As of April 1, 2018, we had made commitments to purchase approximately $2,483 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.

In July 2017, the Company made a strategic decision to invest up to $4,300 in our Newark, New York facility to modernize our manufacturing capability for production of premium 3-volt primary batteries for various applications in the rapidly growing, wireless Internet of Things (“IoT”) market.  This investment, in line with our strategy to diversify revenues outside of the core U.S. government/defense markets and focus on transformational commercial opportunities, will enable us to produce a premium product with performance differentiation and incorporate the manufacturing technology expertise required to deliver a clear competitive advantage in terms of product performance, volume, safety, value proposition and strategic supply chain access to the end market and OEM’s.  In addition to the IoT market, the product will also expand customer options in the legacy smoke detector market by providing our customers the choice between our industry leading next generation 9-volt battery, or a new premium 3-volt product.  We anticipate the capital investment project implementation and applicable new product certification will be completed by the end of 2018. 

Debt Commitments

We have financing through our Credit Facility with KeyBank, which provides a $30,000 secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacility. There have been no borrowings under the Credit Facility. See Note 7 in the Notes to the Consolidated Financial Statements for additional information regarding our Credit Facility.

The Company currently believes that the cash flow generated from operations and when necessary, available borrowing from our Credit Facility, will be sufficient to meet its current and long-term funding requirements for the foreseeable future.

Critical Accounting Policies

Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with U.S. GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Operations and Significant Accounting Policies”) to our Consolidated Financial Statements in our 2017 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.

During the three months of 2018, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed. Refer to Note 2 for updated accounting policies to reflect the Company’s adoption of Topic 606 “Revenue from Contracts with Customers” as of January 1, 2018.

Item 4.  Controls and Procedures

Evaluation Of Disclosure Controls And Procedures

Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.

Changes In Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Dreamliner Litigation 

In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by fire while parked at London Heathrow Airport. Following an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, a final report was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company.   A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell, which Ultralife has produced since 2001, with wide-use in global defense and commercial applications.

On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire, which was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. We immediately referred this matter to our insurers.

This lawsuit has now been resolved (February 2018), the claimant has terminated the action against the Company, and the Court has acknowledged and consented to this termination. The matter was terminated without financial consequences to the Company.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Index to Exhibits

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