ULTRALIFE CORP - Quarter Report: 2019 September (Form 10-Q)

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)                     

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

 

For the quarterly period ended September 29, 2019

 

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: 0-20852

 

ULTRALIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation of organization)   2000 Technology Parkway Newark, New York 14513 (Address of principal executive offices) (Zip Code)

16-1387013 (I.R.S. Employer Identification No.)   (315) 332-7100  (Registrant's telephone number, including area code:)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.10 par value per share	ULBI	NASDAQ
(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☒
	Emerging Growth Company ☐

 

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☒

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☐    No ☐  Not applicable

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of October 29, 2019, the registrant had 15,856,907 shares of common stock outstanding.

 

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						December 31,
		September 29,				2018
		2019				Adjusted (1)
ASSETS
Current assets:
Cash		$	7,089			$	25,934
Trade accounts receivable, net of allowance for doubtful accounts of $322 and $296, respectively			26,573				16,015
Inventories, net			32,396				22,843
Prepaid expenses and other current assets			2,949				2,368
Total current assets			69,007				67,160
Property, equipment and improvements, net			22,599				10,744
Goodwill			26,373				20,109
Other intangible assets, net			9,683				6,504
Deferred income taxes, net			13,556				15,444
Other noncurrent assets			2,086				887
Total Assets		$	143,304			$	120,848
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	10,451			$	9,919
Current portion of long-term debt			1,326				-
Accrued compensation and related benefits			1,534				1,494
Accrued expenses and other current liabilities			4,962				3,973
Total current liabilities			18,273				15,386
Long-term debt			16,257				-
Deferred income taxes			504				591
Other noncurrent liabilities			1,419				408
Total liabilities			36,453				16,385
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued			-				-
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,253,889 shares at September 29, 2019 and 20,053,335 shares at December 31, 2018; outstanding – 15,852,707 shares at September 29, 2019 and 15,920,585 shares at December 31, 2018			2,025				2,005
Capital in excess of par value			183,995				182,630
Accumulated deficit			(54,456	)			(58,035	)
Accumulated other comprehensive loss			(3,471	)			(2,786	)
Treasury stock - at cost; 4,401,182 shares at September 29, 2019 and 4,132,750 shares at December 31, 2018			(21,231	)			(19,266	)
Total Ultralife Corporation equity			106,862				104,548
Non-controlling interest			(11	)			(85	)
Total shareholders’ equity			106,851				104,463
Total liabilities and shareholders' equity		$	143,304			$	120,848

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		Three-Month Period Ended								Nine-Month Period Ended
		September 29, 2019				September 30, 2018				September 29, 2019				September 30, 2018
Revenues		$	27,493			$	20,330			$	75,772			$	66,263
Cost of products sold			19,632				14,289				53,962				46,390
Gross profit			7,861				6,041				21,810				19,873
Operating expenses:
Research and development			2,029				1,099				4,652				3,417
Selling, general and administrative			4,526				3,442				12,262				10,968
Total operating expenses			6,555				4,541				16,914				14,385
Operating income			1,306				1,500				4,896				5,488
Other expense (income):
Interest and financing expense			220				13				339				67
Miscellaneous			(60	)			(34	)			(38	)			(40	)
Total other expense (income)			160				(21	)			301				27
Income before income tax provision			1,146				1,521				4,595				5,461
Income tax provision			225				86				942				219
Net income			921				1,435				3,653				5,242
Net income attributable to non-controlling interest			23				27				74				57
Net income attributable to Ultralife Corporation			898				1,408				3,579				5,185
Other comprehensive loss:
Foreign currency translation adjustments			(668	)			(436	)			(685	)			(862	)
Comprehensive income attributable to Ultralife Corporation		$	230			$	972			$	2,894			$	4,323
Net income per share attributable to Ultralife common shareholders – basic		$	.06			$	.09			$	.23			$	.33
Net income per share attributable to Ultralife common shareholders – diluted		$	.06			$	.09			$	.22			$	.32
Weighted average shares outstanding – basic			15,785				15,952				15,756				15,859
Potential common shares			377				571				382				548
Weighted average shares outstanding - diluted			16,162				16,523				16,138				16,407

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		Nine-Month Period Ended
		September 29, 2019				September 30, 2018
OPERATING ACTIVITIES:
Net income		$	3,653			$	5,242
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation			1,548				1,476
Amortization of intangible assets			372				300
Amortization of financing fees			32				27
Stock-based compensation			519				707
Deferred income taxes			801				54
Changes in operating assets and liabilities:
Accounts receivable			(7,022	)			(8	)
Inventories			(5,021	)			2,947
Prepaid expenses and other assets			(1,547	)			(338	)
Accounts payable and other liabilities			1,818				(2,876	)
Net cash (used in) provided by operating activities			(4,847	)			7,531
INVESTING ACTIVITIES:
Purchase of SWE, net of cash acquired			(25,248	)			-
Purchases of property, equipment and improvements			(4,846	)			(1,994	)
Net cash used in investing activities			(30,094	)			(1,994	)
FINANCING ACTIVITIES:
Proceeds from revolving credit facility			10,182				-
Proceeds from term loan facility			8,000				-
Payment of term loan facility			(423	)			-
Repurchase of common stock			(1,957	)			-
Payment of debt issuance costs			(157	)			-
Proceeds from exercise of stock options			866				1,357
Tax withholdings on stock-based awards			(8	)			-
Proceeds from government grant			-				397
Net cash provided by financing activities			16,503				1,754
Effect of exchange rate changes on cash			(407	)			(167	)
(DECREASE) INCREASE IN CASH			(18,845	)			7,124
Cash, Beginning of period			25,934				18,330
Cash, End of period		$	7,089			$	25,454

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										Capital				Accumulated
		Common Stock								in Excess				Other												Non-
		Number of								of Par				Comprehensive				Accumulated				Treasury				Controlling
		Shares				Amount				Value				Income (Loss)				Deficit				Stock				Interest				Total
Balance – December 31, 2017			19,670,928			$	1,966			$	180,211			$	(1,611	)		$	(82,894	)		$	(18,469	)		$	(154	)		$	79,049
Cumulative effect adjustment (1)																			(71	)											(71	)
Net income																			5,185								57				5,242
Stock option exercises			305,460				32				1,358																				1,390
Stock-based compensation - stock options											653																				653
Stock-based compensation - restricted stock											54																				54
Foreign currency translation adjustments															(862	)															(862	)
Cash settlement of outstanding options											(33	)																			(33	)
Other											3																				3
Balance – September 30, 2018 (1)			19,976,388			$	1,998			$	182,246			$	(2,473	)		$	(77,780	)		$	(18,469	)		$	(97	)		$	85,425
Balance – December 31, 2018 (1)			20,053,335			$	2,005			$	182,630			$	(2,786	)		$	(58,035	)		$	(19,266	)		$	(85	)		$	104,463
Net Income																			3,579								74				3,653
Share repurchases																							(1,957	)							(1,957	)
Stock option exercises			194,720				20				846																				866
Stock-based compensation - stock options											433																				433
Stock-based compensation - restricted stock			5,834								86																				86
Tax withholdings on restricted stock																							(8	)							(8	)
Foreign currency translation adjustments															(685	)															(685	)
Balance – September 29, 2019			20,253,889			$	2,025			$	183,995			$	(3,471	)		$	(54,456	)		$	(21,231	)		$	(11	)		$	106,851
Balance – July 1, 2018 (1)			19,961,404			$	1,996			$	181,818			$	(2,036	)		$	(79,188	)		$	(18,469	)		$	(124	)		$	83,997
Net income																			1,408								27				1,435
Stock option exercises			14,984				2				62																				64
Stock-based compensation - stock options											344																				344
Stock-based compensation - restricted stock											19																				19
Foreign currency translation adjustments															(437	)															(437	)
Other											3																				3
Balance – September 30, 2018 (1)			19,976,388			$	1,998			$	182,246			$	(2,473	)		$	(77,780	)		$	(18,469	)		$	(97	)		$	85,425
Balance – June 30, 2019			20,163,756			$	2,016			$	183,457			$	(2,803	)		$	(55,354	)		$	(21,231	)		$	(34	)		$	106,051
Net income																			898								23				921
Stock option exercises			90,133				9				379																				388
Stock-based compensation - stock options											117																				117
Stock-based compensation - restricted stock											42																				42
Foreign currency translation adjustments															(668	)															(668	)
Balance – September 29, 2019			20,253,889			$	2,025			$	183,995			$	(3,471	)		$	(54,456	)		$	(21,231	)		$	(11	)		$	106,851

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1.     BASIS OF PRESENTATION

 

The accompanying unaudited Consolidated Financial Statements of Ultralife Corporation (the “Company” or “Ultralife”) and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X.  Accordingly, they do not include all the information and footnotes for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included.  Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2018.

 

The December 31, 2018 consolidated balance sheet data referenced herein was derived from audited financial statements but does not include all disclosures required by GAAP.

 

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

 

Our monthly closing schedule is a 4/4/5 weekly-based cycle for each fiscal quarter, as opposed to a calendar month-based cycle for each fiscal quarter. While the actual dates for the quarter-ends will change slightly each year, we believe that there are not any material differences when making quarterly comparisons.

 

Recently Adopted Accounting Guidance

 

Leases

 

Effective January 1, 2019, the Company adopted Accounting Standards Update 2016-02 – Leases (Topic 842). Adoption of the new standard did not materially impact the prior year consolidated statements of operations and cash flows. The prior year consolidated balance sheet has been revised for the effects of the new standard. The effects to our consolidated balance sheet as of December 31, 2018 are presented below.

 

The Company adopted the new standard applying the modified retrospective approach. The Company measured and recognized leases upon adoption which had commenced as of the beginning or during the prior year. The package of practical expedients permitted under the transition guidance of the new standard was elected which allowed us to carry forward the historical lease classification and determination of whether an arrangement is or contains a lease on existing leases. The use-of-hindsight transition practical expedient was applied to determine the lease term for existing leases, which resulted in the lengthening of the lease term at commencement for one of our operating facilities.

 

At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet.

 

The impact on the consolidated balance sheet as of December 31, 2018 is shown below.

 

 

Impact to Previously Reported Results

 

Consolidated Balance Sheet as of December 31, 2018:

 

 

See Note 9 for further disclosure regarding lease accounting.

 

Recent Accounting Guidance Not Yet Adopted

 

There have been no developments to recently issued accounting standards, including the expected dates of adoption and anticipated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2018 Annual Report on Form 10-K.

 

2.     ACQUISITION

 

On May 1, 2019, the Company completed the acquisition of 100% of the issued and outstanding shares of Southwest Electronic Energy Corporation, a Texas corporation (“SWE”), for an aggregate purchase price of $26,190 inclusive of $942 cash acquired and post-closing adjustments.

 

SWE is a leading independent designer and manufacturer of high-performance smart battery systems and battery packs to customer specifications using lithium cells. SWE serves a variety of industrial markets, including oil & gas, remote monitoring, process control and marine, which demand uncompromised safety, service, reliability and quality. The Company acquired SWE as a bolt-on acquisition to further support our strategy of commercial revenue diversification by providing entry to the oil and gas exploration and production, and subsea electrification markets, which are currently unserved by Ultralife. Another key benefit includes obtaining a highly valuable technical team of battery pack and charger system engineers and technicians to add to our new product development-based revenue growth initiatives in our commercial end-markets particularly asset tracking, smart metering and other industrial applications.

 

The acquisition of SWE was completed pursuant to a Stock Purchase Agreement dated May 1, 2019 (the “Stock Purchase Agreement”) by and among Ultralife, SWE, Southwest Electronic Energy Medical Research Institute, a Texas non-profit (the “Seller”), and Claude Leonard Backstein, an individual (the “Shareholder”). The Stock Purchase Agreement contains customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Seller is being held in escrow for indemnification purposes.

 

The aggregate purchase price for the acquisition was funded by the Company through a combination of cash on hand and borrowings under the Credit Facilities (see Note 3).

 

The purchase price allocation was determined in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (ASC 805). Accordingly, the fair value of the consideration was determined, and the assets acquired and liabilities assumed have been recorded at their fair values at the date of the acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.

 

 

The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below. Management is responsible for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered several factors, including reference to an analysis performed under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur. The resulting purchase price allocation is considered preliminary and could differ materially from the final allocation based on further analysis and future events.  The final purchase price allocation may include changes in the valuation of assets acquired and liabilities assumed, including intangible assets, inventories, fixed assets, deferred taxes and residual goodwill.

 

 

The goodwill included in the Company’s purchase price allocation presented above represents the value of SWE’s assembled and trained workforce, the incremental value that SWE engineering and technology will bring to the Company and the revenue growth which is expected to occur over time which is attributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax purposes.

 

The operating results and cash flows of SWE are reflected in the Company’s consolidated financial statements from the date of acquisition. SWE is included in the Battery & Energy Products segment.

 

For the nine months ended September 29, 2019, SWE contributed revenue of $11,993 and net income of $740, inclusive of a $264 increase in cost of products sold for the fair value step-up of acquired inventory sold during the period, non-recurring expenses of $165 directly related to the acquisition, interest expense of $289 directly related to the financing of the SWE acquisition, amortization expense of $101 on acquired identifiable intangible assets, a $55 reduction of depreciation expense as a result of fair value adjustments and useful life changes, and stock-based compensation charges of $49 for stock options and restricted stock awarded to certain SWE employees.

 

During the nine-month period ended September 29, 2019, the Company incurred non-recurring transaction costs of $322 directly attributable to the acquisition. Debt issuance costs of $157, including placement, renewal and legal fees, are amortized to interest expense over a weighted average life of 4.6 years based on the terms of the related Credit Facilities. Other non-recurring transaction costs of $165, including one-time accounting, legal and due diligence services, were expensed during the nine-month period. There were no non-recurring transaction costs incurred during the three-month period ended September 29, 2019.

 

The following supplemental pro forma information presents the combined results of operations, inclusive of the purchase accounting adjustments and one-time acquisition-related expenses described above, as if the acquisition of SWE had been completed on January 1, 2018, the beginning of the comparable prior period.

 

The supplemental pro forma results do not reflect the agreed upon departure of the Shareholder from SWE and dissolution of the SWE Board of Directors upon consummation of the acquisition or the realization of any expected synergies or other cost reductions following the completion of the business combination. The supplemental pro forma results are presented for informational purposes only and should not be considered indicative of the financial position or results of operations had the acquisition been completed as of the dates indicated and does not purport to indicate the future combined financial position or results of operation.

 

 

Set forth below are the unaudited supplemental pro forma results of the Company and SWE for the nine-month periods ended September 29, 2019 and September 30, 2018 as if the acquisition had occurred as of January 1, 2018.

 

 

 

3.     CREDIT FACILITY

 

On May 1, 2019, Ultralife, SWE, and CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), as borrowers, entered into the First Amendment Agreement (the “First Amendment Agreement”) with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to amend the Credit and Security Agreement by and among Ultralife and KeyBank dated May 31, 2017 (the “Credit Agreement”, and together with the First Amendment Agreement, the “Amended Credit Agreement”).

 

The Amended Credit Agreement, among other things, provides for a five-year, $8,000 senior secured term loan (the “Term Loan Facility”) and extends the term of the $30,000 senior secured revolving credit facility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Credit Facilities”) through May 31, 2022. Up to six months prior to May 31, 2022, the Revolving Credit Facility may be increased to $50,000 with the Bank’s concurrence.

 

Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of September 29, 2019, the Company had $7,577 outstanding principal on the Term Loan Facility, of which $1,326 is included in current portion of long-term debt on the balance sheet, and $10,182 outstanding principal on the Revolving Credit Facility. As of September 29, 2019, total unamortized debt issuance costs of $176 associated with the Amended Credit Agreement are classified as a reduction of long-term debt on the balance sheet.

 

The Company is required to repay the borrowings under the Term Loan Facility in sixty (60) equal consecutive monthly payments commencing on May 31, 2019, in arrears, together with applicable interest. All unpaid principal and accrued and unpaid interest with respect to the Term Loan Facility is due and payable in full on April 30, 2024. All unpaid principal and accrued and unpaid interest with respect to the Revolving Credit Facility is due and payable in full on May 31, 2022. The Company may voluntarily prepay principal amounts outstanding at any time subject to certain restrictions.

 

In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated fixed charge coverage ratio of equal to or greater than 1.15 to 1.0, and a consolidated senior leverage ratio of equal to or less than 2.5 to 1.0, each as defined in the Amended Credit Agreement. The Company was in full compliance with its covenants as of September 29, 2019.

 

Borrowings under the Credit Facilities are secured by substantially all the assets of the Company. Availability under the Revolving Credit Facility is subject to certain borrowing base limits based on receivables and inventories.

 

Interest will accrue on outstanding indebtedness under the Credit Facilities at the Base Rate or the Overnight LIBOR Rate, as selected by the Company, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 50 basis points, and (c) the Overnight LIBOR Rate plus one hundred basis points. The applicable margin ranges from zero to negative 50 basis points for the Base Rate and from 185 to 215 basis points for the Overnight LIBOR Rate and are determined based on the Company’s senior leverage ratio.

 

The Company must pay a fee of 0.1% to 0.2% based on the average daily unused availability under the Revolving Credit Facility.

 

Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.

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4.     SHARE REPURCHASE PROGRAM

 

On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.

 

Under the Share Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may be suspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligate the Company to purchase any specific number of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.

 

For the nine-month period ended September 29, 2019, we repurchased a total of 267,300 shares of our common stock for an aggregate consideration (including fees and commissions) of $1,957. There were no shares repurchased during the three-month period ended September 29, 2019.

 

From the inception of the Share Repurchase Program on November 1, 2018, we repurchased a total of 372,974 shares of our common stock for an aggregate consideration (including fees and commissions) of $2,699.

 

 

5.     EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-month period ended September 29, 2019, 914,535 stock options and 31,666 restricted stock awards were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 377,200 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended September 30, 2018, 1,252,502 stock options and 17,500 restricted stock awards were included in the calculation of Diluted EPS resulting in 571,829 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended September 29, 2019 and September 30, 2018, 914,535 and 1,252,502 stock options and 31,666 and 17,500 restricted stock awards, respectively, were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 382,711 and 548,004 additional shares, respectively, in the calculation of fully diluted earnings per share.

 

There were 266,000 and 502,250 outstanding stock options for the three-month periods ended September 29, 2019 and September 30, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 266,000 and 502,250 outstanding stock options for the nine-month periods ended September 29, 2019 and September 30, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive.

 

6.     SUPPLEMENTAL BALANCE SHEET INFORMATION

 

Cash

 

The composition of the Company’s cash was as follows:

 

 

 

As of September 29, 2019 and December 31, 2018, restricted cash included $184 and $266, respectively, relating to a government grant awarded in the People’s Republic of China to fund specified technological research and development initiatives.  The grant proceeds are realized to income as a direct offset to expense as the related expenditures are incurred.  For the nine-month period ended September 29, 2019, grant proceeds of $72 were realized to income.  As of September 29, 2019 and December 31, 2018, restricted cash included euro-denominated deposits of $81 and $85, respectively, withheld by the Dutch tax authorities and third-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.

 

Inventories

 

Inventories are stated at the lower of cost or market, net of obsolescence reserves, with cost determined under the first-in, first-out (FIFO) method. The composition of inventories, net was:

 

 

 

Property, Equipment and Improvements, Net

 

Major classes of property, equipment and improvements consisted of the following:

 

 

Depreciation expense for property, equipment and improvements was as follows:

 

 

 

Goodwill

 

The following table summarizes the goodwill activity by segment for the nine-month periods ended September 29, 2019 and September 30, 2018:

 

 

Other Intangible Assets, Net

 

The composition of other intangible assets was:

 

 

 

The increase in the carrying value of other intangible assets from December 31, 2018 to September 29, 2019 reflects the preliminary valuation of identifiable intangible assets acquired in the Company’s acquisition of SWE. The table below summarizes the estimated fair value, useful life and annual amortization for the identifiable intangible assets resulting from the preliminary valuation analysis. Amortization for the SWE intangible assets is recognized as selling, general and administrative expense.

 

 

The remaining change in the carrying value of other intangible assets from December 31, 2018 to September 29, 2019 is the result of the effect of foreign currency translations.

 

 

Amortization expense for other intangible assets was as follows:

 

 

 

 

7.     STOCK-BASED COMPENSATION

 

We recorded non-cash stock compensation expense in each period as follows:

 

 

We have stock options outstanding from various stock-based employee compensation plans for which we record compensation cost relating to share-based payment transactions in our financial statements. As of September 29, 2019, there was $924 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.4 years.

 

The following table summarizes stock option activity for the nine-month period ended September 29, 2019:

 

 

The following assumptions were used to value stock options granted during the nine months ended September 29, 2019:

 

 

The weighted average grant date fair value of options granted during the nine months ended September 29, 2019 was $3.77.

 

 

Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended September 29, 2019 and September 30, 2018 was $388 and $64, respectively. Cash received from stock option exercises under our stock-based compensation plans for the nine-month periods ended September 29, 2019 and September 30, 2018 was $866 and $1,357, respectively.

 

In April 2019, 20,000 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $11.12 per share. In January 2018, 17,500 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $7.16 per share. All outstanding restricted shares vest in equal annual installments over three years. Unrecognized compensation cost related to these restricted shares was $188 at September 29, 2019.

 

8.     INCOME TAXES

 

Our effective tax rate for the nine-month periods ended September 29, 2019 and September 30, 2018 was 20.5% and 4.0%, respectively. The increase in our effective tax rate for the current period compared to the prior period was primarily due to the reversal of the valuation allowance on our U.S. deferred tax assets as of December 31, 2018.

 

Our effective tax rate for the nine months ended September 29, 2019 was lower than the U.S. federal statutory rate primarily due to tax benefits relating to the exercise of stock options during the period.

 

As of December 31, 2018, we have domestic net operating loss (“NOL”) carryforwards of $63,388, which expire 2019 thru 2035, and domestic tax credits of $1,817, which expire 2028 thru 2037, available to reduce future taxable income. Management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.

 

As of September 29, 2019, for certain past operations in the U.K., we continue to report a valuation allowance for NOL carryforwards of approximately $10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating losses may be limited due to the change in the past U.K. operation and cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd.

 

As of September 29, 2019, we have not recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.

 

As of September 29, 2019, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations.

 

There were no unrecognized tax benefits related to uncertain tax positions at September 29, 2019 and December 31, 2018.

 

As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 2000 through 2018 remain subject to examination by the Internal Revenue Service (“IRS”) due to our net operating loss carryforwards. Our U.S. tax matters for the years 2000 through 2018 remain subject to examination by various state and local tax jurisdictions due to our net operating loss carryforwards. Our tax matters for the years 2010 through 2018 remain subject to examination by the respective foreign tax jurisdiction authorities.

 

9.     OPERATING LEASES

 

The Company has operating leases predominantly for operating facilities. As of September 29, 2019, the remaining lease terms on our operating leases range from less than one year to approximately 5 years. Renewal options to extend our leases have been exercised. Termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.

 

 

The components of lease expense for the current and prior-year comparative periods were as follows:

 

 

Supplemental cash flow information related to leases was as follows:

 

 

Supplemental balance sheet information related to leases was as follows:

 

 

Future minimum lease payments as of September 29, 2019 are as follows:

 

 

In July 2019, the Company entered into a five-year agreement to extend the operating lease term of its Shenzhen facility.

 

 

 

10.     COMMITMENTS AND CONTINGENCIES

 

a. Purchase Commitments

 

As of September 29, 2019, we have made commitments to purchase approximately $1,030 of production machinery and equipment.

 

b. Product Warranties

 

We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in our product warranty liability during the first nine months of 2019 and 2018 were as follows:

 

 

c. Contingencies and Legal Matters

 

We are subject to legal proceedings and claims that arise from time to time in the normal course of business.  We believe that the final disposition of any such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.  However, recognizing that legal matters are subject to inherent uncertainties, there exists the possibility that ultimate resolution of these matters could have a material adverse impact on the Company’s financial position, results of operations or cash flows in the period in which any such effects are recorded.  We are not aware of any such situations at this time.

 

11.     BUSINESS SEGMENT INFORMATION

 

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: lithium 9-volt, cylindrical 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.

 

 

The components of segment performance were as follows:

 

Three-Month Period Ended September 29, 2019:

 

 

Three-Month Period Ended September 30, 2018:

 

 

Nine-Month Period Ended September 29, 2019:

 

 

Nine-Month Period Ended September 30, 2018:

 

 

 

The following tables disaggregate our business segment revenues by major source and geography.

 

 Commercial and Government/Defense Revenue Information: 

 

 

 

 

 

 U.S. and Non-U.S. Revenue Information¹:

 

 

 

 

 

¹ Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects.

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