The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands – except share and per share amounts)
(Unaudited)
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:
|
|
|
As
Previously
Reported
|
|
|
Lease
Standard
Adjustment
|
|
|
As
Adjusted
|
|
|
Other noncurrent assets
|
|
$
|
82
|
|
|
$
|
805
|
|
|
$
|
887
|
|
|
Prepaid expenses and other current assets
|
|
|
2,429
|
|
|
|
(61
|
)
|
|
|
2,368
|
|
|
Accrued expenses and other current liabilities
|
|
|
3,534
|
|
|
|
439
|
|
|
|
3,973
|
|
|
Other noncurrent liabilities
|
|
|
32
|
|
|
|
376
|
|
|
|
408
|
|
|
Accumulated deficit
|
|
|
(57,964
|
)
|
|
|
(71
|
)
|
|
|
(58,035
|
)
|
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.
|
Cash
|
|
$
|
942
|
|
|
Accounts receivable
|
|
|
3,621
|
|
|
Inventories
|
|
|
4,685
|
|
|
Prepaid expenses and other current assets
|
|
|
431
|
|
|
Property, equipment and improvements
|
|
|
9,177
|
|
|
Goodwill
|
|
|
6,474
|
|
|
Other intangible assets
|
|
|
3,649
|
|
|
Accounts payable
|
|
|
(1,060
|
)
|
|
Other current liabilities
|
|
|
(718
|
)
|
|
Deferred tax liability, net
|
|
|
(1,011
|
)
|
|
Net assets acquired
|
|
$
|
26,190
|
|
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.
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
2018
|
|
|
September 29,
2019
|
|
|
Revenue
|
|
$
|
86,506
|
|
|
$
|
84,567
|
|
|
Operating income
|
|
|
4,397
|
|
|
|
5,536
|
|
|
Net Income attributable to Ultralife Corporation
|
|
|
4,009
|
|
|
|
3,900
|
|
|
Net income per share attributable to Ultralife Corporation:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.25
|
|
|
$
|
.25
|
|
|
Diluted
|
|
$
|
.25
|
|
|
$
|
.24
|
|
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.
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:
|
|
|
September 29,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Cash
|
|
$
|
6,824
|
|
|
$
|
25,583
|
|
|
Restricted cash
|
|
|
265
|
|
|
|
351
|
|
|
Total
|
|
$
|
7,089
|
|
|
$
|
25,934
|
|
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:
|
|
|
September 29,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Raw materials
|
|
$
|
19,004
|
|
|
$
|
13,274
|
|
|
Work in process
|
|
|
2,998
|
|
|
|
2,016
|
|
|
Finished goods
|
|
|
10,394
|
|
|
|
7,553
|
|
|
Total
|
|
$
|
32,396
|
|
|
$
|
22,843
|
|
Property, Equipment and Improvements, Net
Major classes of property, equipment and improvements consisted of the following:
|
|
|
September 29,
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Land
|
|
$
|
1,273
|
|
|
$
|
123
|
|
|
Buildings and leasehold improvements
|
|
|
15,257
|
|
|
|
8,267
|
|
|
Machinery and equipment
|
|
|
54,530
|
|
|
|
51,261
|
|
|
Furniture and fixtures
|
|
|
2,176
|
|
|
|
2,058
|
|
|
Computer hardware and software
|
|
|
6,672
|
|
|
|
5,590
|
|
|
Construction in process
|
|
|
4,757
|
|
|
|
4,302
|
|
|
|
|
|
84,665
|
|
|
|
71,601
|
|
|
Less: Accumulated depreciation
|
|
|
(62,066
|
)
|
|
|
(60,857
|
)
|
|
Property, equipment and improvements, net
|
|
$
|
22,599
|
|
|
$
|
10,744
|
|
Depreciation expense for property, equipment and improvements was as follows:
|
|
|
Three-month period ended
|
|
|
Nine-month period ended
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Depreciation expense
|
|
$
|
586
|
|
|
$
|
496
|
|
|
$
|
1,548
|
|
|
$
|
1,476
|
|
Goodwill
The following table summarizes the goodwill activity by segment for the nine-month periods ended September 29, 2019 and September 30, 2018:
|
|
|
Battery &
Energy
|
|
|
Communications
|
|
|
|
|
|
|
|
|
Products
|
|
|
Systems
|
|
|
Total
|
|
|
Balance – December 31, 2017
|
|
$
|
8,965
|
|
|
$
|
11,493
|
|
|
$
|
20,458
|
|
|
Effect of foreign currency translation
|
|
|
(257
|
)
|
|
|
-
|
|
|
|
(257
|
)
|
|
Balance – September 30, 2018
|
|
|
8,708
|
|
|
|
11,493
|
|
|
|
20,201
|
|
|
Effect of foreign currency translation
|
|
|
(92
|
)
|
|
|
-
|
|
|
|
(92
|
)
|
|
Balance – December 31, 2018
|
|
|
8,616
|
|
|
|
11,493
|
|
|
|
20,109
|
|
|
Acquisition of SWE
|
|
|
6,474
|
|
|
|
-
|
|
|
|
6,474
|
|
|
Effect of foreign currency translation
|
|
|
(210
|
)
|
|
|
-
|
|
|
|
(210
|
)
|
|
Balance – September 29, 2019
|
|
$
|
14,880
|
|
|
$
|
11,493
|
|
|
$
|
26,373
|
|
Other Intangible Assets, Net
The composition of other intangible assets was:
|
|
|
at September 29, 2019
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Trademarks
|
|
$
|
3,401
|
|
|
$
|
-
|
|
|
$
|
3,401
|
|
|
Customer relationships
|
|
|
8,907
|
|
|
|
4,586
|
|
|
|
4,321
|
|
|
Patents and technology
|
|
|
5,452
|
|
|
|
4,810
|
|
|
|
642
|
|
|
Distributor relationships
|
|
|
377
|
|
|
|
377
|
|
|
|
-
|
|
|
Trade name
|
|
|
1,485
|
|
|
|
166
|
|
|
|
1,319
|
|
|
Total
|
|
$
|
19,622
|
|
|
$
|
9,939
|
|
|
$
|
9,683
|
|
|
|
|
at December 31, 2018
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Trademarks
|
|
$
|
3,405
|
|
|
$
|
-
|
|
|
$
|
3,405
|
|
|
Customer relationships
|
|
|
6,471
|
|
|
|
4,392
|
|
|
|
2,079
|
|
|
Patents and technology
|
|
|
5,486
|
|
|
|
4,725
|
|
|
|
761
|
|
|
Distributor relationships
|
|
|
377
|
|
|
|
377
|
|
|
|
-
|
|
|
Trade name
|
|
|
370
|
|
|
|
111
|
|
|
|
259
|
|
|
Total
|
|
$
|
16,109
|
|
|
$
|
9,605
|
|
|
$
|
6,504
|
|
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.
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
|
Estimated Fair
|
|
|
Useful Lives
|
|
|
Amortization
|
|
|
|
|
Value
|
|
|
in Years
|
|
|
Expense
|
|
|
Customer relationships
|
|
$
|
2,522
|
|
|
|
15
|
|
|
$
|
168
|
|
|
Trade name
|
|
|
1,127
|
|
|
|
15
|
|
|
|
75
|
|
|
Total
|
|
$
|
3,649
|
|
|
|
|
|
|
$
|
243
|
|
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:
|
|
|
Three-month period ended
|
|
|
Nine-month period ended
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Amortization included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
32
|
|
|
$
|
36
|
|
|
$
|
98
|
|
|
$
|
111
|
|
|
Selling, general and administrative
|
|
|
116
|
|
|
|
61
|
|
|
|
274
|
|
|
|
189
|
|
|
Total amortization expense
|
|
$
|
148
|
|
|
$
|
97
|
|
|
$
|
372
|
|
|
$
|
300
|
|
7. STOCK-BASED COMPENSATION
We recorded non-cash stock compensation expense in each period as follows:
|
|
|
Three-month period ended
|
|
|
Nine-month period ended
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock options
|
|
$
|
117
|
|
|
$
|
344
|
|
|
$
|
433
|
|
|
$
|
653
|
|
|
Restricted stock grants
|
|
|
42
|
|
|
|
19
|
|
|
|
86
|
|
|
|
54
|
|
|
Total
|
|
$
|
159
|
|
|
$
|
363
|
|
|
$
|
519
|
|
|
$
|
707
|
|
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:
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at January 1, 2019
|
|
|
1,576,087
|
|
|
$
|
6.58
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
282,500
|
|
|
|
8.27
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(194,720
|
)
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(46,082
|
)
|
|
|
7.04
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2019
|
|
|
1,617,785
|
|
|
$
|
7.12
|
|
|
|
3.38
|
|
|
$
|
3,192
|
|
|
Vested and expected to vest at September 29, 2019
|
|
|
1,518,161
|
|
|
$
|
7.05
|
|
|
|
3.21
|
|
|
$
|
3,113
|
|
|
Exercisable at September 29, 2019
|
|
|
1,095,661
|
|
|
$
|
6.29
|
|
|
|
2.31
|
|
|
$
|
2,870
|
|
The following assumptions were used to value stock options granted during the nine months ended September 29, 2019:
|
Risk-Free Interest Rate
|
|
|
1.8
|
%
|
|
Volatility Factor
|
|
|
48
|
%
|
|
Weighted Average Expected Life (Years)
|
|
|
5.3
|
|
|
Dividends
|
|
|
0.0
|
%
|
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:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
September 29,
2019
|
|
|
September 30,
2018
|
|
|
September 29,
2019
|
|
|
September 30,
2018
|
|
|
Operating lease cost
|
|
$
|
168
|
|
|
$
|
145
|
|
|
$
|
459
|
|
|
$
|
445
|
|
|
Variable lease cost
|
|
|
21
|
|
|
|
21
|
|
|
|
63
|
|
|
|
69
|
|
|
Total lease cost
|
|
$
|
189
|
|
|
$
|
166
|
|
|
$
|
522
|
|
|
$
|
514
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
Nine Months Ended
|
|
|
|
|
September 29,
2019
|
|
|
September 30,
2018
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
447
|
|
|
$
|
457
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
$
|
1,586
|
|
|
$
|
-
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
Balance Sheet Classification
|
|
September 29,
2019
|
|
|
December 31,
2018
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease right-of-use asset
|
|
Other noncurrent assets
|
|
$
|
1,989
|
|
|
$
|
805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Current operating lease liability
|
|
Accrued expenses and other current liabilities
|
|
$
|
600
|
|
|
$
|
439
|
|
|
Operating lease liability, net of current portion
|
|
Other noncurrent liabilities
|
|
|
1,387
|
|
|
|
376
|
|
|
Total operating lease liability
|
|
|
|
$
|
1,987
|
|
|
$
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
3.9
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
4.5
|
%
|
|
|
4.5
|
%
|
Future minimum lease payments as of September 29, 2019 are as follows:
|
Maturity of Operating Lease Liabilities
|
|
|
|
|
|
2019
|
|
$
|
163
|
|
|
2020
|
|
|
673
|
|
|
2021
|
|
|
459
|
|
|
2022
|
|
|
347
|
|
|
2023
|
|
|
356
|
|
|
Thereafter
|
|
|
178
|
|
|
Total lease payments
|
|
|
2,176
|
|
|
Less: Imputed interest
|
|
|
(189
|
)
|
|
Present value of remaining lease payments
|
|
$
|
1,987
|
|
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:
|
|
|
Nine-Month Period Ended
|
|
|
|
|
September 29,
2019
|
|
|
September 30,
2018
|
|
|
Accrued warranty obligations – beginning
|
|
$
|
95
|
|
|
$
|
149
|
|
|
Assumed warranty obligations – SWE
|
|
|
145
|
|
|
|
-
|
|
|
Accruals for warranties issued
|
|
|
152
|
|
|
|
(9
|
)
|
|
Settlements made
|
|
|
(167
|
)
|
|
|
(54
|
)
|
|
Accrued warranty obligations – ending
|
|
$
|
225
|
|
|
$
|
86
|
|
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:
|
|
|
Battery &
Energy
Products
|
|
|
Communications
Systems
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
22,578
|
|
|
$
|
4,915
|
|
|
$
|
-
|
|
|
$
|
27,493
|
|
|
Segment contribution
|
|
|
6,117
|
|
|
|
1,744
|
|
|
|
(6,555
|
)
|
|
|
1,306
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
(160
|
)
|
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
(225
|
)
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
|
Net income attributable to Ultralife
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
898
|
|
Three-Month Period Ended September 30, 2018:
|
|
|
Battery &
Energy
Products
|
|
|
Communications
Systems
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
17,289
|
|
|
$
|
3,041
|
|
|
$
|
-
|
|
|
$
|
20,330
|
|
|
Segment contribution
|
|
|
4,702
|
|
|
|
1,339
|
|
|
|
(4,541
|
)
|
|
|
1,500
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
(86
|
)
|
|
|
(86
|
)
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
(27
|
)
|
|
Net income attributable to Ultralife
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,408
|
|
Nine-Month Period Ended September 29, 2019:
|
|
|
Battery &
Energy
Products
|
|
|
Communications
Systems
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
58,876
|
|
|
$
|
16,896
|
|
|
$
|
-
|
|
|
$
|
75,772
|
|
|
Segment contribution
|
|
|
16,182
|
|
|
|
5,628
|
|
|
|
(16,914
|
)
|
|
|
4,896
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(301
|
)
|
|
|
(301
|
)
|
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
(942
|
)
|
|
|
(942
|
)
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
(74
|
)
|
|
Net income attributable to Ultralife
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,579
|
|
Nine-Month Period Ended September 30, 2018:
|
|
|
Battery &
Energy
Products
|
|
|
Communications
Systems
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
52,344
|
|
|
$
|
13,919
|
|
|
$
|
-
|
|
|
$
|
66,263
|
|
|
Segment contribution
|
|
|
14,664
|
|
|
|
5,209
|
|
|
|
(14,385
|
)
|
|
|
5,488
|
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
(27
|
)
|
|
Tax provision
|
|
|
|
|
|
|
|
|
|
|
(219
|
)
|
|
|
(219
|
)
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
|
Net income attributable to Ultralife
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,185
|
|
The following tables disaggregate our business segment revenues by major source and geography.
Commercial and Government/Defense Revenue Information:
|
Three-Month Period Ended September 29, 2019:
|
|
Total
Revenue
|
|
|
Commercial
|
|
|
Government/
Defense
|
|
|
Battery & Energy Products
|
|
$
|
22,578
|
|
|
$
|
17,677
|
|
|
$
|
4,901
|
|
|
Communications Systems
|
|
|
4,915
|
|
|
|
-
|
|
|
|
4,915
|
|
|
Total
|
|
$
|
27,493
|
|
|
$
|
17,677
|
|
|
$
|
9,816
|
|
|
|
|
|
|
|
|
|
64
|
%
|
|
|
36
|
%
|
|
Three-Month Period Ended September 30, 2018:
|
|
Total
Revenue
|
|
|
Commercial
|
|
|
Government/
Defense
|
|
|
Battery & Energy Products
|
|
$
|
17,289
|
|
|
$
|
10,127
|
|
|
$
|
7,162
|
|
|
Communications Systems
|
|
|
3,041
|
|
|
|
-
|
|
|
|
3,041
|
|
|
Total
|
|
$
|
20,330
|
|
|
$
|
10,127
|
|
|
$
|
10,203
|
|
|
|
|
|
|
|
|
|
50
|
%
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Period Ended September 29, 2019:
|
|
Total
Revenue
|
|
|
Commercial
|
|
|
Government/
Defense
|
|
|
Battery & Energy Products
|
|
$
|
58,876
|
|
|
$
|
42,736
|
|
|
$
|
16,140
|
|
|
Communications Systems
|
|
|
16,896
|
|
|
|
-
|
|
|
|
16,896
|
|
|
Total
|
|
$
|
75,772
|
|
|
$
|
42,736
|
|
|
$
|
33,036
|
|
|
|
|
|
|
|
|
|
56
|
%
|
|
|
44
|
%
|
|
Nine-Month Period Ended September 30, 2018:
|
|
Total
Revenue
|
|
|
Commercial
|
|
|
Government/
Defense
|
|
|
Battery & Energy Products
|
|
$
|
52,344
|
|
|
$
|
30,007
|
|
|
$
|
22,337
|
|
|
Communications Systems
|
|
|
13,919
|
|
|
|
-
|
|
|
|
13,919
|
|
|
Total
|
|
$
|
66,263
|
|
|
$
|
30,007
|
|
|
$
|
36,256
|
|
|
|
|
|
|
|
|
|
45
|
%
|
|
|
55
|
%
|
U.S. and Non-U.S. Revenue Information1:
|
Three-Month Period Ended September 29, 2019:
|
|
Total
Revenue
|
|
|
United
States
|
|
|
Non-United
States
|
|
|
Battery & Energy Products
|
|
$
|
22,578
|
|
|
$
|
11,459
|
|
|
$
|
11,119
|
|
|
Communications Systems
|
|
|
4,915
|
|
|
|
4,397
|
|
|
|
518
|
|
|
Total
|
|
$
|
27,493
|
|
|
$
|
15,856
|
|
|
$
|
11,637
|
|
|
|
|
|
|
|
|
|
58
|
%
|
|
|
42
|
%
|
|
Three-Month Period Ended September 30, 2018:
|
|
Total
Revenue
|
|
|
United
States
|
|
|
Non-United
States
|
|
|
Battery & Energy Products
|
|
$
|
17,289
|
|
|
$
|
9,389
|
|
|
$
|
7,900
|
|
|
Communications Systems
|
|
|
3,041
|
|
|
|
2,140
|
|
|
|
901
|
|
|
Total
|
|
$
|
20,330
|
|
|
$
|
11,529
|
|
|
$
|
8,801
|
|
|
|
|
|
|
|
|
|
57
|
%
|
|
|
43
|
%
|
|
Nine-Month Period Ended September 29, 2019:
|
|
Total
Revenue
|
|
|
United
States
|
|
|
Non-United
States
|
|
|
Battery & Energy Products
|
|
$
|
58,876
|
|
|
$
|
29,869
|
|
|
$
|
29,007
|
|
|
Communications Systems
|
|
|
16,896
|
|
|
|
15,748
|
|
|
|
1,148
|
|
|
Total
|
|
$
|
75,772
|
|
|
$
|
45,617
|
|
|
$
|
30,155
|
|
|
|
|
|
|
|
|
|
60
|
%
|
|
|
40
|
%
|
|
Nine-Month Period Ended September 30, 2018:
|
|
Total
Revenue
|
|
|
United
States
|
|
|
Non-United
States
|
|
|
Battery & Energy Products
|
|
$
|
52,344
|
|
|
$
|
29,451
|
|
|
$
|
22,893
|
|
|
Communications Systems
|
|
|
13,919
|
|
|
|
12,747
|
|
|
|
1,172
|
|
|
Total
|
|
$
|
66,263
|
|
|
$
|
42,198
|
|
|
$
|
24,065
|
|
|
|
|
|
|
|
|
|
64
|
%
|
|
|
36
|
%
|
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects.
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; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our inability to comply with changes to the regulations for the shipment of our products; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; possible impairments of our goodwill and other intangible assets; our customers’ demand falling short of volume expectations in our supply agreements; negative publicity concerning Lithium-ion batteries; our exposure to foreign currency fluctuations; 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; our ability to utilize our net operating loss carryforwards; 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 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,” “expect,” “estimate,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” 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, 2018.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
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, 2018 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, 2018.
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 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®, AMTI™, ABLE™, 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. See Note 11 in the Notes to Consolidated Financial Statements.
Our website address is www.ultralifecorporation.com. We make available free of charge via a hyperlink on our website (see Investor Relations link on the website) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
Overview
Consolidated revenues of $27,493 for the three-month period ended September 29, 2019, increased by $7,163 or 35.2%, from $20,330 during the three-month period ended September 30, 2018, due to higher revenues from our Battery & Energy Products business reflecting the May 1, 2019 acquisition of SWE and from our Communications Systems business driven by shipments of vehicle amplifier adapter systems to support the U.S. Army’s Network Modernization initiatives under the delivery orders received in October 2018.
Gross profit for the three-month period ended September 29, 2019 was $7,861 or 28.6% of revenues, compared to $6,041 or 29.7% of revenues, for the same quarter a year ago. The 110-basis point decrease in gross margin for both businesses resulted from incremental costs associated with the transitioning of new products to higher volume production, late cycle product changes and rework associated with vehicle amplifier adapter systems for the U.S. Army and sales mix. The gross margin for the third quarter of 2019 was reduced by 21 basis points resulting from the completion of the sell-through of acquired SWE inventory written up to fair market value as required by Generally Accepted Accounting Principles (“GAAP”) purchase accounting.
Operating expenses increased to $6,555 during the three-month period ended September 29, 2019, compared to $4,541 during the three-month period ended September 30, 2018. The increase of $2,014 or 44.3% was primarily attributable to SWE which contributed operating expenses of $1,494 for the third quarter 2019. Excluding SWE, operating expenses increased $520 or 11.5% due primarily to an increase of $353 or 32.1% in core business research and development expenses for new product development and testing. Both periods reflect continued tight control over discretionary spending. Operating expenses as a percentage of sales increased 150 basis points from 22.3% for the third quarter of 2018 to 23.8% for the current quarter.
Operating income for the three-month period ended September 29, 2019 was $1,306 or 4.8% of revenues, compared to $1,500 or 7.4% for the year-earlier period. The decrease in operating income resulted from the lower gross margin and the higher research and development costs associated with new product transitions to manufacturing and final development testing. Operating income for the three-month period ending September 29, 2019 includes a $59 purchase accounting adjustment related to the completion of the sell-through of acquired SWE inventory. Net of this adjustment, SWE contributed $1,010 of operating income for the current period.
Net income attributable to Ultralife was $898, or $0.06 per share – basic and diluted, for the three-month period ended September 29, 2019, compared to $1,408, or $0.09 per share – basic and diluted, for the three-month period ended September 30, 2018. As a result of our reversal of the allowance on deferred tax assets at year-end 2018, we utilized a statutory tax rate of 19.6% to record our tax provision for the third quarter of 2019 compared to an effective rate of 5.7% for the year-earlier quarter. Since we do not expect to pay cash taxes in the U.S. for the foreseeable future due to the usage of our deferred tax assets, we have estimated an effective tax rate of 5.2% resulting in Adjusted EPS of $0.07 for the 2019 third quarter. Including the one-time adjustment and the use of the U.S. statutory tax rate, SWE was accretive by approximately $0.05 of EPS for the quarter.
Adjusted EBITDA, defined as net income 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 $2,307 in the third quarter of 2019 compared to $2,472 for the third quarter of 2018. See the section “Adjusted EBITDA” beginning on page 26 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
As we near the end of 2019, we remain focused on delivering profitable growth in 2019 by continuing to fulfill Communications Systems’ vehicle amplifier adapter system orders in our backlog, solid SWE performance, and ongoing new product development projects in our end markets.
Three-Month Periods Ended September 29, 2019 and September 30, 2018
Revenues. Consolidated revenues for the three-month period ended September 29, 2019 were $27,493, an increase of $7,163, or 35.2%, from the $20,330 reported for the three-month period ended September 30, 2018. Overall, commercial sales increased 74.6% and government/defense sales decreased 3.8% from the 2018 period. Revenues for the 2019 period include revenues of SWE which was acquired by the Company on May 1, 2019.
Battery & Energy Products revenues increased $5,289, or 30.6%, from $17,289 for the three-month period ended September 30, 2018 to $22,578 for the three-month period ended September 29, 2019. The increase was attributable to the $7,243 revenue of SWE and a $307 or 3.0% increase in core commercial sales partially offset by a $2,261 or 31.6% reduction in government/defense sales primarily reflecting the absence of revenue from a large 5390 battery order completed in 2018 and the timing of sales to certain defense prime contractors.
Communications Systems revenues increased $1,874, or 61.6%, from $3,041 during the three-month period ended September 30, 2018 to $4,915 for the three-month period ended September 29, 2019. This increase is primarily attributable to shipments of vehicle amplifier adapter systems to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018, shipments of vehicle communication kits under an indefinite-delivery/indefinite-quantity contract with a major defense prime contractor announced in October 2018 and shipments of Universal Vehicle Adapters under an indefinite-delivery/indefinite-quantity contract with the Naval Air Warfare Center Aircraft Division announced in June 2019. These shipments exceeded several non-recurring orders shipped in the 2018 third quarter.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $19,632 for the quarter ended September 29, 2019, an increase of $5,343, or 37.4%, from the $14,289 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased to 71.4% for the three-month period ended September 29, 2019 from 70.3% for the three-month period ended September 30, 2018. Correspondingly, consolidated gross margin was 28.6% for the three-month period ended September 29, 2019, compared with 29.7% for the three-month period ended September 30, 2018, primarily reflecting incremental costs associated with the transition of new products to higher volume production, late cycle product changes and rework relating to vehicle amplifier adapter systems for the U.S. Army and product sales mix. The gross margin for the 2019 period includes the completion of the sell-through of the acquired SWE inventory which had been adjusted to fair market value in accordance with purchase accounting and resulted in a 21-basis point reduction in reported gross margin.
For our Battery & Energy Products segment, gross profit for the third quarter of 2019 was $6,117, an increase of $1,415 or 30.1% from gross profit of $4,702 for the third quarter of 2018. Battery & Energy Products’ gross margin of 27.1% decreased by 10 basis points from the 27.2% gross margin for the year-earlier period, reflecting the transitioning of new products to higher volume production and the completion of the sell-through of acquired SWE inventory adjusted to fair market value which resulted in a $59 charge to cost of products sold in the third quarter of 2019. Excluding this adjustment, the gross margin for Battery & Energy Products would have been 27.4%.
For our Communications Systems segment, gross profit for the third quarter of 2019 was $1,744 or 35.5% of revenues, an increase of $405 or 30.2%, from gross profit of $1,339, or 44.0% of revenues, for the third quarter of 2018. The 850-basis point decrease in gross margin during 2019 is driven by late cycle product changes and rework relating to the vehicle amplifier adapter systems for the U.S. Army and the larger sales mix of competitively bid awards.
Operating Expenses. Operating expenses for the three-month period ended September 29, 2019 were $6,555, an increase of $2,014 or 44.3% over the $4,541 for the three-month period ended September 30, 2018. The increase is primarily attributable to the acquisition of SWE, which contributed operating expenses of $1,494 in the third quarter, and a $353 or 32.1% increase in core research and development expense for new product development and testing. Excluding SWE, operating expenses increased $520 or 11.5% due primarily to the higher research and development expenses. Both periods reflect continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 23.8% for the quarter ended September 29, 2019 compared to 22.3% for the quarter ended September 30, 2018. Amortization expense associated with intangible assets related to our acquisitions was $148 for the third quarter of 2019 ($116 in selling, general and administrative expenses and $32 in research and development costs), including $60 for SWE ($60 in selling, general and administrative expenses), compared with $97 for the third quarter of 2018 ($61 in selling, general, and administrative expenses and $36 in research and development costs). Research and development costs were $2,029 for the three-month period ended September 29, 2019, an increase of $930 or 84.6%, from $1,099 for the three-months ended September 30, 2018. The increase is attributable to $577 of research and development costs incurred by SWE and a $353 increase in core business investments for new product development and testing. Selling, general, and administrative expenses increased $1,084 or 31.5%, to $4,526 for the third quarter of 2019 from $3,442 for the third quarter of 2018. The increase is primarily attributable to the acquisition of SWE which contributed $917, including intangible asset amortization of $60, for the third quarter of 2019.
Other Expense (Income). Other expense totaled $160 for the three-month period ended September 29, 2019 compared to other income of $21 for the three-month period ended September 30, 2018. Interest and financing expense, net of interest income, increased $207, from $13 for the third quarter of 2018 to $220 for the comparable period in 2019. The increase is due primarily to the financing for the SWE acquisition, which was $179 for the third quarter of 2019. Miscellaneous income amounted to $60 for the third quarter of 2019 compared with miscellaneous expense of $34 for the third quarter of 2018, primarily due to transactions impacted by foreign currency fluctuations in the U.S. dollar relative to the Pound Sterling, and the strengthening of the U.S dollar to the Pound Sterling by 3% from the end of the second quarter to the end of the third quarter of 2019 and 2% from the end of second quarter to the end of the third quarter in 2018.
Income Taxes. The tax provision for the 2019 third quarter was $225 compared to $86 for the third quarter of 2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of 19.6% was used to record our tax provision for the third quarter of 2019 compared to an effective tax rate of 5.7% for the year-earlier quarter. We expect that our deferred taxes will offset U.S. taxes for the foreseeable future, and that a cash-based effective tax rate for the 2019 third quarter would be approximately 5.2%. See Note 8 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 $898, or $0.06 per share – basic and diluted, for the three-month period ended September 29, 2019, compared to $1,408, or $0.09 per share – basic and diluted, for the three-month period ended September 30, 2018. Average weighted common shares outstanding used to compute diluted earnings per share decreased from 16,523,433 in the third quarter of 2018 to 16,162,055 in the third quarter of 2019. The decrease in 2019 is attributable to share repurchases under the Company’s Share Repurchase Program which commenced on November 1, 2018, partially offset by stock option exercises since the third quarter of 2018 and a decrease in the weighted average stock price used to compute diluted shares from $9.29 for the third quarter of 2018 to $8.73 for the third quarter of 2019.
Nine-Month Periods Ended September 29, 2019 and September 30, 2018
Revenues. Consolidated revenues for the nine-month period ended September 29, 2019 amounted to $75,772, an increase of $9,509 or 14.4%, from the $66,263 reported for the nine-month period ended September 30, 2018. Overall, commercial sales increased 42.4% from $30,007 for the 2018 nine-month period to $42,736 for the nine-month 2019 period, and government/defense sales decreased 8.9% from $36,256 for the 2018 period to $33,036 for the 2019 period. Revenues for the nine-month 2019 period include SWE which was acquired by the Company on May 1, 2019.
Battery & Energy Products revenues increased $6,532, or 12.5%, from $52,344 for the nine-month period ended September 30, 2018 to $58,876 for the nine-month period ended September 29, 2019. The increase was attributable to the $11,993 revenue contribution from the operations of SWE and a $736 or 2.5% increase in core battery commercial sales partially offset by a $6,197 or 27.7% reduction in government/defense sales primarily reflecting the absence of revenue from a large 5390 battery order completed in 2018 and the timing of sales from certain large defense prime contractors.
Communications Systems revenues increased $2,977, or 21.4%, from $13,919 during the nine-month period ended September 30, 2018 to $16,896 for the nine-month period ended September 29, 2019. This increase is primarily attributable to shipments of mounted power amplifiers and vehicle amplifier adapter systems to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018, shipments of vehicle communication kits under an indefinite-delivery/indefinite-quantity contract with an major defense prime contractor announced in October 2018 and shipments of Universal Vehicle Adapters under an indefinite-delivery/indefinite-quantity contract with the Naval Air Warfare Center Aircraft Division announced in June 2019.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $53,962 for the nine-month period ended September 29, 2019, an increase of $7,572 or 16.3%, from the $46,390 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 70.0% for the nine-month period ended September 30, 2018 to 71.2% for the nine-month period ended September 29, 2019. Correspondingly, consolidated gross margin was 28.8% for the nine-month period ended September 29, 2019, compared with 30.0% for the nine-month period ended September 30, 2018, due primarily to product mix. The gross margin for the 2019 period includes an adjustment to increase the book value of the acquired SWE inventory to fair market value in accordance with purchase accounting which resulted in a 40-basis point reduction in reported gross margin for the first nine months of 2019 recognized on the sell through of product.
For our Battery & Energy Products segment, the cost of products sold increased $5,014 or 13.3%, from $37,680 during the nine-month period ended September 30, 2018 to $42,694 during the nine-month period ended September 29, 2019. Battery & Energy Products’ gross profit for the 2019 nine-month period was $16,182 or 27.5% of revenues, an increase of $1,518 or 10.4% from gross profit of $14,664, or 28.0% of revenues, for the 2018 nine-month period. Battery & Energy Products’ gross margin decreased for the nine-month period ended September 29, 2019 by 50 basis points, primarily due to the purchase accounting adjustment described above which accounted for 40 basis points of the reduction.
For our Communications Systems segment, the cost of products sold increased by $2,558 or 29.4% from $8,710 during the nine-month period ended September 30, 2018 to $11,268 during the nine-month period ended September 29, 2019. Communications Systems’ gross profit for the first nine months of 2019 was $5,628 or 33.3% of revenues, an increase of $419 or 8.0% from gross profit of $5,209 or 37.4% of revenues, for the nine-month period ended September 30, 2018. The decrease in gross margin was primarily due to costs incurred to transition new products to high volume production to fulfill large program awards during 2019.
Operating Expenses. Operating expenses for the nine-month period ended September 29, 2019 totaled $16,914, an increase of 2,529 or 17.6% from the $14,385 recorded during the nine-month period ended September 30, 2018. The increase is fully attributable to the acquisition of SWE on May 1, 2019, which contributed operating expenses of $2,650 including $165 of one-time direct acquisition costs and $101 of intangible asset amortization. Excluding SWE results, operating expenses decreased $121 or 0.8% due to lower corporate expenses. Both periods reflected continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 22.3% for the nine-month period ended September 29, 2019 compared to 21.7% for the comparable 2018 period. Amortization expense associated with intangible assets related to our acquisitions was $372 for the first nine months of 2019 ($274 in selling, general and administrative expenses and $98 in research and development costs), including $101 for SWE ($101 in selling, general and administrative expenses), compared with $300 for the first nine months of 2018 ($189 in selling, general, and administrative expenses and $111 in research and development costs). Research and development costs were $4,652 for the nine-month period ended September 29, 2019, an increase of $1,235 or 36.1% over $3,417 for the nine-months ended September 30, 2018. The increase is attributable to $960 of research and development costs incurred by SWE and a $275 increase in core business new product development and testing. Selling, general, and administrative expenses increased $1,294 or 11.8%, from $10,968 during the first nine months of 2018 to $12,262 during the first nine months of 2019. The increase is fully attributable to the inclusion of SWE results which contributed $1,690, including one-time acquisition costs of $165 and intangible asset amortization of $101, partially offset by lower corporate spending.
Other Expense. Other expense totaled $301 for the nine-month period ended September 29, 2019 compared to $27 for the nine-month period ended September 30, 2018. Interest and financing expense, net of interest income, increased $272 to $339 for the 2019 period from $67 for the comparable period in 2018, as a result of the financing for the SWE acquisition. Miscellaneous expense amounted to $38 for the first nine months of 2019 compared with income of $40 for the first nine months of 2018, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.
Income Taxes. We recognized a tax provision of $942 for the first three quarters of 2019 compared with a tax provision of $219 for the first three quarters of 2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of 20.5% was used to record our tax provision for the first nine months of 2019 compared to an effective tax rate of 4.0% for the year-earlier period. We expect that our deferred taxes will offset U.S. taxes for the foreseeable future, and that a cash-based effective tax rate for the 2019 first nine months would be approximately 3.1%. See Note 8 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.
Net Income Attributable to Ultralife. Net income attributable to Ultralife and net income attributable to Ultralife common shareholders per diluted share was $3,579 and $0.22, respectively, for the nine months ended September 29, 2019, compared to $5,185 and $0.32, respectively, for the nine months ended September 30, 2018. Average common shares outstanding used to compute diluted earnings per share decreased from 16,407,121 in the 2018 period to 16,138,335 in the 2019 period, mainly due to share repurchases under the Company’s Share Repurchase Program which commenced on November 1, 2018, partially offset by stock option exercises under our Long-Term Incentive Plans.
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 in addition to U.S. GAAP financial measures. We define Adjusted EBITDA as net income 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 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 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 providing 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 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:
|
|
●
|
Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business;
|
|
|
●
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements;
|
|
|
●
|
while stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and
|
|
|
●
|
other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
|
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
Adjusted EBITDA is calculated as follows for the periods presented:
|
|
|
Three-Month Period Ended
|
|
|
Nine-Month Period Ended
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Ultralife
|
|
$
|
898
|
|
|
$
|
1,408
|
|
|
$
|
3,579
|
|
|
$
|
5,185
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and financing expense, net
|
|
|
220
|
|
|
|
13
|
|
|
|
339
|
|
|
|
67
|
|
|
Income tax provision
|
|
|
225
|
|
|
|
86
|
|
|
|
942
|
|
|
|
219
|
|
|
Depreciation expense
|
|
|
586
|
|
|
|
496
|
|
|
|
1,548
|
|
|
|
1,476
|
|
|
Amortization of intangible assets and financing fees
|
|
|
160
|
|
|
|
106
|
|
|
|
404
|
|
|
|
327
|
|
|
Stock-based compensation expense
|
|
|
159
|
|
|
|
363
|
|
|
|
519
|
|
|
|
707
|
|
|
Non-cash purchase accounting adjustments
|
|
|
59
|
|
|
|
-
|
|
|
|
264
|
|
|
|
-
|
|
|
Adjusted EBITDA
|
|
$
|
2,307
|
|
|
$
|
2,472
|
|
|
$
|
7,595
|
|
|
$
|
7,981
|
|
Adjusted EPS
In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance in addition to U.S. GAAP financial measures. We define Adjusted EPS as net income attributable to Ultralife Corporation excluding the provision for deferred taxes divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that will be offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under U.S. GAAP. Neither current nor potential investors in our securities should rely on Adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EPS to EPS and net income attributable to Ultralife.
Adjusted EPS is calculated as follows for the periods presented:
|
ULTRALIFE CORPORATION AND SUBSIDIARIES
|
|
CALCULATION OF ADJUSTED EPS
|
|
(In Thousands Except Per Share Amounts)
|
|
(Unaudited)
|
|
|
|
Three-Month Period Ended
|
|
|
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
|
|
|
Amount
|
|
|
Per
Basic
Share
|
|
|
Per
Diluted
Share
|
|
|
Amount
|
|
|
Per
Basic
Share
|
|
|
Per
Diluted
Share
|
|
|
Net income attributable to Ultralife Corporation
|
|
$
|
898
|
|
|
$
|
.06
|
|
|
$
|
.06
|
|
|
$
|
1,408
|
|
|
$
|
.09
|
|
|
$
|
.09
|
|
|
Deferred tax provision
|
|
|
165
|
|
|
|
.01
|
|
|
|
.01
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted net income attributable to Ultralife Corporation
|
|
$
|
1,063
|
|
|
$
|
.07
|
|
|
$
|
.07
|
|
|
$
|
1,426
|
|
|
$
|
.09
|
|
|
$
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
15,785
|
|
|
|
16,162
|
|
|
|
|
|
|
|
15,952
|
|
|
|
16,523
|
|
|
|
|
Nine-Month Period Ended
|
|
|
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
|
|
|
Amount
|
|
|
Per
Basic
Share
|
|
|
Per
Diluted
Share
|
|
|
Amount
|
|
|
Per
Basic
Share
|
|
|
Per
Diluted
Share
|
|
|
Net income attributable to Ultralife Corporate
|
|
$
|
3,579
|
|
|
$
|
.23
|
|
|
$
|
.22
|
|
|
$
|
5,185
|
|
|
$
|
.33
|
|
|
$
|
.32
|
|
|
Deferred tax provision
|
|
|
801
|
|
|
|
.05
|
|
|
|
.05
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted net income attributable to Ultralife Corporation
|
|
$
|
4,380
|
|
|
$
|
.28
|
|
|
$
|
.27
|
|
|
$
|
5,239
|
|
|
$
|
.33
|
|
|
$
|
.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
15,756
|
|
|
|
16,138
|
|
|
|
|
|
|
|
15,859
|
|
|
|
16,407
|
|
Liquidity and Capital Resources
As of September 29, 2019, cash totaled $7,089, a decrease of $18,845 as compared to $25,934 of cash held at December 31, 2018, primarily driven by the acquisition of SWE on May 1, 2019, the procurement of inventory to fulfill the higher backlog level entering 2019, an increase in accounts receivable due to the timing of shipments, strategic capital investments for our Battery & Energy Products business, and repurchases of our common stock under our Share Repurchase Program.
During the nine-month period ended September 29, 2019, net cash of $4,847 was used in operations, driven by a $7,022 increase in accounts receivable and $5,021 increase in inventory primarily attributable to the large program awards announced in October 2018 for our Communications Systems business. Cash used in operations was largely offset by net income of $3,653, non-cash expenses (depreciation, amortization, stock-based compensation and deferred taxes) totaling $3,272, and a net decrease in other working capital of $271.
Cash used in investing activities for the nine months ended September 29, 2019 was $30,094, consisting of the purchase price for SWE of $25,248, net of cash acquired, and capital expenditures of $4,846 primarily due to investment in automation equipment pertaining to our Battery & Energy Products business, including 3-Volt cell production.
Net cash provided by financing activities for the nine months ended September 29, 2019 was $16,503, consisting of $17,759 of net borrowings drawn against our Credit Facilities primarily to fund the acquisition of SWE and stock option exercise proceeds of $866, partially offset by repurchases of our common stock under our Share Repurchase Program totaling $1,957 and debt issuance costs of $157.
As of September 29, 2019, the Company has significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 8 in the Notes to Consolidated Financial Statements for additional information.
As of September 29, 2019, we had made commitments to purchase approximately $1,030 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.
Debt Commitments
On May 1, 2019, in connection with financing the SWE acquisition (see Note 3 to the Notes to Consolidated Financial Statements), the Company drew down $8,000 on its Term Loan Facility and $6,782 under its Revolving Credit Facility. As of September 29, 2019, we had $7,577 outstanding principal on the Term Loan Facility, of which $1,326 is due to be paid over the next twelve months, and $10,182 outstanding principal on the Revolving Credit Facility. As of September 29, 2019, the Company is in full compliance with its debt covenants under the Credit Facilities. Management believes that cash flow generated from future operations and remaining availability under our Revolving Credit Facility will be sufficient to meet our general 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 2018 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the first nine months of 2019, 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 1 in the notes to consolidated financial statements for updated accounting policies to reflect the Company’s adoption of Topic 842 - Leases as of January 1, 2019.
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.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer
Refer to Note 4 of the Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for further discussion regarding share repurchases.
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 and under which the Company was authorized to repurchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Share repurchases under this program were made in accordance with SEC Rule 10b-18 using a variety of methods, which included open market purchases and block trades in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under 10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’s discretion.
The following table sets forth information regarding our repurchases of common stock for the first nine months of 2019 under this program:
|
|
|
Total
Number of
Shares
Purchased
|
|
|
Weighted
Average
Price Paid
Per Share
|
|
|
Total Number
of Shares
Purchased
As Part of
Publicly
Announced
Program
|
|
|
Maximum
Number of
Shares That
May Yet Be
Purchased
Under the
Program
|
|
|
January 2019
|
|
|
267,100
|
|
|
$
|
7.29
|
|
|
|
372,774
|
|
|
|
2,127,226
|
|
|
February 2019
|
|
|
200
|
|
|
|
7.49
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
March 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
April 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
May 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
June 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
July 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
August 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
September 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
372,974
|
|
|
|
2,127,026
|
|
|
Total
|
|
|
267,300
|
|
|
|
|
|
|
|
372,974
|
|
|
|
|
|
All repurchases were made using cash resources. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards.
Item 6. EXHIBITS
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.
|
|
|
ULTRALIFE CORPORATION
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
Date: October 31, 2019
|
By: /s/ Michael D. Popielec
|
|
|
|
|
Michael D. Popielec
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
Date: October 31, 2019
|
By: /s/ Philip A. Fain
|
|
|
|
|
Philip A. Fain
|
|
|
|
|
Chief Financial Officer and Treasurer
|
|
|
|
|
(Principal Financial Officer and
|
|
|
|
|
Principal Accounting Officer)
|
|