UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q 10-
______________Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the Quarter Endedfiscal October 1quarter, 2017 ended March 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-27460file number: 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of
2000 Technology Parkway Newark, New York 14513 (Address of principal executive offices) (Zip Code) | 16-1387013 (I.R.S. Employer Identification No.)
( |
___________________
None
(Former name, former address and former fiscal year, if changed since last report)
Registrant's telephone number, including area code: (315) 332-7100
_____________________________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 [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 |
|
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 [ ]Yes☐ No [ X ]☒
TheAPPLICABLE 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 registrant’sissuer’s classes of common stock, was 15,627,513, net of 4,019,711 treasury shares, as of October 31, 2017.the latest practicable date.
As of April 30, 2019, the registrant had 15,736,668 shares of common stock outstanding.
ULTRALIFE CORPORATION AND SUBSIDIARIES
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements (unaudited): | |
Consolidated Balance Sheets as of | 3 | |
Consolidated Statements of Income and Comprehensive Income for the Three | 4 | |
Consolidated Statements of Cash Flows for the | 5 | |
Consolidated Statements of Changes in Shareholders’ Equity for the Three Month Periods Ended March 31, 2019 and | 6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 4. | Controls and Procedures | 24 |
PART II. | OTHER INFORMATION | |
Item |
| |
| Unregistered Sales of Equity Securities and Use of Proceeds | 25 |
Item 6. | Exhibits | 26 |
Signatures | ||
|
|
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) |
March 31, | December 31, 2018 | |||||||
2019 | Adjusted (1) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 21,240 | $ | 25,934 | ||||
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $302 and $296, Respectively | 13,938 | 16,015 | ||||||
Inventories, Net | 27,906 | 22,843 | ||||||
Prepaid Expenses and Other Current Assets | 2,397 | 2,368 | ||||||
Total Current Assets | 65,481 | 67,160 | ||||||
Property, Equipment and Improvements, Net | 12,398 | 10,744 | ||||||
Goodwill | 20,251 | 20,109 | ||||||
Other Intangible Assets, Net | 6,484 | 6,504 | ||||||
Deferred Income Taxes, Net | 15,421 | 15,444 | ||||||
Other Noncurrent Assets | 916 | 887 | ||||||
Total Assets | $ | 120,951 | $ | 120,848 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 11,307 | $ | 9,919 | ||||
Accrued Compensation and Related Benefits | 1,364 | 1,494 | ||||||
Accrued Expenses and Other Current Liabilities | 3,325 | 3,973 | ||||||
Total Current Liabilities | 15,996 | 15,386 | ||||||
Deferred Income Taxes | 564 | 591 | ||||||
Other Noncurrent Liabilities | 468 | 408 | ||||||
Total Liabilities | 17,028 | 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 – 20,134,596 | ||||||||
Shares at March 31, 2019 and 20,053,335 Shares at December 31, 2018; Outstanding – 15,733,414 | ||||||||
Shares at March 31, 2019 and 15,920,585 at December 31, 2018 | 2,013 | 2,005 | ||||||
Capital in Excess of Par Value | 183,163 | 182,630 | ||||||
Accumulated Deficit | (57,610 | ) | (58,035 | ) | ||||
Accumulated Other Comprehensive Loss | (2,351 | ) | (2,786 | ) | ||||
Treasury Stock - At Cost; 4,401,182 at March 31, 2019 and 4,132,750 Shares at December 31, 2018 | (21,231 | ) | (19,266 | ) | ||||
Total Ultralife Corporation Equity | 103,984 | 104,548 | ||||||
Non-Controlling Interest | (61 | ) | (85 | ) | ||||
Total Shareholders’ Equity | 103,923 | 104,463 | ||||||
Total Liabilities and Shareholders' Equity | $ | 120,951 | $ | 120,848 |
(1) |
|
|
|
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
October 1, | December 31, | |||||||
2017 | 2016 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 14,607 | $ | 10,629 | ||||
Restricted Cash | 81 | 77 | ||||||
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $277 and $277, Respectively | 15,741 | 13,179 | ||||||
Inventories, Net | 24,922 | 23,456 | ||||||
Prepaid Expenses and Other Current Assets | 2,602 | 2,079 | ||||||
Total Current Assets | 57,953 | 49,420 | ||||||
Property, Equipment and Improvements, Net | 7,612 | 7,999 | ||||||
Goodwill | 20,381 | 19,965 | ||||||
Intangible Assets, Net | 7,167 | 7,194 | ||||||
Security Deposits and Other Non-Current Assets | 134 | 72 | ||||||
Deferred Income Taxes | 94 | 94 | ||||||
Total Assets | $ | 93,341 | $ | 84,744 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 7,108 | $ | 7,292 | ||||
Accrued Compensation and Related Benefits | 2,286 | 1,258 | ||||||
Accrued Expenses and Other Current Liabilities | 3,388 | 2,606 | ||||||
Income Taxes Payable | 285 | 172 | ||||||
Total Current Liabilities | 13,067 | 11,328 | ||||||
Deferred Income Taxes | 5,704 | 5,538 | ||||||
Other Non-Current Liabilities | 28 | 18 | ||||||
Total Liabilities | 18,799 | 16,884 | ||||||
Commitments and Contingencies (Note 11) | ||||||||
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 – 19,610,628 | ||||||||
Shares at October 1, 2017 and 19,324,723 Shares at December 31, 2016; Outstanding – 15,590,917 | 1,961 | 1,932 | ||||||
Shares at October 1, 2017 and 15,308,971 at December 31, 2016 | ||||||||
Capital in Excess of Par Value | 179,794 | 178,163 | ||||||
Accumulated Deficit | (86,694 | ) | (90,542 | ) | ||||
Accumulated Other Comprehensive Loss | (1,887 | ) | (3,080 | ) | ||||
Treasury Stock - At Cost; 4,019,711 at October 1, 2017 and 4,015,752 Shares at December 31, 2016 | (18,470 | ) | (18,443 | ) | ||||
Total Ultralife Corporation Equity | 74,704 | 68,030 | ||||||
Non-Controlling Interest | (162 | ) | (170 | ) | ||||
Total Shareholders’ Equity | 74,542 | 67,860 | ||||||
Total Liabilities and Shareholders' Equity | $ | 93,341 | $ | 84,744 |
ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In Thousands except per share amounts) (Unaudited) |
Three Month Periods Ended | ||||||||
March 31, | April 1, | |||||||
2019 | 2018 | |||||||
Revenues | $ | 18,882 | $ | 23,069 | ||||
Cost of Products Sold | 13,798 | 15,787 | ||||||
Gross Profit | 5,084 | 7,282 | ||||||
Operating Expenses: | ||||||||
Research and Development | 1,036 | 1,101 | ||||||
Selling, General and Administrative | 3,500 | 3,825 | ||||||
Total Operating Expenses | 4,536 | 4,926 | ||||||
Operating Income | 548 | 2,356 | ||||||
Other Expenses: | ||||||||
Interest and Financing Expense | (5 | ) | (33 | ) | ||||
Miscellaneous | (53 | ) | (100 | ) | ||||
Total Other Expenses | (58 | ) | (133 | ) | ||||
Income Before Income Tax Provision | 490 | 2,223 | ||||||
Income Tax Provision | (41 | ) | (55 | ) | ||||
Net Income | 449 | 2,168 | ||||||
Net Income Attributable to Non-Controlling Interest | (24 | ) | (17 | ) | ||||
Net Income Attributable to Ultralife Corporation | 425 | 2,151 | ||||||
Other Comprehensive Income: | ||||||||
Foreign Currency Translation Adjustments | 435 | 752 | ||||||
Comprehensive Income Attributable to Ultralife Corporation | $ | 860 | $ | 2,903 | ||||
Net Income Per Share Attributable to Ultralife Common Shareholders – Basic | $ | .03 | $ | .14 | ||||
Net Income Per Share Attributable to Ultralife Common Shareholders – Diluted | $ | .03 | $ | .13 | ||||
Weighted Average Shares Outstanding – Basic | 15,740 | 15,704 | ||||||
Potential Common Shares | 485 | 498 | ||||||
Weighted Average Shares Outstanding – Diluted | 16,225 | 16,202 |
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) |
Three Month Periods Ended | Nine Month Periods Ended | |||||||||||||||
October 1, | September 25, | October 1, | September 25, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | $ | 21,047 | $ | 19,631 | $ | 63,022 | $ | 60,835 | ||||||||
Cost of Products Sold | 14,792 | 13,634 | 43,656 | 42,533 | ||||||||||||
Gross Profit | 6,255 | 5,997 | 19,366 | 18,302 | ||||||||||||
Operating Expenses: | ||||||||||||||||
Research and Development | 1,355 | 1,357 | 3,678 | 4,438 | ||||||||||||
Selling, General and Administrative | 3,637 | 3,502 | 11,262 | 11,745 | ||||||||||||
Total Operating Expenses | 4,992 | 4,859 | 14,940 | 16,183 | ||||||||||||
Operating Income | 1,263 | 1,138 | 4,426 | 2,119 | ||||||||||||
Other (Expense) Income: | ||||||||||||||||
Interest and Financing Expense | (38 | ) | (50 | ) | (147 | ) | (213 | ) | ||||||||
Miscellaneous | (20 | ) | 20 | (53 | ) | 46 | ||||||||||
Income Before Income Taxes | 1,205 | 1,108 | 4,226 | 1,952 | ||||||||||||
Income Tax Provision | 104 | 92 | 370 | 213 | ||||||||||||
Net Income | 1,101 | 1,016 | 3,856 | 1,739 | ||||||||||||
Net (Income) Loss Attributable to Non-Controlling Interest | (3 | ) | 3 | (8 | ) | 25 | ||||||||||
Net Income Attributable to Ultralife Corporation | 1,098 | 1,019 | 3,848 | 1,764 | ||||||||||||
Other Comprehensive Income (Loss): | ||||||||||||||||
Foreign Currency Translation Adjustments | 440 | (613 | ) | 1,193 | (1,314 | ) | ||||||||||
Comprehensive Income Attributable to Ultralife Corporation | $ | 1,538 | $ | 406 | $ | 5,041 | $ | 450 | ||||||||
Net Income Per Share Attributable to Ultralife Common Shareholders – Basic | $ | .07 | $ | .07 | $ | .25 | $ | .12 | ||||||||
Net Income Per Share Attributable to Ultralife Common Shareholders – Diluted | $ | .07 | $ | .07 | $ | .24 | $ | .11 | ||||||||
Weighted Average Shares Outstanding – Basic | 15,564 | 15,207 | 15,495 | 15,262 | ||||||||||||
Potential Common Shares | 407 | 91 | 323 | 184 | ||||||||||||
Weighted Average Shares Outstanding - Diluted | 15,971 | 15,298 | 15,818 | 15,446 |
Three Month Periods Ended | ||||||||
March 31, | April 1, | |||||||
2019 | 2018 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 449 | $ | 2,168 | ||||
Adjustments to Reconcile Net Income to Net Cash (Used In) Provided By Operating Activities: | ||||||||
Depreciation | 447 | 484 | ||||||
Amortization of Intangible Assets | 92 | 102 | ||||||
Amortization of Financing Fees | 9 | 9 | ||||||
Stock-Based Compensation | 185 | 139 | ||||||
Deferred Income Taxes | (5 | ) | (1 | ) | ||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | 2,076 | (939 | ) | |||||
Inventories | (4,963 | ) | (502 | ) | ||||
Prepaid Expenses and Other Assets | (1 | ) | (86 | ) | ||||
Accounts Payable and Other Liabilities | 1,166 | (2,295 | ) | |||||
Net Cash Used In Operating Activities | (545 | ) | (921 | ) | ||||
INVESTING ACTIVITIES: | ||||||||
Purchases of Property, Equipment and Improvements | (2,581 | ) | (172 | ) | ||||
Net Cash Used In Investing Activities | (2,581 | ) | (172 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Cash Paid to Repurchase Common Stock | (1,957 | ) | - | |||||
Proceeds from Exercise of Stock Option | 356 | 939 | ||||||
Tax Withholdings on Stock-Based Awards | (8 | ) | - | |||||
Net Cash (Used In) Provided By Financing Activities | (1,609 | ) | 939 | |||||
Effect of Exchange Rate Changes on Cash | 41 | 154 | ||||||
DECREASE IN CASH | (4,694 | ) | - | |||||
Cash, Beginning of Period | 25,934 | 18,330 | ||||||
Cash, End of Period | $ | 21,240 | $ | 18,330 |
The accompanying notes are an integral part of these consolidated financial statements. |
ULTRALIFE CORPORATION AND SUBSIDIARIES
| ||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||
(Dollars in Thousands) (Unaudited) |
Nine Month Periods Ended | ||||||||
October 1, | September 25, | |||||||
2017 | 2016 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 3,856 | $ | 1,739 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided By (Used In) Operating Activities: | ||||||||
Depreciation | 1,507 | 1,698 | ||||||
Amortization of Intangible Assets | 315 | 403 | ||||||
Amortization of Financing Fees | 42 | 55 | ||||||
Stock-Based Compensation | 529 | 555 | ||||||
Deferred Income Taxes | 117 | 165 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | (2,412 | ) | (283 | ) | ||||
Inventories | (1,221 | ) | 755 | |||||
Prepaid Expenses and Other Assets | (582 | ) | 176 | |||||
Accounts Payable and Other Liabilities | 1,506 | (1,695 | ) | |||||
Net Cash Provided By Operating Activities | 3,657 | 3,568 | ||||||
INVESTING ACTIVITIES: | ||||||||
Cash Paid for Property, Equipment and Improvements | (971 | ) | (990 | ) | ||||
Acquisition of Accutronics, Net of Cash Acquired | - | (9,857 | ) | |||||
Change in Restricted Cash | - | 60 | ||||||
Net Cash Used In Investing Activities | (971 | ) | (10,787 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from Stock Option Exercise | 1,120 | 181 | ||||||
Cash Paid to Repurchase Treasury Stock | - | (607 | ) | |||||
Proceeds from Debt Borrowing | - | 3,030 | ||||||
Payments of Debt Borrowings | - | (3,030 | ) | |||||
Net Cash Provided By (Used In) Financing Activities | 1,120 | (426 | ) | |||||
Effect of Exchange Rate Changes on Cash | 172 | (98 | ) | |||||
INCREASE (DECREASE) IN CASH | 3,978 | (7,743 | ) | |||||
Cash, Beginning of Period | 10,629 | 14,393 | ||||||
Cash, End of Period | $ | 14,607 | $ | 6,650 |
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 | 2,151 | 17 | 2,168 | |||||||||||||||||||||||||||||
Stock Option Exercises | 221,009 | 23 | 995 | 1,018 | ||||||||||||||||||||||||||||
Stock-Based Compensation -Stock Options | 123 | 123 | ||||||||||||||||||||||||||||||
Stock-Based Compensation -Restricted Stock | 16 | 16 | ||||||||||||||||||||||||||||||
Foreign Currency Translation Adjustments | 752 | 752 | ||||||||||||||||||||||||||||||
Cash settlement of outstanding options | (33 | ) | (33 | ) | ||||||||||||||||||||||||||||
Balance – April 1, 2018 (1) | 19,891,937 | $ | 1,989 | $ | 181,312 | $ | (859 | ) | $ | (80,814 | ) | $ | (18,469 | ) | $ | (137 | ) | $ | 83,022 | |||||||||||||
Balance – December 31, 2018 (1) | 20,053,335 | $ | 2,005 | $ | 182,630 | $ | (2,786 | ) | $ | (58,035 | ) | $ | (19,266 | ) | $ | (85 | ) | $ | 104,463 | |||||||||||||
Net Income | 425 | 24 | 449 | |||||||||||||||||||||||||||||
Share Repurchases | (1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||
Stock Option Exercises | 75,427 | 8 | 348 | 356 | ||||||||||||||||||||||||||||
Stock-Based Compensation -Stock Options | 174 | 174 | ||||||||||||||||||||||||||||||
Stock-Based Compensation -Restricted Stock | 5,834 | 11 | 11 | |||||||||||||||||||||||||||||
Tax Withholdings on Restricted Stock | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||
Foreign Currency Translation Adjustments | 435 | 435 | ||||||||||||||||||||||||||||||
Balance – March 31, 2019 | 20,134,596 | $ | 2,013 | $ | 183,163 | $ | (2,351 | ) | $ | (57,610 | ) | $ | (21,231 | ) | $ | (61 | ) | $ | 103,923 |
(1) | Effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. Prior period balances have been adjusted for the effects of the new standard. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands – except share and per share amounts)
(unaudited)(Unaudited)
1.BASIS OF PRESENTATION |
|
The accompanying unaudited Consolidated Financial Statements of Ultralife Corporation (the “Company”) 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 of 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, 2016.2018.
The December 31, 20162018 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 noncancellable 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 are 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. RecentAccounting 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. SUBSEQUENT EVENTS Acquisition of Southwest Electronic Energy Corporation |
|
On January 13, 2016,May 1, 2019, Ultralife UK Limited (the “Merger Subsidiary”), a U.K. corporation and a wholly-owned subsidiary of Ultralife Corporation (the “Company”), completed the acquisition of all100% of the issued and outstanding ordinary shares of Accutronics LimitedSouthwest Electronic Energy Corporation (“Accutronics”SWE”), a U.K. corporation based for an aggregate purchase price of $25.0 million in Newcastle-under-Lyme, U.K., from Intrinsic Equity Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert Andrew Phillipscash, net of cash acquired and Michael Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and any of the Sellers, other than pertainingsubject to this acquisition. Accutronicscustomary post-closing working capital adjustments.
SWE is a leading independent designer and manufacturer of high-performance smart batteriesbattery systems and charger systems for high-performance, feature-laden portablebattery packs to customer specifications using lithium cells. SWE serves a variety of industrial markets, including oil & gas, remote monitoring, process control and handheld electronic devicesmarine, which demand uncompromised safety, service, reliability and is classified in the Battery & Energy Products segment.quality. The Company acquired SWE as a bolt-on acquisition of Accutronics advancesto further support our strategy of commercial revenue diversification by providing entry to the oil and expandsgas 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 geographic reach within European OEM’s. With industry experts predicting mid-to-high single digitnew product development-based revenue growth through 2020initiatives in the global medical batteries market, this strategic investment positions Ultralife well for further penetration ofour commercial end-markets particularly asset tracking, smart metering and growing revenue streams from an attractive commercial market.other industrial applications.
The SWE acquisition was completed pursuant to the terms of the Sharea Stock Purchase Agreement dated January 13, 2016May 1, 2019 (the “Stock Purchase Agreement”) by and among the Merger SubsidiaryUltralife, SWE, Southwest Electronic Energy Medical Research Institute, a Texas non-profit (the “Seller”), and the Sellers. Claude Leonard Benckenstein, an individual (the “Shareholder”).
The Merger Subsidiary paid at the time of closing an aggregate purchase price of £7,575 ($10,976) in cash, and in exchangefor the Merger Subsidiary received all of the outstanding shares of Accutronics ordinary stock. Monies to fund the purchase price were advanced to the Merger Subsidiary fromSWE Acquisition was funded by the Company’s general corporate funds. through a combination of cash on hand and borrowings under the Credit Facilities (see Note 3).
The purchase price was subject to adjustment based onStock Purchase Agreement contains customary terms and conditions including representations, warranties and indemnification provisions. A portion of the difference between actual and estimated amounts of working capital of Accutronics as well as the amount of net cash of Accutronics. The adjustment resulted in a final paymentconsideration paid to the SellersSeller will be held in the amount of £133 on February 24, 2016, bringing the total aggregate purchase price to £7,708 ($11,161).escrow for post-closing adjustments and indemnification purposes.
The purchase price allocation was determined in accordance with the accounting treatmentacquisition of SWE will be accounted for as a business combination, in Financial Accounting Standards Board (“FASB”) ASC Topic 805, Business Combinations. Under the guidance, the fair value of the consideration was determined and accordingly, the assets acquired and liabilities assumed have been recordedwill be recognized at their fair values atvalue as of the acquisition date. The operating results and cash flows of SWE will be included in the consolidated financial statements from the date of acquisition in the acquisition. The excessCompany's Battery & Energy Products segment.
Due to the timing of the consideration paid overacquisition, the estimatedinitial accounting is not yet complete. The Company is in the process of preparing the preliminary estimate of the fair values has been recorded as goodwill.
The final allocationvalue of purchase price to the assets acquired and liabilities assumed is presented inand the table below. Management is responsibleassociated adjustments for determining the fair value of the tangiblesupplemental pro forma revenue and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered a number of factors, including reference to an analysis performed under FASB ASC Topic 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. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.earnings information.
Cash | $ | 1,304 | ||
Accounts Receivable | 1,344 | |||
Inventory | 2,167 | |||
Prepaids and Other Current Assets | 584 | |||
Property, Plant & Equipment | 269 | |||
Identifiable Intangible Assets | 4,374 | |||
Goodwill | 4,487 | |||
Accounts Payable | (1,009 | ) | ||
Accrued Expenses | (1,136 | ) | ||
Income Taxes Payable | (111 | ) | ||
Non-Current Liabilities | (209 | ) | ||
Deferred Income Taxes | (74 | ) | ||
Deferred Income Taxes on Intangible Assets | (829 | ) | ||
Total Consideration | $ | 11,161 |
First Amendment Agreement
The goodwill included in the Company’s purchase price allocation presented above represents the value of Accutronics assembled and trained workforce, the incremental value that Accutronics engineering and technology will bring to the Company and the revenue growth expected to occur over time attributable to increased market penetration from future new products and customers. The goodwill acquiredOn May 1, 2019, in connection with the SWE acquisition, is not deductible for income tax purposes.
The identifiable intangible assets included in the Company’s purchase price allocation represent customer contracts and relationships of $2,821, intellectual property of $1,132 and trade name of $421 that are amortized straight-line over a period ranging from 10 to 15 years.
During entered into the nine-month period ended September 25, 2016, direct acquisition costs of $251 and increased cost of sales related to purchase accounting adjustments of $96First Amendment Agreement with KeyBank National Association. See Note 3 for inventory acquired were recorded in the Company’s Consolidated Statement of Income and Comprehensive Income. Accutronics contributed revenue of $7,551 and an operating loss of $61 during the nine-month period ended September 25, 2016 reflecting the purchase accounting adjustments and non-recurring costs directly related to the acquisition.further information.
Set forth below are the unaudited pro forma results of the Company for the nine-month period ended September 25, 2016, as if the acquisition occurred as of January 1, 2015. The unaudited pro forma results for the nine months ended September 25, 2016 exclude direct acquisition costs of $251 and cost of sales of $96 related to the purchase accounting adjustments for inventory acquired. The operating results of Accutronics were not material for the period from January 1, 2016 to the acquisition date.
Nine Months Ended | ||||
September 25, 2016 | ||||
Revenue | $ | 60,835 | ||
Operating income | $ | 2,417 | ||
Net income attributable to Ultralife | $ | 2,076 | ||
Earnings per share: | ||||
Basic | $ | 0.14 | ||
Diluted | $ | 0.13 |
The unaudited pro forma results do not reflect the realization of any expected cost savings or other synergies from the acquisition of Accutronics as a result of restructuring activities, other cost savings initiatives or sales synergies following the completion of the business combination. Accordingly, these unaudited pro forma results are presented for informational purposes only and not necessarily indicative of what the actual results of operations of the combined Company would have been if the acquisition had occurred at the beginning of the 2015 period presented, nor are they indicative of future results of operations.3.CREDIT FACILITY
|
|
On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on May 1, 2014 and authorized the Company to repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. The Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to be repurchased under the program was increased to 3.4 million shares. 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 Share Repurchase Program expired on June 2, 2016 and did not obligate the Company to repurchase any specific number of shares. From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480. During the nine-month period ended September 25, 2016, the Company repurchased 149,904 shares under this program for a total cost (excluding fees and commissions) of $603.
|
|
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. The composition of net inventories was:
October 1, | December 31, | |||||||
2017 | 2016 | |||||||
Raw Materials | $ | 12,939 | $ | 14,482 | ||||
Work In Process | 1,871 | 986 | ||||||
Finished Goods | 10,112 | 7,988 | ||||||
Total | $ | 24,922 | $ | 23,456 |
|
|
Major classes of property, equipment and improvements consisted of the following:
October 1, | December 31, | |||||||
2017 | 2016 | |||||||
Land | $ | 123 | $ | 123 | ||||
Buildings and Leasehold Improvements | 7,801 | 7,757 | ||||||
Machinery and Equipment | 50,788 | 49,722 | ||||||
Furniture and Fixtures | 1,989 | 1,947 | ||||||
Computer Hardware and Software | 5,303 | 5,223 | ||||||
Construction In Process | 384 | 421 | ||||||
66,388 | 65,193 | |||||||
Less: Accumulated Depreciation | (58,776 | ) | (57,194 | ) | ||||
Property, Equipment and Improvements, Net | $ | 7,612 | $ | 7,999 |
Depreciation expense for property, equipment and improvements was as follows:
Three-Month Periods Ended | Nine-Month Periods Ended | |||||||||||||||
October 1, | September 25, | October 1, | September 25, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Depreciation Expense | $ | 497 | $ | 533 | $ | 1,507 | $ | 1,698 |
|
|
a. Goodwill
The following table summarizes the goodwill activity by segment for the nine-month periods ended October 1, 2017 and September 25, 2016:
Battery & Energy | Communi- cations | |||||||||||
Products | Systems | Total | ||||||||||
Balance - December 31, 2015 | $ | 4,790 | $ | 11,493 | $ | 16,283 | ||||||
Acquisition of Accutronics | 4,407 | - | 4,407 | |||||||||
Measurement Period Adjustment | 80 | - | 80 | |||||||||
Effect of Foreign Currency Translation | (507 | ) | - | (507 | ) | |||||||
Balance – September 25, 2016 | 8,770 | 11,493 | 20,263 | |||||||||
Effect of Foreign Currency Translation | (298 | ) | - | (298 | ) | |||||||
Balance - December 31, 2016 | 8,472 | 11,493 | 19,965 | |||||||||
Effect of Foreign Currency Translation | 416 | - | 416 | |||||||||
Balance – October 1, 2017 | $ | 8,888 | $ | 11,493 | $ | 20,381 |
b. Intangible Assets
The composition of intangible assets was:
at October 1, 2017 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,408 | $ | - | $ | 3,408 | ||||||
Customer Relationships | 6,600 | 4,151 | 2,449 | |||||||||
Patents and Technology | 5,538 | 4,551 | 987 | |||||||||
Distributor Relationships | 377 | 377 | - | |||||||||
Trade Name | 391 | 68 | 323 | |||||||||
Total Intangible Assets | $ | 16,314 | $ | 9,147 | $ | 7,167 |
at December 31, 2016 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,404 | $ | - | $ | 3,404 | ||||||
Customer Relationships | 6,395 | 3,975 | 2,420 | |||||||||
Patents and Technology | 5,455 | 4,417 | 1,038 | |||||||||
Distributor Relationships | 377 | 368 | 9 | |||||||||
Trade Name | 359 | 36 | 323 | |||||||||
Total Intangible Assets | $ | 15,990 | $ | 8,796 | $ | 7,194 |
Amortization expense for intangible assets was as follows:
Three-Month Periods Ended | Nine-Month Periods Ended | |||||||||||||||
October 1, | September 25, | October 1, | September 25, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Amortization Included in: | ||||||||||||||||
Research and Development | $ | 42 | $ | 49 | $ | 123 | $ | 152 | ||||||||
Selling, General and Administrative | 64 | 80 | 192 | 251 | ||||||||||||
Total Amortization Expense | $ | 106 | $ | 129 | $ | 315 | $ | 403 |
The change in the cost value of total intangible assets from December 31, 2016 to October 1, 2017 is a result of the effect of foreign currency translations.
|
|
On May 31, 2017,1, 2019, Ultralife, CorporationSWE, and CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), as borrowers, entered into a Credit and Securitythe First Amendment Agreement (the “Credit“First Amendment Agreement”) and related security agreements with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to establishamend 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 $30,000five-year, $8.0 million senior secured cash flow-based,term loan (the “Term Loan Facility”) and extends the term of the $30.0 million senior secured revolving credit facility that includes a $1,500 letter of credit subfacility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Credit Facility”Facilities”). The Credit Agreement provides that through May 31, 2022. Up to six months prior to May 31, 2022, the Revolving Credit Facility may be increased to $50.0 million with the Bank’s concurrence to $50,000 prior to the last six monthsconcurrence.
Upon closing of the term and is scheduled to expireSWE Acquisition on May 30, 2020.1, 2019, the Company drew down the full amount of the Term Loan Facility and $6.8 million under the Revolving Credit Facility. The remaining availability under the Revolving Credit Facility replaces the Company’s asset-based revolving credit facility with PNC Bank National Association which expired in accordance with its termsis subject to certain borrowing base limits based on May 24, 2017 (the “Prior Credit Agreement”).receivables and inventories.
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 provides the Company with an aggregate of up to $30,000 of loanis due and letter of credit availability determined basedpayable in full on a borrowing base formula.May 31, 2022. The Company may use advancesvoluntarily 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.
Borrowings under the Credit Facility for general working capital purposes, to reimburse drawings under letters of credit and to fund capital expenditures and acquisitions,Facilities are secured by substantially all subject to the termsassets of the Credit Agreement. The Company had no amounts drawn under the Prior Credit Agreement at the time of its expiration and has not borrowed under the Credit Facility.Company.
Interest will accrue on outstanding indebtedness under the Credit AgreementFacilities 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 theone hundred basis points. The applicable margin or at the Base Rate plus the applicable margin, as selected by the Company. During the period beginning May 31, 2017 and ending April 1, 2018, the applicable margin for Overnight LIBOR Loans is 185 basis points, the applicable margin for Base Rate Loans isranges from zero to negative 50 basis points and applicable margin for the Unused Fee is 20Base Rate and from 185 to 215 basis points. Beginning April 2, 2018points for the Overnight LIBOR Rate and thereafter, the applicable margins will beare determined based on the chart below.Company’s senior leverage ratio.
Consolidated Senior Leverage Ratio | Applicable Basis Points for Overnight LIBOR Loans | Applicable Basis Points for Base Rate Loans | Applicable Basis Points for Unused Fee | |||||||||
Less than 1.50 to 1.00 | 185 | (50 | ) | 20 | ||||||||
Greater than or equal to 1.50 to 1.00 but less than 2.50 to 1.00 | 200 | (25 | ) | 15 | ||||||||
Greater than or equal to 2.50 to 1.00 | 215 | 0 | 10 |
The Company must pay a fee of 0.1% to 0.2% based on itsthe average daily unused availability equal tounder the applicable margin for the Unused Fee and customary letter of credit fees.Revolving Credit Facility.
In addition to the affirmative and negative covenants, the Company must maintain a fixed charge coverage ratio of 1.15 to 1.0, tested each fiscal quarter for the trailing four fiscal quarters, and a minimum tangible net worth of $40,000, tested as of the end of each calendar year. The Company was in full compliance with its covenants as of October 1, 2017.
Any outstanding borrowings must be repaid upon expiration of the term of the Credit Facility. Payments must be made duringby the termCompany to the extent outstanding borrowings exceed the maximum amount then permitted to be drawn as borrowings underon the Credit FacilityFacilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations of the Company under the Credit Facility may be accelerated in additionand the Bank will have other customary remedies including resort to the other remedies availablesecurity interest the Company provided to the BankBank.
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.
During the quarter ended March 31, 2019, we repurchased a total of 267,300 shares of our common stock for an aggregate consideration (including fees and commissions) of $1,957.
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 March 31, 2019, 1,052,410 stock options and 11,666 restricted stock awards were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 484,843 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended April 1, 2018, 1,324,753 stock options and 17,500 restricted stock awards were included in the calculation of Diluted EPS resulting in 498,109 additional shares in the calculation of fully diluted earnings per share. There were 448,250 and 214,000 outstanding stock options for the three-month periods ended March 31, 2019 and April 1, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive.
6. SUPPLEMENTAL BALANCE SHEET INFORMATION
Cash
The Company had cash and restricted cash totaling $21,240 and $25,934 as of March 31, 2019 and December 31, 2018, respectively.
March 31, | December 31, | |||||||||
2019 | 2018 | |||||||||
Cash | $20,929 | $25,583 | ||||||||
Restricted Cash | 311 | 351 | ||||||||
Total | $21,240 | $25,934 |
As of March 31, 2019 and December 31, 2018, restricted cash included $228 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 quarter ended March 31, 2019, grant proceeds of approximately $38 were realized to income.
As of March 31, 2019 and December 31, 2018, restricted cash includes euro-denominated deposits of $83 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 termsfirst-in, first-out (FIFO) method. The composition of inventories, net was:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Raw Materials | $ | 17,201 | $ | 13,274 | ||||
Work In Process | 2,067 | 2,016 | ||||||
Finished Goods | 8,638 | 7,553 | ||||||
Total | $ | 27,906 | $ | 22,843 |
Property, Equipment and Improvements, Net
Major classes of property, equipment and improvements consisted of the Credit Agreement. The Credit Facility is secured by substantially allfollowing:
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Land | $ | 123 | $ | 123 | ||||
Buildings and Leasehold Improvements | 8,284 | 8,267 | ||||||
Machinery and Equipment | 51,772 | 51,261 | ||||||
Furniture and Fixtures | 2,073 | 2,058 | ||||||
Computer Hardware and Software | 5,889 | 5,590 | ||||||
Construction In Process | 5,478 | 4,302 | ||||||
73,619 | 71,601 | |||||||
Less: Accumulated Depreciation | (61,221 | ) | (60,857 | ) | ||||
Property, Equipment and Improvements, Net | $ | 12,398 | $ | 10,744 |
Depreciation expense for property, equipment and improvements was $447 and $484 for the assets of the Company.three-month periods ended March 31, 2019 and April 1, 2018, respectively.
Goodwill
The following table summarizes the goodwill activity by segment for the three-month periods ended March 31, 2019 and April 1, 2018:
Other Intangible Assets, Net The composition of other intangible assets was:
The change in the cost value of total intangible assets from December 31, 2018 to March 31, 2019 is a result of the effect of foreign currency translations. Amortization expense for intangible assets was $92 and $102 for the three-month periods ended March 31, 2019 and April 1, 2018, respectively. Amortization included in research and development expenses was $33 and $38 for the three-month periods ended March 31, 2019 and April 1, 2018, respectively. Amortization included in selling, general and administrative expenses was $59 and $64 for the three-month periods ended March 31, 2019 and April 1, 2018, respectively. 7. .STOCK-BASED COMPENSATION |
|
We recorded non-cash stock compensation expense in each period as follows:
Three-Month Periods Ended | Nine-Month Periods Ended | Three-Month Periods Ended | ||||||||||||||||||||||
October 1, | September 25, | October 1, | September 25, | March 31, | April 1, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
Stock Options | $ | 130 | $ | 197 | $ | 518 | $ | 525 | $ | 174 | $ | 123 | ||||||||||||
Restricted Stock Grants | 3 | 8 | 11 | 30 | 11 | 16 | ||||||||||||||||||
Total | $ | 133 | $ | 205 | $ | 529 | $ | 555 | $ | 185 | $ | 139 |
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 October 1, 2017,March 31, 2019, there was $508$372 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.20.8 years.
The following table summarizes stock option activity for the nine-monththree-month period ended October 1, 2017:March 31, 2019:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2017 | 2,323,581 | $ | 6.22 | |||||||||||||
Granted | 244,750 | 5.60 | ||||||||||||||
Exercised | (273,005 | ) | 4.10 | |||||||||||||
Forfeited or Expired | (244,482 | ) | 8.91 | |||||||||||||
Outstanding at October 1, 2017 | 2,050,844 | $ | 6.10 | 3.10 | $ | 3,149 | ||||||||||
Vested and Expected to Vest at October 1, 2017 | 1,937,204 | $ | 6.18 | 2.95 | $ | 2,928 | ||||||||||
Exercisable at October 1, 2017 | 1,218,744 | $ | 5.03 | 1.86 | $ | 2,163 |
The following assumptions were used to value stock options granted during the nine months ended October 1, 2017:
| ||||
| ||||
| ||||
|
The weighted average grant date fair value of options granted during the nine months ended October 1, 2017 was $2.47.
On April 19, 2017, the Company’s Board of Directors extended the expiration date from December 30, 2017 to December 30, 2020 of options previously granted (and fully vested at the time of modification) to the Company’s President and Chief Executive Officer to purchase an aggregate 300,000 shares of the Company’s common stock. Pursuant to Accounting Standards Codification Topic 718, Compensation – Stock Compensation, the transaction was accounted for as an equity award modification. During the second quarter, the Company recognized compensation cost of $193 representing the incremental fair value of the modified award computed as of the modification date as the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified.
FASB’s guidance for share-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options in excess of the deferred tax asset attributable to stock compensation costs for such stock options. We did not record any excess tax benefits in the first nine months of 2017 or 2016.
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 | - | - | ||||||||||||||
Exercised | (75,427 | ) | 4.71 | |||||||||||||
Forfeited or Expired | - | - | ||||||||||||||
Outstanding at March 31, 2019 | 1,500,660 | $ | 6.68 | 3.25 | $ | 5,574 | ||||||||||
Vested and Expected to Vest at March 31, 2019 | 1,409,243 | $ | 6.65 | 3.12 | $ | 5,280 | ||||||||||
Exercisable at March 31, 2019 | 1,031,701 | $ | 5.98 | 2.47 | $ | 4,377 |
Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended OctoberMarch 31, 2019 and April 1, 20172018 was $356 and September 25, 2016 was $131 and $106,$939, respectively. Cash received from stock option exercises for the nine-month periods ended October 1, 2017 and September 25, 2016 was $1,120 and $181, respectively.
In September 2014, 49,200January 2018, 17,500 shares of restricted stock were awarded to certaincertain of our employees. These shares have now fully vestedvest in equal annual installments over three years, and we estimated theiryears. The weighted average grant date fair value to be $3.24of these awards was $7.16 per share. In September 2017, 15,900 shares of the awarded restricted stock vested and the Company repurchased 3,959 shares at a total cost of $26 to satisfy the statutory tax withholding on shares vested for certain employees. There is no unrecognizedUnrecognized compensation cost related to these restricted shares was $42 at October 1, 2017.March 31, 2019.
|
|
We use the asset and liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.
For the three-month periods ended October 1, 2017 and September 25, 2016, we recognized $104 and $92, respectively, in income tax expense. For the nine-month periods ended October 1, 2017 and September 25, 2016, we recorded $370 and $213, respectively, in income tax expense. These are detailed as follows:
Three-Month Periods Ended | Nine-Month Periods Ended | |||||||||||||||
October 1, | September 25, | October 1, | September 25, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Current Income Tax Provision: | ||||||||||||||||
Foreign | $ | 48 | $ | 12 | $ | 199 | $ | (1 | ) | |||||||
Federal | 14 | 21 | 42 | 38 | ||||||||||||
State | 4 | 4 | 12 | 11 | ||||||||||||
Deferred Income Tax Provision | 38 | 55 | 117 | 165 | ||||||||||||
Total | $ | 104 | $ | 92 | $ | 370 | $ | 213 |
8. INCOME TAXES
Our effective tax rate for the three months ended March 31, 2019 and April 1, 2018 was 8% and 3%, respectively. The deferred incomeincrease in our effective tax provision israte for the current quarter compared to the prior quarter was primarily due to the recognitionreversal of the valuation allowance on our U.S. deferred tax liabilities relating to goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. The current income tax provision is primarily due to the income generated by our foreign operations and estimated U.S. federal alternative minimum taxes.as of December 31, 2018.
Our effective consolidated tax ratesrate for the nine-month periodsthree months ended October 1, 2017 and September 25, 2016 were:
Nine-Month Periods Ended | ||||||||
October 1, | September 25, | |||||||
2017 | 2016 | |||||||
Income Before Income Taxes | $ | 4,226 | $ | 1,952 | ||||
Income Tax Provision | 370 | 213 | ||||||
Effective Income Tax Rate | 8.8 | % | 10.9 | % |
March 31, 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.
The overall effective tax rate is the resultAs of the combination of income and losses in each of our tax jurisdictions, which is particularly influenced by the fact thatMarch 31, 2019, we have recorded a full reserve against our deferreddomestic net operating losses (“NOL”) carryforwards of $63,388, which expire 2019 thru 2035, and domestic tax assets pertainingcredits of $1,817, which expire 2028 thru 2037, available to cumulative historical losses for our U.S. operations and certain foreign subsidiaries, as management does not believe, at this time, thatreduce future taxable income. Management has concluded it is more likely than not that wethese domestic NOL and credit carryforwards will realize the benefit of these losses.be fully utilized.
As of DecemberMarch 31, 2016,2019, for certain past operations in the U.K., we have domestic and foreign net operating losses (“NOL”) totaling approximately $70,976 and $12,760, respectively, and domestic tax credits of approximately $1,704, availablecontinue to reduce future taxable income. Included in ourreport a valuation allowance for NOL carryforwards are foreign loss carryforwards of approximately $12,760,$10,000, nearly all of which can be carried forward indefinitely. The domestic NOL carryforwardUtilization of $70,976 expires fromthe 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 March 31, 2019, through 2034.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 March 31, 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 March 31, 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 20022000 through 20162018 remain subject to examination by the Internal Revenue Service (“IRS”) anddue 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 NOLnet operating loss carryforwards. Our tax matters for the years 20092010 through 20162018 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 March 31, 2019, the remaining lease terms on our operating leases range from less than one year to approximately 3 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 comparative period were as follows:
Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2019 | 2018 | |||||||
Operating Lease Cost | $ | 145 | $ | 151 | ||||
Variable Lease Cost | 21 | 18 | ||||||
Total Lease Cost | $ | 166 | $ | 169 |
Supplemental cash flow information related to leases was as follows:
Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2019 | 2018 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 150 | $ | 153 | ||||
Right-of-use assets obtained in exchange for lease liabilities: | $ | 131 | $ | - |
Supplemental balance sheet information related to leases was as follows:
|
|
Balance Sheet Classification | March 31, 2019 | December 31, 2018 | |||||||
Assets: | |||||||||
Operating lease right-of-use asset | Other noncurrent assets | $ | 844 | $ | 805 | ||||
Liabilities: | |||||||||
Current operating lease liability | Accrued expenses and other current liabilities | $ | 412 | $ | 439 | ||||
Operating lease liability, net of current portion | Other noncurrent liabilities | 436 | 376 | ||||||
Total operating lease liability | $ | 848 | $ | 815 | |||||
Weighted-average remaining lease term (years) | 2.3 | 2.1 | |||||||
Weighted-average discount rate | 4.5 | % | 4.5 | % |
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 effectFuture minimum lease payments as of securities, if any, and is calculated using the treasury stock method. For the three-month period ended October 1, 2017, 1,481,844 stock options and no restricted stock units were included in the calculation of Diluted EPSMarch 31, 2019 are as such securities are dilutive. Inclusion of these securities resulted in 407,668 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended September 25, 2016, 758,953 stock options and 15,900 restricted stock units were included in the calculation of Diluted EPS resulting in 91,041 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended October 1, 2017 and September 25, 2016, 1,066,844 and 1,139,843 stock options and zero and 15,900 restricted stock units, respectively, were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 323,217 and 184,564 additional shares, respectively, in the calculation of fully diluted earnings per share.follows:
There were 569,000 and 1,733,083 outstanding stock options for the three-month periods ended October 1, 2017 and September 25, 2016, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 984,000 and 1,351,833 outstanding stock options for the nine-month periods ended October 1, 2017 and September 25, 2016, respectively, which were not included in EPS as the effect would be anti-dilutive.
Maturity of Operating Lease Liabilities | ||||
2019 | $ | 307 | ||
2020 | 389 | |||
2021 | 160 | |||
2022 | 36 | |||
2023 | - | |||
Thereafter | - | |||
Total lease payments | 892 | |||
Less: Imputed interest | (44 | ) | ||
Present value of remaining lease payments | $ | 848 |
10. COMMITMENTS AND CONTINGENCIES
|
|
a. Purchase Commitments
As of October 1, 2017,March 31, 2019, we have made commitments to purchase approximately $640$2,363 of production machinery and equipment.
b. Product Warranties
We estimate future warranty costs associated with expectedto be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Warranty reservesEstimated future costs are based on historicalactual past experience of warranty claims and are generally will be estimated as a percentage of sales over the warranty period. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes in our product warranty liability during the first ninethree months of 20172019 and 20162018 were as follows:
Nine-Month Periods Ended | ||||||||
October 1, 2017 | September 25, 2016 | |||||||
Accrued Warranty Obligations – Beginning | $ | 172 | $ | 192 | ||||
Accruals for Warranties Issued | 66 | 30 | ||||||
Settlements Made | (58 | ) | (43 | ) | ||||
Accrued Warranty Obligations – Ending | $ | 180 | $ | 179 |
Three-Month Periods Ended | ||||||||
March 31, 2019 | April 1, 2018 | |||||||
Accrued Warranty Obligations – Beginning | $ | 95 | $ | 149 | ||||
Accruals for Warranties Issued | 5 | 14 | ||||||
Settlements Made | (5 | ) | (6 | ) | ||||
Accrued Warranty Obligations – Ending | $ | 95 | $ | 157 |
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 finalfinal disposition of any such matters will not have a material adverse effect on ourthe Company’s financial position, results of operations or cash flows.
Dreamliner Litigation
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by However, recognizing that legal matters are subject to inherent uncertainties, and there exists the possibility that ultimate resolution of these matters could have a fire while parked at London Heathrow Airport. We participatedmaterial adverse impact on the Company’s financial position and results of operations in and provided technical assistance in support of an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, as we are one of many downstream suppliers to that manufacturer. A final report was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company.
A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced and this cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria, and is authorized for use in aerospace applications under Technical Standard Order C142.
On May 4, 2015, we were notified of a lawsuitperiod in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire. The suit was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. The suit seeks as damages $42,000 plus other unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers.any such effects are recorded. We are working with those insurers and their counsel to respond to and actively defend againstnot aware of any such situations at this action, which is ongoing.
At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial exposure to the Company.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 March 31, 2019:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 15,998 | $ | 2,884 | $ | - | $ | 18,882 | ||||||||
Segment Contribution | 4,410 | 674 | (4,536 | ) | 548 | |||||||||||
Other Expense | (58 | ) | (58 | ) | ||||||||||||
Tax Provision | (41 | ) | (41 | ) | ||||||||||||
Non-Controlling Interest | (24 | ) | (24 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 425 |
Three-Month Period Ended OctoberApril 1,, 2017 2018:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 18,616 | $ | 2,431 | $ | - | $ | 21,047 | $ | 17,224 | $ | 5,845 | $ | - | $ | 23,069 | ||||||||||||||||
Segment Contribution | 5,186 | 1,069 | (4,992 | ) | 1,263 | |||||||||||||||||||||||||||
Interest, Financing and Miscellaneous Expense, Net | (58 | ) | (58 | ) | ||||||||||||||||||||||||||||
Tax Provision | (104 | ) | (104 | ) | ||||||||||||||||||||||||||||
Non-Controlling Interest | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||
Segment Contribution | 5,036 | 2,246 | (4,926 | ) | 2,356 | |||||||||||||||||||||||||||
Other Expense | (133 | ) | (133 | ) | ||||||||||||||||||||||||||||
Tax Provision | (55 | ) | (55 | ) | ||||||||||||||||||||||||||||
Non-Controlling Interest | (17 | ) | (17 | ) | ||||||||||||||||||||||||||||
Net Income Attributable to Ultralife | $ | 1,098 | $ | 2,151 | ||||||||||||||||||||||||||||
Total Assets | $ | 45,221 | $ | 31,465 | $ | 16,655 | $ | 93,341 |
The following tables disaggregate our business segment revenues by major source and geography.
Three-Month Period Ended September 25, 2016:Commercial and Government/Defense Revenue Information:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 14,943 | $ | 4,688 | $ | - | $ | 19,631 | ||||||||
Segment Contribution | 4,522 | 1,475 | (4,859 | ) | 1,138 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (30 | ) | (30 | ) | ||||||||||||
Tax Provision | (92 | ) | (92 | ) | ||||||||||||
Non-Controlling Interest | 3 | 3 | ||||||||||||||
Net Income Attributable to Ultralife | $ | 1,019 | ||||||||||||||
Total Assets | $ | 42,394 | $ | 32,129 | $ | 9,034 | $ | 83,557 |
Three-Month Period Ended March 31, 2019: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 15,998 | $ | 10,010 | $ | 5,988 | ||||||
Communications Systems | 2,884 | - | 2,884 | |||||||||
Total | $ | 18,882 | $ | 10,010 | $ | 8,872 | ||||||
53 | % | 47 | % |
Three-Month Period Ended April 1, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 17,224 | $ | 9,626 | $ | 7,598 | ||||||
Communications Systems | 5,845 | - | 5,845 | |||||||||
Total | $ | 23,069 | $ | 9,626 | $ | 13,443 | ||||||
42 | % | 58 | % |
Nine-Month Period Ended October U.S. and Non-U.S. Revenue Information1, 2017:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 52,977 | $ | 10,045 | $ | - | $ | 63,022 | ||||||||
Segment Contribution | 14,858 | 4,508 | (14,940 | ) | 4,426 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (200 | ) | (200 | ) | ||||||||||||
Tax Provision | (370 | ) | (370 | ) | ||||||||||||
Non-Controlling Interest | (8 | ) | (8 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 3,848 |
Three-Month Period Ended March 31, 2019: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 15,998 | $ | 7,567 | $ | 8,431 | ||||||
Communications Systems | 2,884 | 2,454 | 430 | |||||||||
Total | $ | 18,882 | $ | 10,021 | $ | 8,861 | ||||||
53 | % | 47 | % |
Three-Month Period Ended April 1, 2018: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 17,224 | $ | 9,415 | $ | 7,809 | ||||||
Communications Systems | 5,845 | 5,573 | 272 | |||||||||
Total | $ | 23,069 | $ | 14,988 | $ | 8,081 | ||||||
65 | % | 35 | % |
Nine-Month Period Ended September 25, 2016:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 47,142 | $ | 13,693 | $ | - | $ | 60,835 | ||||||||
Segment Contribution | 14,404 | 3,898 | (16,183 | ) | 2,119 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (167 | ) | (167 | ) | ||||||||||||
Tax Provision | (213 | ) | (213 | ) | ||||||||||||
Non-Controlling Interest | 25 | 25 | ||||||||||||||
Net Income Attributable to Ultralife | $ | 1,764 |
|
|
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, “Income Taxes: Balance Sheet Classification of Deferred Taxes”, which requires that deferred tax liabilities and assets be netted against each other and1 Sales classified as non-current in a classified statement of financial position. ASU 2015-17 is effective for public companies for annual and interim periods beginning after December 15, 2016. During the first quarter of 2017, we adopted ASU 2015-17 on a retrospective basis. As such, we reclassified $94 of foreign current deferred tax assets to non-current on the consolidated balance sheets as of April 2, 2017 and December 31, 2016. The deferred tax liabilities relate to U.S. tax obligationsinclude shipments to U.S.-based prime contractors which cannot be netted against foreign deferred taxes. The adoption of ASU 2015-17 did not affect our consolidated statements of income.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)”, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. ASU 2016-09 is effective for public companies for annual and interim periods beginning after December 15, 2016. We adopted the new accounting standard in the first quarter of 2017 and will maintain our policy to estimate forfeitures expected to occur to determine stock-based compensation expense. Adoption of this new accounting standard resulted in the recognition of an increase in the Company’s gross deferred tax asset of approximately $1,200 and an offsetting increase in the valuation allowance. There was no impact to the Company’s retained earnings as a result of adopting this new accounting standard.some cases may serve non-U.S. projects
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable value. This standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and must be applied on a retrospective basis. We adopted the new accounting standard in the first quarter of 2017. There was no material impact to the Company's financial statements as a result of adopting this new accounting standard.
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements and disclosures, from those disclosed in the Company’s 2016 Annual Report on Form 10-K, except for the following:
|
|
|
|
ItemItem 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, our reliance on certain key customers; potential costs because of the warranties we supply with our products and services; our efforts to develop new commercial applications for our products; 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; our ability to comply with changes to the regulations for the shipment of our products;possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; possible impairments of our goodwill and other intangible assets; possible breaches in security and other disruptions; safety risks, including the risk of fire; negative publicityour inability to comply with changes to the regulations for the shipment of lithium-ion batteries;our products; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; potential disruptions inpossible impairments of our supply of raw materialsgoodwill and components;other intangible assets; our exposure to foreign currency fluctuations; our customers’customers’ demand falling short of volume expectations in our supply agreements; negative publicity of 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 utilize our net operating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.
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, 20162018 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, 2016.2018.
The financial information in this Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below represent results from continuing operations, unless otherwise specified.
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 manufacture, install and maintainmanufacture power and communications systems includingincluding: 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®, AMTITM, ABLETM, ACCUTRONICS™, ACCUPRO™, and ENTELLION™ brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includesincludes: Lithium 9-volt, cylindrical, thin cell and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables.accessories. The Communications Systems segment includesincludes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication system kitssystems 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 $21,047$18,882 for the three-month period ended October 1, 2017, increasedMarch 31, 2019, decreased by $1,416$4,187 or 7.2%18.1%, from $19,631$23,069 during the three-month period ended September 25, 2016, despite $2,270April 1, 2018, due to the timing differences in government/defense battery shipments and the start-up of revenues attributableproduction and shipment of Communications Systems products to shipmentssupport the U.S. Army’s Network Modernization initiatives under the delivery orders announced in October 2018, which were less than Q1 2018 shipments of Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) ProgramAmplifier Adapters for the U.S. Army’s Special Force Assistance Brigades under a contract awarded in the year-earlier period. Excluding the VIPER shipments, the Company’s revenues increased 21% driven by a 25% increase for Battery & Energy Products sales. Communications Systems core product sales such as our 20-watt amplifiers, universal vehicle adaptorsDecember 2017 and power supplies were flat with the year-earlier period. shipments to a large global defense prime contractor.
Gross profit for the three-month period ended October 1, 2017March 31, 2019 was $6,255,$5,084 or 29.7%26.9% of revenues, comparedcompared to $5,997,$7,282 or 30.5%31.6% of revenues, for the same quarter a year ago. The 80470 basis point decline primarily reflectsdecrease in gross margin resulted from costs incurred to commence production of Communications Systems large program awards announced in October 2018 for shipment in 2019 and the product mix of products sold and supply chain variances. our shipments.
Operating expenses increaseddecreased to $4,992$4,536 during the three-month period ended October 1, 2017,March 31, 2019, compared to $4,859$4,926 during the three-month period ended September 25, 2016.April 1, 2018. The increasedecrease of $133$390 or 2.7%7.9% was primarily attributable to an accrual related to executive variable compensation reflecting year-to-date operating results. Management continues to maintain their strictcontinued tight control over all discretionary spending.
Operating income for the three-month periodperiod ended October 1, 2017March 31, 2019 was $1,263$548 or 6.0%2.9% of revenues, compared to $1,138$2,356 or 5.8%10.2% for the year-earlier period. The year-over-year increasedecrease in operating income reflectsprimarily resulted from lower sales in our Communications Systems business and the impact ofcosts to transition to production to fulfill the higher sales and operating expense leverage.large program awards announced in October 2018.
Net income attributable to Ultralife was $1,098$425, or $0.07$.03 per share – basic and diluted, for the three-month period ended October 1, 2017,March 31, 2019 compared to $1,019$2,151, or $0.07$0.14 per share – basic and $0.13 per share – diluted, for the three-month period ended September 25, 2016.
Adjusted EBITDA, defined as net income attributable to Ultralife before net interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, plus/minus expense/income that we do not consider reflective of our ongoing operations, amounted to $1,985 in the third quarter of 2017 compared to $2,046 in the third quarter of 2016. See the section “Adjusted EBITDA from Continuing Operations” on Page 25 for a reconciliation ofApril 1, 2018. Adjusted EBITDA, to Net Income Attributable to Ultralife.
Primarily as a result of our operating performance, we generated cash of $3,978 for the nine month period ended October 1, 2017. Accordingly, cash increased from $10,629 at December 31, 2016 to $14,607 at October 1, 2017.
Having more than doubled both operating profit and EPS for the first nine months of the year, we are well positioned towards delivering another year of profitable growth. In addition, the BA-5390 $21.4 million indefinite-delivery / indefinite-quantity (“IDIQ”) award received in March 2017, the VIPER $4.7 million contract received in August 2017, and the recent BA-5790/5795 CFx $49.8 million IDIQ award received in September 2017 serve as positive indicators of future growth potential as we finish out 2017 and head into 2018.”
Results of Operations
Three-Month Periods Ended October 1, 2017 and September 25, 2016
Revenues. Consolidated revenues for the three-month period ended October 1, 2017 amounted to $21,047, an increase of $1,416 or 7.2%, from the $19,631 reported for the three-month period ended September 25, 2016.
Battery & Energy Products revenues increased $3,673 or 24.6%, to $18,616 for the three-month period ended October 1, 2017 from $14,943 for the three-month period ended September 25, 2016. Government and defense sales increased 57.5% from the 2016 period due primarily to higher battery demand from both U.S. and international customers which were up 58.0% and 56.1%, respectively. Commercial revenues for the third quarter of 2017 increased 8.3% over the prior year period, reflecting a 14.2% increase in the shipment of medical batteries and chargers and 1.3% increase for other commercial applications.
Communications Systems revenues decreased $2,257 or 48.2%, from $4,688 during the three-month period ended September 25, 2016 to $2,431 for the three-month period ended October 1, 2017. This decrease is due to revenues attributable to shipments of VIPER systems of $2,270 in the 2016 period. Excluding VIPER, sales of core products such as our 20-watt amplifiers, universal vehicle adaptors and power supplies were essentially flat with the prior-year period.
Cost of Products Sold. Cost of products sold totaled $14,792 for the quarter ended October 1, 2017, an increase of $1,158, or 8.5%, from the $13,634 reported for the same quarter a year ago. Consolidated cost of products sold as a percentage of total revenue increased to 70.3% for the three-month period ended October 1, 2017 from 69.5% for the three-month period ended September 25, 2016. Correspondingly, consolidated gross margin was 29.7% for the three-month period ended October 1, 2017, compared with 30.5% for the three-month period ended September 25, 2016, primarily reflecting the mix of products sold and incremental supply chain variances for the Battery & Energy Product business in the 2017 period.
In our Battery & Energy Products segment, the cost of products sold increased $3,010 or 28.9%, to $13,430 for the three-month period ended October 1, 2017 from $10,420 during the three-month period ended September 25, 2016. Battery & Energy Products’ gross profit for the third quarter of 2017 was $5,186 or 27.9% of revenues, an increase of $663 or 14.7%, from gross profit of $4,523 or 30.3% of revenues for the third quarter of 2016. Battery & Energy Products’ gross margin as a percentage of revenues decreased for the three-month period ended October 1, 2017 by 240 basis points, primarily reflecting the mix of products sold, incremental supply chain variances and manufacturing variances incurred on the start-up of certain new products in the 2017 period.
In our Communications Systems segment, the cost of products sold decreased by $1,852 or 57.6% from $3,214 during the three-month period ended September 25, 2016 to $1,362 during the three-month period ended October 1, 2017 due to the VIPER shipments in 2016 as well as core product mix. Communications Systems’ gross profit for the third quarter of 2017 was $1,069 or 44.0% of revenues, a decrease of $405 or 27.5%, from gross profit of $1,474 or 31.4% of revenues, for the third quarter of 2016. The gross margin of 44.0%, an increase of 1,260 basis points over the 2016 period, was driven by the sales growth of high-value proposition core amplifier and integrated solutions products.
Operating Expenses. Operating expenses for the three-month period ended October 1, 2017 totaled $4,992, an increase of $133 or 2.7% from the $4,859 incurred during the three-month period ended September 25, 2016. The increase was due primarily to an accrual related to executive variable compensation based on the year-over-year improvement in operating results. Management continues to maintain their strict control over all discretionary spending.
Overall, operating expenses as a percentage of revenues were 23.7% for the quarter ended October 1, 2017 compared to 24.8% for the quarter ended September 25, 2016. Amortization expense associated with intangible assets related to our acquisitions was $106 for the third quarter of 2017 ($64 in selling, general and administrative expenses and $42 in research and development costs), compared with $129 for the third quarter of 2016 ($80 in selling, general, and administrative expenses and $49 in research and development costs). Research and development costs were $1,355 for the three-month period ended October 1, 2017, essentially flat with $1,357 for the three months ended September 25, 2016. Selling, general, and administrative expenses increased $135 or 3.9% to $3,637 during the third quarter of 2017 from $3,502 during the third quarter of 2016. The increase is primarily attributable to an accrual related to executive variable compensation reflecting year-to-date operating results.
Other Expense. Other expense totaled $58 for the three-month period ended October 1, 2017 compared to $30 for the three-month period ended September 25, 2016. Interest and financing expense was $38 for the third quarter of 2017 compared to $50 for the 2016 period. The decrease is primarily due to the more favorable terms of our Revolving Credit Agreement which was executed on May 31, 2017. Miscellaneous income (expense) amounted to ($20) for the third quarter of 2017 compared with $20 for the third quarter of 2016, primarily due to transactions impacted by foreign currency fluctuations between the U.S. dollar relative to Pounds Sterling and the Euro.
Income Taxes. We recognized a tax provision of $104 for the third quarter of 2017 compared to $92 for the third quarter of 2016, an increase of $12 or 13.0%. The increase is primarily due to the increased amounts and geographic mix of earnings for the quarter. See Note 9 in the Notes to Consolidated Financial Statements in this Form 10-Q 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 $1,098 and $0.07, respectively, for the three months ended October 1, 2017, compared to $1,019 and $0.07, respectively, for the three months ended September 25, 2016. Average common shares outstanding used to compute diluted earnings per share increased from 15,297,718 in the third quarter of 2016 to 15,971,243 in the third quarter of 2017 due to the exercise of stock options and the vesting of restricted stock under our Long-Term Incentive Plans, and the increased stock price.
Nine-Month Periods Ended October 1, 2017 and September 25, 2016
Revenues. Consolidated revenues for the nine-month period ended October 1, 2017 amounted to $63,022, an increase of $2,187 or 3.6%, from the $60,835 generated during the nine-month period ended September 25, 2016.
Battery & Energy Products revenues increased $5,835, or 12.4%, from $47,142 for the nine-month period ended September 25, 2016 to $52,977 for the nine-month period ended October 1, 2017. Commercial revenues of this business segment increased 7.3% over the 2016 nine-month period and now comprise 58.5% of total segment sales versus 60.7% last year. The increase in commercial revenues resulted from 12.1% year-over-year growth in the shipment of medical batteries and chargers, supplemented by a 2.5% increase across our expanding non-medical commercial customer base. Government and defense sales of the Battery & Energy Products business segment increased 20.3% from the 2016 nine-month period and now comprise 41.5% of total segment sales versus 39.3% last year. The increase reflects the higher overall demand across our U.S. and international customer base.
Communications Systems revenues decreased $3,648, or 26.6%, from $13,693 during the nine-month period ended September 25, 2016 to $10,045 for the nine-month period ended October 1, 2017. Revenues attributable to VIPER shipments were $8,219 in the nine-month period in 2016. In the comparable period in 2017, there was $133 of revenues attributable to VIPER shipments. Excluding the VIPER shipments, sales of core amplifiers and integrated solutions products increased $4,438 or 81.1% over the first nine months of 2016 driven by an increased demand for our core products such as our 20-watt amplifiers, universal vehicle adaptors and power supplies.
Cost of Products Sold. Cost of products sold totaled $43,656 for the nine-month period ended October 1, 2017, an increase of $1,123 or 2.6%, from the $42,533 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 69.9% for the nine-month period ended September 25, 2016 to 69.3% for the nine-month period ended October 1, 2017. Correspondingly, consolidated gross margin was 30.7% for the nine-month period ended October 1, 2017, compared with 30.1% for the nine-month period ended September 25, 2016, due primarily to favorable product mix for our Communications Systems segment for the 2017 period.
For our Battery & Energy Products segment, the cost of products sold increased $5,381 or 16.4%, from $32,738 during the nine-month period ended September 25, 2016 to $38,119 during the nine-month period ended October 1, 2017. Battery & Energy Products’ gross profit for the 2017 nine-month period was $14,858 or 28.0% of revenues, an increase of $454 or 3.2% from gross profit of $14,404, or 30.6% of revenues, for the 2016 nine-month period. Battery & Energy Products’ gross margin as a percentage of revenues decreased for the nine-month period ended October 1, 2017 by 260 basis points, primarily reflecting the mix of products sold and incremental supply chain variances.
For our Communications Systems segment, the cost of products sold decreased by $4,258 or 43.5% from $9,795 during the nine-month period ended September 25, 2016 to $5,537 during the nine-month period ended October 1, 2017. Communications Systems’ gross profit for the first nine months of 2017 was $4,508 or 44.9% of revenues, an increase of $610 or 15.6% from gross profit of $3,898 or 28.5% of revenues, for the third quarter of 2016. The 1,640 basis point increase in gross margin during 2017 is due to growth in core product sales and favorable product mix.
Operating Expenses. Total operating expenses for the nine-month period ended October 1, 2017 totaled $14,940, a decrease of $1,243 or 7.7% from the $16,183 incurred during the nine-month period ended September 25, 2016. This decrease was attributable to reductions in discretionary costs completed during and subsequent to the 2016 second quarter, cost synergies associated with our acquisition of Accutronics, and one-time costs incurred in January 2016 to complete the acquisition.
Overall, operating expenses as a percentage of revenues were 23.7% for the nine-month period ended October 1, 2017 compared to 26.6% for the comparable 2016 period. Amortization expense associated with intangible assets related to our acquisitions was $315 for the first nine months of 2017 ($192 in selling, general and administrative expenses and $123 in research and development costs), compared with $403 for the first nine months of 2016 ($251 in selling, general, and administrative expenses and $152 in research and development costs). Research and development costs were $3,678 for the nine-month period ended October 1, 2017, a decrease of $760, or 17.1%, from $4,438 for the nine months ended September 25, 2016. The decrease primarily reflects the timing of development and testing costs associated with the shipment of VIPER units in 2016 and discretionary cost reduction actions completed during and subsequent to the second quarter of 2016, including synergies with Accutronics. Selling, general, and administrative expenses decreased $483 or 4.1%, from $11,745 during the first nine months of 2016 to $11,262 during the first nine months of 2017. The decrease is attributable to one-time costs incurred to complete the acquisition of Accutronics in January 2016 and discretionary cost reductions.
Other Expense. Other expense totaled $200 for the nine-month period ended October 1, 2017 compared to $167 for the nine-month period ended September 25, 2016. Interest and financing expense decreased $66 to $147 for the 2017 period from $213 for the comparable period in 2016. The decrease is attributable to one-time costs of $48 associated with the acquisition of Accutronics and more favorable terms of our Revolving Credit Agreement which was executed on May 31, 2017. Miscellaneous income (expense) amounted to ($53) for the first nine months of 2017 compared with $46 for the first nine months of 2016, primarily due to transactions impacted by foreign currency fluctuations between the U.S. dollar relative to Pounds Sterling and the Euro.
Income Taxes. We recognized a tax provision of $370 for the first three quarters of 2017 compared with a tax provision of $213 for the first three quarters of 2016. The increase of $157 or 73.7% is primarily due to the increased amounts and geographic mix of earnings for the 2017 period. The effective consolidated tax rates for the nine-month periods ended October 1, 2017 and September 25, 2016 were 8.8% and 10.9%, respectively. See Note 9 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.
Net Income Attributable to Ultralife. Net income attributable to Ultralife and Net income attributable to Ultralife common shareholders per diluted share was $3,848 and $0.24, respectively, for the nine months ended October 1, 2017, compared to $1,764 and $0.11, respectively, for the nine months ended September 25, 2016. Average common shares outstanding used to compute diluted earnings per share increased from 15,446,290 in the 2016 period to 15,817,961 in the 2017 period, mainly due to the exercise of stock options and the vesting of restricted stock under our Long-Term Incentive Plans and the increased price of our common stock.
Adjusted EBITDA from Continuing Operations
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDAdefined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations.operations, amounted to $1,204 or 6.4% of revenues in the first quarter of 2019 compared to $2,973 or 12.9% of revenues for the first quarter of 2018. See the section “Adjusted EBITDA” beginning on page 21 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
With key amplifier product shipments now increasing and robust opportunities for growth from our diversified set of commercial and government/defense customers ahead of us, we remain well positioned for another year of profitable growth in 2019.
Results of Operations
Three-Month Periods Ended March 31, 2019 and April1, 2018
Revenues. Consolidated revenues for the three-month period ended March 31, 2019 amounted to $18,882, a decrease of $4,187, or 18.1%, from the $23,069 reported for the three-month period ended April 1, 2018.
Battery & Energy Products revenues decreased $1,226, or 7.1%, to $15,998 from $17,224 for the three-month period ended April 1, 2018. Commercial revenues for the first quarter of 2019 comprised 63% of total revenues for the segment and increased 4.0% over the prior year period. This increase primarily resulted from 10.4% revenue growth attributable to our medical customers, partially offset by a reduction in the sales of our 9-Volt batteries. Government and defense sales decreased 21.2% primarily due to the lumpiness of orders from some of our U.S. and international defense customers.
Communications Systems revenues decreased $2,961, or 50.7%, to $2,884 from $5,845 for the three-month period ended April 1, 2018. This decrease is primarily due to the initial start-up production and shipment of products to support the U.S. Army’s Network Modernization initiatives under the delivery orders announced in October 2018 which were less than Q1 2018 shipments of Vehicle Amplifier Adapters for the U.S. Army’s Special Force Assistance Brigades under a contract awarded in December 2017 and power supplies shipments to a large global defense prime contractor.
Cost of Products Sold. Cost of products sold totaled $13,798 for the quarter ended March 31, 2019, a decrease of $1,989, or 12.6%, from the $15,787 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased to 73.1% for the three-month period ended March 31, 2019 from 68.4% for the three-month period ended April 1, 2018. Correspondingly, consolidated gross margin was 26.9% for the three-month period ended March 31, 2019, compared with 31.6% for the three-month period ended April 1, 2018, primarily reflecting sales mix and costs incurred to commence the initial production of Communications Systems products to begin shipments under large program awards announced in October 2018.
For our Battery & Energy Products segment, gross profit for the first quarter of 2019 was $4,410 or 27.6% of revenues, a decrease of $626 or 12.4% from gross profit of $5,036 or 29.2% of revenues, for the first quarter of 2018. The decrease in Battery & Energy Products’ gross margin for 2019 was due to product mix.
For our Communications Systems segment, gross profit for the first quarter of 2019 was $674 or 23.4% of revenues, a decrease of $1,572 or 70.0%, from gross profit of $2,246, or 38.4% of revenues, for the first quarter of 2018. The decrease in gross margin during 2019 was primarily due to costs incurred to commence production of large program awards announced in October 2018.
Operating Expenses. Total operating expenses for the three-month period ended March 31, 2019 totaled $4,536, a decrease of $390 or 7.9% from the $4,926 reported during the three-month period ended April 1, 2018. The decrease resulted from continued tight control over discretionary spending in 2019.
Overall, operating expenses as a percentage of revenues were 24.0% for the quarter ended March 31, 2019 compared to 21.4% for the quarter ended April 1, 2018. Amortization expense associated with intangible assets related to our acquisitions was $92 for the first quarter of 2019 ($59 in selling, general and administrative expenses and $33 in research and development costs), compared with $102 for the first quarter of 2018 ($64 in selling, general, and administrative expenses and $38 in research and development costs). Research and development costs were $1,036 for the three-month period ended March 31, 2019, a decrease of $65 or 5.9%, from $1,101 for the three-months ended April 1, 2018. The decrease primarily reflects the timing of development and testing costs associated with new products. Selling, general, and administrative expenses decreased $325 or 8.5%, to $3,500 during the first quarter of 2019 from $3,825 during the first quarter of 2018. The decrease is attributable to continued tight control over discretionary administrative spending.
Other Expense. Other expense totaled $58 for the three-month period ended March 31, 2019 compared to $133 for the three-month period ended April 1, 2018. Interest and financing expense decreased $28, from $33 for the first quarter of 2018 to $5 for the comparable period in 2019. The decrease is due to the offsetting interest earned on our higher cash balances from the year-earlier period. Miscellaneous expense amounted to $53 for the first quarter of 2019 compared with $100 for the first quarter of 2018, primarily due to the strengthening of the U.S. dollar relative to Pounds Sterling and the Euro.
Income Taxes. The tax provision for the 2019 first quarter was $41 compared to $55 for the first quarter of 2018. 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 $425, or $.03 per share – basic and diluted for the three-month period ended March 31, 2019 compared to $2,151, or $0.14 per share – basic and $0.13 per share – diluted, for the three-month period ended April 1, 2018. Average weighted common shares outstanding used to compute diluted earnings per share increased from 16,202,314 in the first quarter of 2018 to 16,224,790 in the first quarter of 2019. The increase in 2019 is attributable to stock option exercises since the first quarter of 2018 and an increase in the weighted average stock price to compute diluted shares from $8.17 for the first quarter of 2018 to $9.40 for the first quarter of 2019, partially offset by the repurchase of shares in the 2019 period.
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense. 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’ useunderstanding 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 acquired through our business acquisitions (affecting relative amortization expense)expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and other significant non-operating expenses or income.one-time charges/benefits relating to income taxes. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Net income (loss) attributable to Ultralife;Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles (“U.S. GAAP”).
We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as income (loss) from operations.operating income. 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 limitingpresenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.
The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:
● | 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; |
● |
|
● |
|
● |
|
We compensate for these limitations by relying primarily on our U.S. GAAPGAAP results and using Adjusted EBITDA only supplementally. on a supplemental basis. 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 Periods Ended | Nine-Month Periods Ended | Three-Month Periods Ended | ||||||||||||||||||||||
October 1, | September 25, | October 1, | September 25, | March 31, | April 1, | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | |||||||||||||||||||
Net Income Attributable to Ultralife | $ | 1,098 | $ | 1,019 | $ | 3,848 | $ | 1,764 | $ | 425 | $ | 2,151 | ||||||||||||
Add: | ||||||||||||||||||||||||
Interest and Financing Expense, Net | 38 | 50 | 147 | 213 | 5 | 33 | ||||||||||||||||||
Income Tax Provision | 104 | 92 | 370 | 213 | 41 | 55 | ||||||||||||||||||
Depreciation Expense | 497 | 533 | 1,507 | 1,698 | 447 | 484 | ||||||||||||||||||
Amortization of Intangible Assets and Financing Fees | 115 | 147 | 357 | 457 | 101 | 111 | ||||||||||||||||||
Stock-Based Compensation Expense | 133 | 205 | 529 | 555 | ||||||||||||||||||||
Non-Cash Purchase Accounting Adjustments | - | - | - | 96 | ||||||||||||||||||||
Other | - | - | - | 12 | ||||||||||||||||||||
Stock-Based Compensation Expense | 185 | 139 | ||||||||||||||||||||||
Adjusted EBITDA | $ | 1,985 | $ | 2,046 | $ | 6,758 | $ | 5,008 | $ | 1,204 | $ | 2,973 |
Liquidity and Capital Resources
As of October 1, 2017,March 31, 2019, cash totaled $14,607, an increase$21,240, a decrease of $3,978 from the beginning of the year. During the nine-month period ended October 1, 2017, we generated $3,657 of cash from our operating activities$4,694 as compared to $3,568$25,934 of cash generated duringheld at December 31, 2018, primarily driven by the nine-monthprocurement of inventory for large program awards for our Communications Systems business, strategic capital investment for our Battery & Energy Products business, and repurchases of our common stock under our Share Repurchase Program.
During the three-month period ended September 25, 2016, anMarch 31, 2019, net cash of $545 was used in operations, driven by a $4,963 increase of $89.in inventory primarily relating to large program awards announced in October 2018 for our Communications Systems business. Cash generated fromused in operations in 2017 consisted ofwas largely offset by net income of $3,856,$449 plus non-cash expenses (depreciation, amortization, stock-based compensation and stock-based compensation)deferred taxes) totaling $2,393,$728 and a net increasedecrease of $3,241 in accounts payable and other working capital items of $1,041 largelyprimarily attributable to the timing of payroll. This was partially offset by an increase in accounts receivable of $2,412 primarily due to the timing of shipmentscustomer collections and an increase in inventory of $1,221 largely due to service 2017 backlog.
Cash provided by operations for the nine-month period ended September 25, 2016 included net income of $1,739 plus non-cash expenses (depreciation, amortization and stock-based compensation) totaling $2,711, and a decrease in inventory of $755, partially offset by a net decrease in accounts payable and other working capital items of $1,637 largely attributable to the payment for inventory procured. supplier payments.
Cash used in investing activities for the nine-monththree-month period ended October 1, 2017 March 31, 2019 consisted of $971 for capital expenditures. For the nine months ended September 25, 2016, we used $10,787 of cash in investing activities primarily for the acquisition of Accutronics of $9,857 (final purchase price of $11,161, net cash acquired from Accutronics of $1,304) plus capital expenditures totaling $990.of $2,581 primarily due to investment in automation equipment pertaining to our Battery & Energy Products business, including 3-Volt cell production.
Cash provided by financing activities for the nine months ended October 1, 2017 consisted of $1,120 of proceeds from stock option exercises. For the nine months ended September 25, 2016, netNet cash used in financing activities totaled $426, consisting of $607 usedfor the three months ended March 31, 2019 was attributable to repurchase sharesshare repurchases under theour Share Repurchase Program andtotaling $1,957, partially offset by $181 of stock option exercise proceeds. See Note 3 in the Notes to Consolidated Financial Statements in this Form 10-Q for additional information on the Share Repurchase Program.proceeds of $356.
As of October 1, 2017,March 31, 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 March 31, 2019, we had made commitments to purchase approximately $640$2,363 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.
In July 2017, the Company made a strategic decision to invest up to $4,300 in our Newark, New York facility to modernize our manufacturing capability for production of premium 3-volt primary batteries for various applications in the rapidly growing, wireless Internet of Things (“IoT”) market. This investment, in line with our strategy to diversify revenues outside of the core U.S. government/defense markets and focus on transformational commercial opportunities, will enable us to produce a premium product with performance differentiation and incorporate the manufacturing technology expertise required to deliver a clear competitive advantage in terms of product performance, volume, safety, value proposition and strategic supply chain access to the end market and OEM’s. In addition to the IoT market, the product will also expand customer options in the legacy smoke detector market by providing our customers the choice between our industry leading next generation 9-volt battery, or a new premium 3-volt product. We anticipate the capital investment project implementation and applicable new product certification will be completed by the end of 2018.
Debt Commitments
We haveOn May 1, 2019, in connection with financing through our Creditthe SWE acquisition (see Note 2 to the notes to consolidated financial statements), the Company drew down $8.0 million on its Term Loan Facility with KeyBank, which provides a $30,000 secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacility. There have been no borrowingsand $6.8 million under theits Revolving Credit Facility. See Note 7 in the Notes to the Consolidated Financial Statements for additional information regarding our Credit Facility.
The Company currently believes that the cash flow generated from future operations and when necessary, available borrowing fromavailability under our Revolving Credit Facility will be sufficient to meet its current and long-termour general funding requirements for the foreseeable future.
See Note 3 to the notes to consolidated financial statements for further information regarding our credit facilities.
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’smanagement’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 20162018 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the ninefirst three months of 2017,2019, 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 Ofof Disclosure Controls Andand 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 Inin 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 |
|
|
|
Dreamliner Litigation
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by a fire while parked at London Heathrow Airport. We participated in and provided technical assistance in support of an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, as we are one of many downstream suppliers to that manufacturer. A final report was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company.
A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced and this cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria, and is authorized for use in aerospace applications under Technical Standard Order C142.
On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire. The suit was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. The suit seeks as damages $42,000 plus other unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are working with those insurers and their counsel to respond to and actively defend against this action, which is ongoing.
At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial exposure to the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
2(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
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 April 28, 2014,October 31, 2018, the Company’sCompany’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on MayNovember 1, 20142018 and under which the Company was authorized to repurchase up to 1.82.5 million shares of its outstanding common stock over a period not to exceed twelve months. The Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to be repurchased under the program was increased to 3.4 million shares.
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 Share Repurchase Program expired on June 2, 2016 and did not obligatefollowing table sets forth information regarding our repurchases of common stock for the Company to repurchase any specific numberfirst quarter of shares. From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480. During the three and nine month periods ended September 25, 2016, the Company repurchased 149,904 shares2019 under this program for a total cost (excluding fees and commissions)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 | ||||||||||||
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 $603.stock awards.
Item 6. EXHIBITS
Exhibit Index | Exhibit Description | Incorporated By Reference from | ||
31.1 | Filed herewith | |||
31.2 | Filed herewith | |||
32 | Filed herewith | |||
101.INS | XBRL Instance Document | |||
101.SCH | XBRL Taxonomy Extension Schema Document | |||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |||
101.LAB | XBRL Taxonomy Label Linkbase Document | |||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | |||
101.DEF | XBRL Taxonomy Definition Document |
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.
| |||
| |||
Date: May 2, 2019 | By: /s/ Michael D. Popielec | ||
Michael D. Popielec | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: May 2, 2019 | By: /s/ Philip A. Fain | ||
Philip A. Fain | |||
Chief Financial Officer and Treasurer | |||
(Principal Financial Officer and | |||
Principal Accounting Officer) |
The following exhibits are filed herewithin:
Index to Exhibits
31.1 |
31.2 |
32 |
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Label Linkbase Document |
101.PRE | XBRL Taxonomy Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Definition Document |
28
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.
|
|
| |
| |||
| |||
| |||
29