UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29 30, 201920
20
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission file number: 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation of organization)
2000 Technology Parkway Newark, New York 14513 (Address of principal executive offices) (Zip Code) | 16-1387013 (I.R.S. Employer Identification No.)
(315) 332-7100 (Registrant's telephone number, including area code:) |
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.10 par value per share | ULBI | NASDAQ |
(Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒
|
Non-accelerated filer ☐ | Smaller reporting company ☒ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No☒
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐ Not applicable
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 29, 2019 26, the2020, the registrant had 15,856,907 15,928,055shares of common stock outstanding.outstanding.
ULTRALIFE CORPORATION AND SUBSIDIARIES
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION | |
Item 1. | Consolidated Financial Statements (unaudited): | |
Consolidated Balance Sheets as of September | 3 | |
Consolidated Statements of Income and Comprehensive Income for the Three and Nine-Month Periods Ended September | 4 | |
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September | 5 | |
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine-Month Periods Ended September | 6 | |
Notes to Consolidated Financial Statements | 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 20 |
Item 4. | Controls and Procedures |
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PART II. | OTHER INFORMATION | |
Item |
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Item 6. | Exhibits |
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Signatures |
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PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (
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December 31, | |||||||||||||||||
September 29, | 2018 | September 30, | December 31, | ||||||||||||||
2019 | Adjusted (1) | 2020 | 2019 | ||||||||||||||
ASSETS | ASSETS | ASSETS | |||||||||||||||
Current assets: | Current assets: | ||||||||||||||||
Cash | $ | 7,089 | $ | 25,934 | Cash | $ | 13,777 | $ | 7,405 | ||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $322 and $296, respectively | 26,573 | 16,015 | |||||||||||||||
Trade accounts receivable, net of allowance for doubtful accounts of $303 and $324, respectively | Trade accounts receivable, net of allowance for doubtful accounts of $303 and $324, respectively | 15,012 | 30,106 | ||||||||||||||
Inventories, net | 32,396 | 22,843 | Inventories, net | 29,746 | 29,759 | ||||||||||||
Prepaid expenses and other current assets | 2,949 | 2,368 | Prepaid expenses and other current assets | 3,661 | 3,103 | ||||||||||||
Total current assets | 69,007 | 67,160 | Total current assets | 62,196 | 70,373 | ||||||||||||
Property, equipment and improvements, net | 22,599 | 10,744 | |||||||||||||||
Property, plant and equipment, net | Property, plant and equipment, net | 22,605 | 22,525 | ||||||||||||||
Goodwill | 26,373 | 20,109 | Goodwill | 26,705 | 26,753 | ||||||||||||
Other intangible assets, net | 9,683 | 6,504 | Other intangible assets, net | 9,212 | 9,721 | ||||||||||||
Deferred income taxes, net | 13,556 | 15,444 | Deferred income taxes, net | 12,425 | 13,222 | ||||||||||||
Other noncurrent assets | 2,086 | 887 | Other noncurrent assets | 2,411 | 1,963 | ||||||||||||
Total Assets | $ | 143,304 | $ | 120,848 | Total Assets | $ | 135,554 | $ | 144,557 | ||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||
Current Liabilities: | Current Liabilities: | ||||||||||||||||
Accounts payable | $ | 10,451 | $ | 9,919 | Accounts payable | $ | 8,875 | $ | 9,388 | ||||||||
Current portion of long-term debt | 1,326 | - | Current portion of long-term debt | 1,537 | 1,372 | ||||||||||||
Accrued compensation and related benefits | 1,534 | 1,494 | Accrued compensation and related benefits | 1,258 | 1,655 | ||||||||||||
Accrued expenses and other current liabilities | 4,962 | 3,973 | Accrued expenses and other current liabilities | 5,702 | 4,775 | ||||||||||||
Total current liabilities | 18,273 | 15,386 | Total current liabilities | 17,372 | 17,190 | ||||||||||||
Long-term debt | 16,257 | - | Long-term debt | 2,190 | 15,780 | ||||||||||||
Deferred income taxes | 504 | 591 | Deferred income taxes | 480 | 559 | ||||||||||||
Other noncurrent liabilities | 1,419 | 408 | Other noncurrent liabilities | 1,675 | 1,278 | ||||||||||||
Total liabilities | 36,453 | 16,385 | Total liabilities | 21,717 | 34,807 | ||||||||||||
Commitments and contingencies (Note 10) | |||||||||||||||||
Commitments and contingencies (Note 9) | Commitments and contingencies (Note 9) | ||||||||||||||||
Shareholders' equity: | Shareholders' equity: | ||||||||||||||||
Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | - | - | |||||||||||||||
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,253,889 shares at September 29, 2019 and 20,053,335 shares at December 31, 2018; outstanding – 15,852,707 shares at September 29, 2019 and 15,920,585 shares at December 31, 2018 | 2,025 | 2,005 | |||||||||||||||
Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | 0 | 0 | ||||||||||||||
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,331,348 shares at September 30, 2020 and 20,268,050 shares at December 31, 2019; outstanding – 15,928,055 shares at September 30, 2020 and 15,866,868 shares at December 31, 2019 | Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,331,348 shares at September 30, 2020 and 20,268,050 shares at December 31, 2019; outstanding – 15,928,055 shares at September 30, 2020 and 15,866,868 shares at December 31, 2019 | 2,033 | 2,026 | ||||||||||||||
Capital in excess of par value | 183,995 | 182,630 | Capital in excess of par value | 185,261 | 184,292 | ||||||||||||
Accumulated deficit | (54,456 | ) | (58,035 | ) | Accumulated deficit | (49,706 | ) | (52,830 | ) | ||||||||
Accumulated other comprehensive loss | (3,471 | ) | (2,786 | ) | Accumulated other comprehensive loss | (2,619 | ) | (2,531 | ) | ||||||||
Treasury stock - at cost; 4,401,182 shares at September 29, 2019 and 4,132,750 shares at December 31, 2018 | (21,231 | ) | (19,266 | ) | |||||||||||||
Treasury stock - at cost; 4,403,293 shares at September 30, 2020 and 4,401,182 shares at December 31, 2019 | Treasury stock - at cost; 4,403,293 shares at September 30, 2020 and 4,401,182 shares at December 31, 2019 | (21,246 | ) | (21,231 | ) | ||||||||||||
Total Ultralife Corporation equity | 106,862 | 104,548 | Total Ultralife Corporation equity | 113,723 | 109,726 | ||||||||||||
Non-controlling interest | (11 | ) | (85 | ) | Non-controlling interest | 114 | 24 | ||||||||||
Total shareholders’ equity | 106,851 | 104,463 | Total shareholders’ equity | 113,837 | 109,750 | ||||||||||||
Total liabilities and shareholders' equity | $ | 143,304 | $ | 120,848 | Total liabilities and shareholders' equity | $ | 135,554 | $ | 144,557 |
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The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES | |||||||
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME | |||||||
( | |||||||
|
Three-Month Period Ended | Nine-Month Period Ended | Three-month period ended | Nine-month period ended | |||||||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 | September 30, 2020 | September 29, 2019 | September 30, 2020 | September 29, 2019 | |||||||||||||||||||||||||
Revenues | $ | 27,493 | $ | 20,330 | $ | 75,772 | $ | 66,263 | $ | 24,362 | $ | 27,493 | $ | 78,736 | $ | 75,772 | ||||||||||||||||
Cost of products sold | 19,632 | 14,289 | 53,962 | 46,390 | 17,851 | 19,632 | 56,928 | 53,962 | ||||||||||||||||||||||||
Gross profit | 7,861 | 6,041 | 21,810 | 19,873 | 6,511 | 7,861 | 21,808 | 21,810 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Research and development | 2,029 | 1,099 | 4,652 | 3,417 | 1,606 | 2,029 | 4,429 | 4,652 | ||||||||||||||||||||||||
Selling, general and administrative | 4,526 | 3,442 | 12,262 | 10,968 | 4,198 | 4,526 | 12,893 | 12,262 | ||||||||||||||||||||||||
Total operating expenses | 6,555 | 4,541 | 16,914 | 14,385 | 5,804 | 6,555 | 17,322 | 16,914 | ||||||||||||||||||||||||
Operating income | 1,306 | 1,500 | 4,896 | 5,488 | ||||||||||||||||||||||||||||
Operating income | 707 | 1,306 | 4,486 | 4,896 | ||||||||||||||||||||||||||||
Other expense (income): | ||||||||||||||||||||||||||||||||
Interest and financing expense | 220 | 13 | 339 | 67 | 92 | 220 | 372 | 339 | ||||||||||||||||||||||||
Miscellaneous | (60 | ) | (34 | ) | (38 | ) | (40 | ) | ||||||||||||||||||||||||
Total other expense (income) | 160 | (21 | ) | 301 | 27 | |||||||||||||||||||||||||||
Miscellaneous income | (39 | ) | (60 | ) | (110 | ) | (38 | ) | ||||||||||||||||||||||||
Total other expense | 53 | 160 | 262 | 301 | ||||||||||||||||||||||||||||
Income before income tax provision | 1,146 | 1,521 | 4,595 | 5,461 | 654 | 1,146 | 4,224 | 4,595 | ||||||||||||||||||||||||
Income tax provision | 225 | 86 | 942 | 219 | 192 | 225 | 1,010 | 942 | ||||||||||||||||||||||||
Net income | 921 | 1,435 | 3,653 | 5,242 | 462 | 921 | 3,214 | 3,653 | ||||||||||||||||||||||||
Net income attributable to non-controlling interest | 23 | 27 | 74 | 57 | 55 | 23 | 90 | 74 | ||||||||||||||||||||||||
Net income attributable to Ultralife Corporation | 898 | 1,408 | 3,579 | 5,185 | 407 | 898 | 3,124 | 3,579 | ||||||||||||||||||||||||
Other comprehensive loss: | ||||||||||||||||||||||||||||||||
Other comprehensive gain (loss): | ||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (668 | ) | (436 | ) | (685 | ) | (862 | ) | 677 | (668 | ) | (88 | ) | (685 | ) | |||||||||||||||||
Comprehensive income attributable to Ultralife Corporation | $ | 230 | $ | 972 | $ | 2,894 | $ | 4,323 | $ | 1,084 | $ | 230 | $ | 3,036 | $ | 2,894 | ||||||||||||||||
Net income per share attributable to Ultralife common shareholders – basic | $ | .06 | $ | .09 | $ | .23 | $ | .33 | $ | .03 | $ | .06 | $ | .20 | $ | .23 | ||||||||||||||||
Net income per share attributable to Ultralife common shareholders – diluted | $ | .06 | $ | .09 | $ | .22 | $ | .32 | $ | .03 | $ | .06 | $ | .19 | $ | .22 | ||||||||||||||||
Weighted average shares outstanding – basic | 15,785 | 15,952 | 15,756 | 15,859 | ||||||||||||||||||||||||||||
Weighted average shares outstanding – basic | 15,908 | 15,785 | 15,889 | 15,756 | ||||||||||||||||||||||||||||
Potential common shares | 377 | 571 | 382 | 548 | 181 | 377 | 214 | 382 | ||||||||||||||||||||||||
Weighted average shares outstanding - diluted | 16,162 | 16,523 | 16,138 | 16,407 | ||||||||||||||||||||||||||||
Weighted average shares outstanding - diluted | 16,089 | 16,162 | 16,103 | 16,138 |
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Nine-Month Period Ended | ||||||||
September 29, 2019 | September 30, 2018 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 3,653 | $ | 5,242 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 1,548 | 1,476 | ||||||
Amortization of intangible assets | 372 | 300 | ||||||
Amortization of financing fees | 32 | 27 | ||||||
Stock-based compensation | 519 | 707 | ||||||
Deferred income taxes | 801 | 54 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (7,022 | ) | (8 | ) | ||||
Inventories | (5,021 | ) | 2,947 | |||||
Prepaid expenses and other assets | (1,547 | ) | (338 | ) | ||||
Accounts payable and other liabilities | 1,818 | (2,876 | ) | |||||
Net cash (used in) provided by operating activities | (4,847 | ) | 7,531 | |||||
INVESTING ACTIVITIES: | ||||||||
Purchase of SWE, net of cash acquired | (25,248 | ) | - | |||||
Purchases of property, equipment and improvements | (4,846 | ) | (1,994 | ) | ||||
Net cash used in investing activities | (30,094 | ) | (1,994 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from revolving credit facility | 10,182 | - | ||||||
Proceeds from term loan facility | 8,000 | - | ||||||
Payment of term loan facility | (423 | ) | - | |||||
Repurchase of common stock | (1,957 | ) | - | |||||
Payment of debt issuance costs | (157 | ) | - | |||||
Proceeds from exercise of stock options | 866 | 1,357 | ||||||
Tax withholdings on stock-based awards | (8 | ) | - | |||||
Proceeds from government grant | - | 397 | ||||||
Net cash provided by financing activities | 16,503 | 1,754 | ||||||
Effect of exchange rate changes on cash | (407 | ) | (167 | ) | ||||
(DECREASE) INCREASE IN CASH | (18,845 | ) | 7,124 | |||||
Cash, Beginning of period | 25,934 | 18,330 | ||||||
Cash, End of period | $ | 7,089 | $ | 25,454 |
The accompanying notes are an integral part of these consolidated financial statements. |
ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) (Unaudited) |
Nine-month period ended | ||||||||
September 30, 2020 | September 29, 2019 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 3,214 | $ | 3,653 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation | 1,743 | 1,548 | ||||||
Amortization of intangible assets | 444 | 372 | ||||||
Amortization of financing fees | 36 | 32 | ||||||
Stock-based compensation | 756 | 519 | ||||||
Deferred income taxes | 821 | 801 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 15,094 | (7,022 | ) | |||||
Inventories | 13 | (5,021 | ) | |||||
Prepaid expenses and other assets | (84 | ) | (1,547 | ) | ||||
Accounts payable and other liabilities | (546 | ) | 1,818 | |||||
Net cash provided by (used in) operating activities | 21,491 | (4,847 | ) | |||||
INVESTING ACTIVITIES: | ||||||||
Purchases of property, plant and equipment | (1,902 | ) | (4,846 | ) | ||||
Proceeds from sale of equipment | 120 | 0 | ||||||
Purchase of SWE, net of cash acquired | 0 | (25,248 | ) | |||||
Net cash used in investing activities | (1,782 | ) | (30,094 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from Paycheck Protection Program loan | 3,459 | 0 | ||||||
Repayment of Paycheck Protection Program loan | (3,459 | ) | 0 | |||||
Payment of revolving credit facility | (10,182 | ) | ||||||
Payment of term loan facility | (3,279 | ) | (423 | ) | ||||
Proceeds from exercise of stock options | 218 | 866 | ||||||
Tax withholdings on stock-based awards | (15 | ) | (8 | ) | ||||
Proceeds from revolving credit facility | --- | 10,182 | ||||||
Proceeds from term loan facility | 0 | 8,000 | ||||||
Repurchase of common stock | 0 | (1,957 | ) | |||||
Payment of debt issuance costs | 0 | (157 | ) | |||||
Net cash (used in) provided by financing activities | (13,258 | ) | 16,503 | |||||
Effect of exchange rate changes on cash | (79 | ) | (407 | ) | ||||
INCREASE (DECREASE) IN CASH | 6,372 | (18,845 | ) | |||||
Cash, Beginning of period | 7,405 | 25,934 | ||||||
Cash, End of period | $ | 13,777 | $ | 7,089 |
The accompanying notes are an integral part of these consolidated financial statements. |
ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||
( (Unaudited) |
Capital | Accumulated | Capital | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | in Excess | Other | Non- | Common Stock | in Excess | Other | Non- | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number of | of Par | Comprehensive | Accumulated | Treasury | Controlling | Number of | of Par | Comprehensive | Accumulated | Treasury | Controlling | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Value | Income (Loss) | Deficit | Stock | Interest | Total | 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 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – December 31, 2018 | 20,053,335 | $ | 2,005 | $ | 182,630 | $ | (2,786 | ) | $ | (58,035 | ) | $ | (19,266 | ) | $ | (85 | ) | $ | 104,463 | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 3,579 | 74 | 3,653 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share repurchases | (1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 194,720 | 20 | 846 | 866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation – stock options | 433 | 433 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 86 | 86 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock | 5,834 | (8 | ) | (8 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (685 | ) | (685 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 29, 2019 | 20,253,889 | $ | 2,025 | $ | 183,995 | $ | (3,471 | ) | $ | (54,456 | ) | $ | (21,231 | ) | $ | (11 | ) | $ | 106,851 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – December 31, 2019 | 20,268,050 | $ | 2,026 | $ | 184,292 | $ | (2,531 | ) | $ | (52,830 | ) | $ | (21,231 | ) | $ | 24 | $ | 109,750 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | 5,185 | 57 | 5,242 | 3,124 | 90 | 3,214 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 305,460 | 32 | 1,358 | 1,390 | 50,797 | 5 | 213 | 218 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - stock options | 653 | 653 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation – stock options | 674 | 674 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 82 | 82 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Vesting of restricted stock | 12,501 | 2 | (15 | ) | (13 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (88 | ) | (88 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 30, 2020 | 20,331,348 | $ | 2,033 | $ | 185,261 | $ | (2,619 | ) | $ | (49,706 | ) | $ | (21,246 | ) | $ | 114 | $ | 113,837 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance – June 30, 2019 | 20,163,756 | $ | 2,016 | $ | 183,457 | $ | (2,803 | ) | $ | (55,354 | ) | $ | (21,231 | ) | $ | (34 | ) | $ | 106,051 | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 898 | 23 | 921 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 90,133 | 9 | 379 | 388 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation -stock options | 117 | 117 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation -restricted stock | 42 | 42 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (668 | ) | (668 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 29, 2019 | 20,253,889 | $ | 2,025 | $ | 183,995 | $ | (3,471 | ) | $ | (54,456 | ) | $ | (21,231 | ) | $ | (11 | ) | $ | 106,851 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – June 30, 2020 | 20,297,182 | $ | 2,030 | $ | 184,900 | $ | (3,296 | ) | $ | (50,113 | ) | $ | (21,246 | ) | $ | 59 | $ | 112,334 | ||||||||||||||||||||||||||||||||||||||||||||||
Net income | 407 | 55 | 462 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 34,166 | 3 | 139 | 142 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation – stock options | 204 | 204 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 54 | 54 | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (862 | ) | (862 | ) | 677 | 677 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash settlement of outstanding options | (33 | ) | (33 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 30, 2018 (1) | 19,976,388 | $ | 1,998 | $ | 182,246 | $ | (2,473 | ) | $ | (77,780 | ) | $ | (18,469 | ) | $ | (97 | ) | $ | 85,425 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – December 31, 2018 (1) | 20,053,335 | $ | 2,005 | $ | 182,630 | $ | (2,786 | ) | $ | (58,035 | ) | $ | (19,266 | ) | $ | (85 | ) | $ | 104,463 | |||||||||||||||||||||||||||||||||||||||||||||
Net Income | 3,579 | 74 | 3,653 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share repurchases | (1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 194,720 | 20 | 846 | 866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - stock options | 433 | 433 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 5,834 | 86 | 86 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax withholdings on restricted stock | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (685 | ) | (685 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 29, 2019 | 20,253,889 | $ | 2,025 | $ | 183,995 | $ | (3,471 | ) | $ | (54,456 | ) | $ | (21,231 | ) | $ | (11 | ) | $ | 106,851 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – July 1, 2018 (1) | 19,961,404 | $ | 1,996 | $ | 181,818 | $ | (2,036 | ) | $ | (79,188 | ) | $ | (18,469 | ) | $ | (124 | ) | $ | 83,997 | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 1,408 | 27 | 1,435 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 14,984 | 2 | 62 | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - stock options | 344 | 344 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 19 | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (437 | ) | (437 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 30, 2018 (1) | 19,976,388 | $ | 1,998 | $ | 182,246 | $ | (2,473 | ) | $ | (77,780 | ) | $ | (18,469 | ) | $ | (97 | ) | $ | 85,425 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – June 30, 2019 | 20,163,756 | $ | 2,016 | $ | 183,457 | $ | (2,803 | ) | $ | (55,354 | ) | $ | (21,231 | ) | $ | (34 | ) | $ | 106,051 | |||||||||||||||||||||||||||||||||||||||||||||
Net income | 898 | 23 | 921 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises | 90,133 | 9 | 379 | 388 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - stock options | 117 | 117 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation - restricted stock | 42 | 42 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (668 | ) | (668 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance – September 29, 2019 | 20,253,889 | $ | 2,025 | $ | 183,995 | $ | (3,471 | ) | $ | (54,456 | ) | $ | (21,231 | ) | $ | (11 | ) | $ | 106,851 | |||||||||||||||||||||||||||||||||||||||||||||
Balance – September 30, 2020 | 20,331,348 | $ | 2,033 | $ | 185,261 | $ | (2,619 | ) | $ | (49,706 | ) | $ | (21,246 | ) | $ | 114 | $ | 113,837 |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts inIn thousands – except share and per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Ultralife Corporation and its subsidiaries (the “Company” or “Ultralife”) and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-038-03 of Regulation S-X.S-X. Accordingly, they do not include all the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included. Results for interim periods should not be considered indicative of results to be expected for subsequent interim periods or a full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K10-K for the year ended December 31, 2018.2019.
The December 31, 2018 2019 consolidated balance sheet datainformation 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.
OurEffective January 1, 2020, the Company’s interim fiscal periods are reported on a calendar month-basis to better align with fiscal period changes of our customer base. Prior to 2020, the Company’s monthly closing schedule iswas a 4/4/5 weekly-based cycle for each fiscal quarter, as opposed to a calendar month-based week-based cycle for each fiscal quarter. While the actual dates for the quarter-ends willWe do not believe this change slightly each year, we believe that there are not any material differences when makingmaterially impacts quarterly comparisons.
Recently Adopted Accounting Guidance
Leases
Effective January 1, 2019, 2020, the Company adopted Accounting Standards Update 2016-02(“ASU”) 2017-04, “Intangibles – LeasesGoodwill and Other (Topic 842)350) – Simplifying the Test for Goodwill Impairment”. The new standard eliminates the two-step process that required the identification of potential impairment and a separate measure of the actual impairment. Adoption of the new standard did will not materially impact the prior year consolidated statements of operations and cash flows. The prior year consolidated balance sheet has been revised for the effects of the new standard. The effects to our consolidated balance sheet as of December 31, 2018 are presented below.
The Company adopted the new standard applying the modified retrospective approach. The Company measured and recognized leases upon adoption which had commenced as of the beginning or during the prior year. The package of practical expedients permitted under the transition guidance of the new standard was elected which allowed us to carry forward the historical lease classification and determination of whether an arrangement is or contains a lease on existing leases. The use-of-hindsight transition practical expedient was applied to determine the lease term for existing leases, which resulted in the lengthening of the lease term at commencement for one of our operating facilities.
At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet.
The impact on the consolidated balance sheet as of December 31, 2018 is shown below.
Impact to Previously Reported Results
Consolidated Balance Sheet as of December 31, 2018:
As Previously Reported | Lease Standard Adjustment | As Adjusted | ||||||||||
Other noncurrent assets | $ | 82 | $ | 805 | $ | 887 | ||||||
Prepaid expenses and other current assets | 2,429 | (61 | ) | 2,368 | ||||||||
Accrued expenses and other current liabilities | 3,534 | 439 | 3,973 | |||||||||
Other noncurrent liabilities | 32 | 376 | 408 | |||||||||
Accumulated deficit | (57,964 | ) | (71 | ) | (58,035 | ) |
See Note 9 for further disclosure regarding lease accounting.
Recent Accounting Guidance Not Yet Adopted
There have been no developments to recently issued accounting standards, including the expected dates of adoption and anticipated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2018 Annual Report on Form 10-K.statements.
Recent Accounting Guidance Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.
2. ACQUISITION
On May 1, 2019, the Company completed the acquisition of 100% of the issued and outstanding shares of Southwest Electronic Energy Corporation, a Texas corporation (“SWE”), for an aggregate purchase price of $26,190 inclusive of $942 cash acquired and post-closing adjustments.
SWE is a leading independent designer and manufacturer of high-performance smart battery systems and battery packs to customer specifications using lithium cells. SWE serves a variety of industrial markets, including oil & gas, remote monitoring, process control and marine, which demand uncompromised safety, service, reliability and quality. The Company acquired SWE as a bolt-on acquisition to further support our strategy of commercial revenue diversification by providing entry to the oil and& gas exploration and production, and subsea electrification markets, which are currentlywere previously unserved by Ultralife. Another key benefit of the acquisition includes obtaining a highly valuable technical team of battery pack and charger system engineers and technicians to add to our new product development-based revenue growth initiatives in our commercial end-markets particularly asset tracking, smart metering and other industrial applications.
The acquisition of SWE was completed pursuant to a Stock Purchase Agreement dated May 1, 2019 (the(the “Stock Purchase Agreement”) by and among Ultralife, SWE, Southwest Electronic Energy Medical Research Institute, a Texas non-profit (the “Seller”), and Claude Leonard Backstein,Benckenstein, an individual (the “Shareholder”). The Stock Purchase Agreement contains customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Seller is being held in escrow for indemnification purposes.
The aggregate purchase price for the acquisition was funded by the Company through a combination of cash on hand and borrowings under the Credit Facilities (see Note 3)3).
The purchase price allocation was determined in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (ASC 805)("ASC 805"). Accordingly, the fair value of the consideration was determined, and the assets acquired and liabilities assumed have been recorded at their fair values at the date of the acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.
The allocation of the purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below. Management is responsible for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered several factors, including reference to an analysis performed under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur. The resulting purchase price allocation is considered preliminary and could differ materially from the final allocation based on further analysis and future events. The final purchase price allocation may include changes in the valuation of assets acquired and liabilities assumed, including intangible assets, inventories, fixed assets, deferred taxes and residual goodwill.
Cash | $ | 942 | $ | 942 | ||||
Accounts receivable | 3,621 | 3,621 | ||||||
Inventories | 4,685 | 4,685 | ||||||
Prepaid expenses and other current assets | 431 | |||||||
Property, equipment and improvements | 9,177 | |||||||
Other current assets | 431 | |||||||
Property, plant and equipment | 9,177 | |||||||
Goodwill | 6,474 | 6,534 | ||||||
Other intangible assets | 3,649 | |||||||
Customer relationships | 2,522 | |||||||
Trade name | 1,127 | |||||||
Accounts payable | (1,060 | ) | (1,060 | ) | ||||
Other current liabilities | (718 | ) | (778 | ) | ||||
Deferred tax liability, net | (1,011 | ) | (1,011 | ) | ||||
Net assets acquired | $ | 26,190 | $ | 26,190 |
The goodwill included in the Company’s purchase price allocation presented above represents the value of SWE’s assembled and trained workforce, the incremental value that SWE engineering and technology will bring to the Company and the revenue growth which is expected to occur over time which is attributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax purposes.
The operating results and cash flows of SWE are reflected in the Company’s consolidated financial statements from the date of acquisition. SWE is included in the Battery & Energy Products segment.
For the nine months ended September 30, 2020, SWE contributed revenue of $13,382 and net income of $858, inclusive of interest expense of $273 directly related to the financing of the SWE acquisition and amortization expense of $182 on identifiable intangible assets acquired from SWE.
For the nine months ended September 29, 2019,from the May 1, 2019 acquisition date, SWE contributed revenue of $11,993 and net income of $740, inclusive of a $264 increase in cost of products sold for the fair value step-up of acquired inventory sold during the period, non-recurring expenses of $165 directly related to the acquisition, interest expense of $289 directly related to the financing of the SWE acquisition, amortization expense of $101 on acquired identifiable intangible assets, a $55 reduction of depreciation expense as a result of fair value adjustments and useful life changes, and stock-based compensation charges of $49 for stock options and restricted stock awarded to certain SWE employees.
During the nine-month period ended September 29, 2019, the Company incurred non-recurring transaction costs of $322 directly attributable to the acquisition. Debt issuance costs of $157, including placement, renewal and legal fees, are amortized to interest expense over a weighted average life of 4.6 years based on the terms of the related Credit Facilities. Other non-recurring transaction costs of $165, including one-time accounting, legal and due diligence services, were expensed during the nine-month period. There were no non-recurring transaction costs incurred during the three-month period ended September 29, 2019.
The following supplemental pro forma information presents the combined results of operations, inclusive of the purchase accounting adjustments and one-timeone-time acquisition-related expenses described above, as if the acquisition of SWE had been completed on January 1,2018, the beginning of the comparable prior period.
The supplemental pro forma results do not reflect the agreed upon departure of the Shareholder from SWE and dissolution of the SWE Board of Directors upon consummation of the acquisition or the realization of any expected synergies or other cost reductions following the completion of the business combination. The supplemental pro forma results are presented for informational purposes only and should not be considered indicative of the financial position or results of operations had the acquisition been completed as of the dates indicated and does not purport to indicate the future combined financial position or results of operation.
Set forth below are the unaudited supplemental pro forma results of the Company and SWE for the nine-monthnine-month periods ended September 30, 2020 and September 29, 2019 and September 30, 2018 as if the acquisition had occurred as of January 1,2018.
Nine Months Ended | Nine months ended | |||||||||||||||||
September 30, 2018 | September 29, 2019 | September 30, 2020 | September 29, 2019 | |||||||||||||||
Revenue | $ | 86,506 | $ | 84,567 | $ | 78,736 | $ | 84,567 | ||||||||||
Operating income | 4,397 | 5,536 | $ | 4,486 | 5,536 | |||||||||||||
Net Income attributable to Ultralife Corporation | 4,009 | 3,900 | ||||||||||||||||
Net income attributable to Ultralife Corporation | $ | 3,124 | 3,900 | |||||||||||||||
Net income per share attributable to Ultralife Corporation: | ||||||||||||||||||
Basic | $ | .25 | $ | .25 | $ | .20 | $ | .25 | ||||||||||
Diluted | $ | .25 | $ | .24 | $ | .19 | $ | .24 |
3. CREDIT FACILITYDEBT
Credit Facilities
On May 1, 2019, Ultralife, SWE, and CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), as borrowers, entered into the First Amendment Agreement (the “First Amendment Agreement”) with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to amend the Credit and Security Agreement by and among Ultralife and KeyBank dated May 31, 2017 (the(the “Credit Agreement”, and together with the First Amendment Agreement, the “Amended Credit Agreement”).
The Amended Credit Agreement, among other things, provides for a five-year,five-year, $8,000 senior secured term loan (the “Term Loan Facility”) and extends the term of the $30,000 senior secured revolving credit facility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Credit Facilities”) through May 31, 2022. Up to six months prior to May 31, 2022, the Revolving Credit Facility may be increased to $50,000 with the Bank’s concurrence.
Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of September 29, 2019, 30, 2020, the Company had $7,577$3,855 outstanding principal on the Term Loan Facility, of which $1,326$1,537 is included in current portion of long-term debt on the balance sheet, and $10,182no amounts outstanding principal on the Revolving Credit Facility. As of September 29, 2019, 30, 2020, total unamortized debt issuance costs of $176$128 associated with the Amended Credit Agreement are classified as a reduction of long-term debt on the balance sheet.
The Company is required to repay the borrowings under the Term Loan Facility in sixty (60) (60) equal consecutive monthly payments commencing on May 31, 2019, in arrears, together with applicable interest. All unpaid principal and accrued and unpaid interest with respect to the Term Loan Facility is due and payable in full on April 30, 2024. All unpaid principal and accrued and unpaid interest with respect to the Revolving Credit Facility is due and payable in full on May 31, 2022. The Company may voluntarily prepay principal amounts outstanding at any time subject to certain restrictions.
In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated fixed charge coverage ratio of equal to or greater than 1.15 to 1.0, and a consolidated senior leverage ratio of equal to or less than 2.5 to 1.0, each as defined in the Amended Credit Agreement. The Company was in full compliance with its covenants as of September 29, 2019.30, 2020.
Borrowings under the Credit Facilities are secured by substantially all the assets of the Company. Availability under the Revolving Credit Facility is subject to certain borrowing base limits based on receivables and inventories.
Interest will accrue on outstanding indebtedness under the Credit Facilities at the Base Rate or the Overnight LIBOR Rate, as selected by the Company, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 50 basis points, and (c) the Overnight LIBOR Rate plus one hundred basis points. The applicable margin ranges from zero to negative 50 basis points for the Base Rate and from 185 to 215 basis points for the Overnight LIBOR Rate and are determined based on the Company’s senior leverage ratio.
The Company must pay a fee of 0.1% to 0.2% based on the average daily unused availability under the Revolving Credit Facility.
Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.
4. SHARE REPURCHASE PROGRAM
On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Under the Share Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may be suspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligate the Company to purchase any specific number of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.
For the nine-month period ended September 29, 2019, we repurchased a total of 267,300 shares of our common stock for an aggregate consideration (including fees and commissions) of $1,957. There were no shares repurchased during the three-month period ended September 29, 2019.
From the inception of the Share Repurchase Program on November 1, 2018, we repurchased a total of 372,974 shares of our common stock for an aggregate consideration (including fees and commissions) of $2,699.
5. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-monththree-month period ended September 30, 2020, 831,244 stock options and 19,165 restricted stock awards were included in the calculation of diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 181,270 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended September 29, 2019, 914,535 stock options and 31,666 restricted stock awards were included in the calculation of Diluteddiluted EPS as such securities are dilutive. Inclusion of these securities resultedresulting in 377,200 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month periodnine-month periods ended September 30, 2018, 1,252,5022020 and September 29, 2019, 831,244 and 914,535 stock options and 17,500 restricted stock awards were included in the calculation of Diluted EPS resulting in 571,829 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended September 29, 201919,165 and September 30, 2018, 914,535 and 1,252,502 stock options and 31,666 and 17,500 restricted stock awards, respectively, were included in the calculation of Diluteddiluted EPS as such securities are dilutive. Inclusion of these securities resulted in 382,711213,574 and 548,004382,711 additional shares, respectively, in the calculation of fully diluted earnings per share.
There were 266,000898,167 and 502,250703,250 outstanding stock options for the three-monththree-month periods ended September 30, 2020 and September 29, 2019, and September 30, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 266,000898,167 and 502,250703,250 outstanding stock options for the nine-monthnine-month periods ended September 30, 2020 and September 29, 2019, and September 30, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive.
6.5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Fair Value Measurements and Disclosures
The fair value of financial instruments approximated their carrying values at September 30, 2020 and December 31, 2019. The fair value of cash, trade accounts receivable, trade accounts payable, accrued liabilities, and the current portion of long-term debt approximates carrying value due to the short-term nature of these instruments. The carrying value of long-term debt approximates fair value, as the variable interest rates approximate current market rates.
Cash
The composition of the Company’s cash was as follows:
September 29, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash | $ | 6,824 | $ | 25,583 | $ | 13,690 | $ | 7,135 | ||||||||
Restricted cash | 265 | 351 | 87 | 270 | ||||||||||||
Total | $ | 7,089 | $ | 25,934 | $ | 13,777 | $ | 7,405 |
As of September 29, 2019 30, 2020 and December 31, 2018, 2019, restricted cash included $184$87 and $266,$82, respectively, relating toof euro-denominated deposits withheld by the Dutch tax authorities and third-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. As of December 31, 2019, restricted cash included $188 for 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 expensequalifying expenditures as the related expenditures are incurred. For the nine-monthnine-month period ended September 29, 2019, 30, 2020, grant proceeds of $72$188 were realizedused to income. As of September 29, 2019fund qualifying capital expenditures and December 31, 2018, restricted cash included euro-denominated deposits of $81material 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.labor costs incurred. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.
Inventories
Inventories are stated at the lower of cost or market, net of obsolescence reserves, with cost determined under the first-in, first-outfirst-in, first-out (FIFO) method. The composition of inventories, net was:
September 29, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Raw materials | $ | 19,004 | $ | 13,274 | $ | 17,600 | $ | 18,485 | ||||||||
Work in process | 2,998 | 2,016 | 3,861 | 2,548 | ||||||||||||
Finished goods | 10,394 | 7,553 | 8,285 | 8,726 | ||||||||||||
Total | $ | 32,396 | $ | 22,843 | $ | 29,746 | $ | 29,759 |
Property, Plant and Equipment, and Improvements, Net
Major classes of property, equipmentplant and improvementsequipment consisted of the following:
September 29, | December 31, | September 30, | December 31, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Land | $ | 1,273 | $ | 123 | $ | 1,273 | $ | 1,273 | ||||||||
Buildings and leasehold improvements | 15,257 | 8,267 | 15,365 | 15,386 | ||||||||||||
Machinery and equipment | 54,530 | 51,261 | 55,869 | 55,058 | ||||||||||||
Furniture and fixtures | 2,176 | 2,058 | 2,219 | 2,194 | ||||||||||||
Computer hardware and software | 6,672 | 5,590 | 6,812 | 6,712 | ||||||||||||
Construction in process | 4,757 | 4,302 | 5,622 | 4,730 | ||||||||||||
84,665 | 71,601 | 87,160 | 85,353 | |||||||||||||
Less: Accumulated depreciation | (62,066 | ) | (60,857 | ) | (64,555 | ) | (62,828 | ) | ||||||||
Property, equipment and improvements, net | $ | 22,599 | $ | 10,744 | ||||||||||||
Property, plant and equipment, net | $ | 22,605 | $ | 22,525 |
Depreciation expense for property, equipmentplant and improvementsequipment was as follows:
Three-month period ended | Nine-month period ended | |||||||||||||||
September 29, | September 30, | September 29, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depreciation expense | $ | 586 | $ | 496 | $ | 1,548 | $ | 1,476 |
Three-month period ended | Nine-month period ended | |||||||||||||||
September 30, | September 29, | September 30, | September 29, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Depreciation expense | $ | 582 | $ | 586 | $ | 1,743 | $ | 1,548 |
Goodwill
The following table summarizes the goodwill activity by segment for the nine-month periodsnine-month period ended September 29, 2019 and September 30, 2018:2020.
Battery & Energy | Communications | |||||||||||
Products | Systems | Total | ||||||||||
Balance – December 31, 2017 | $ | 8,965 | $ | 11,493 | $ | 20,458 | ||||||
Effect of foreign currency translation | (257 | ) | - | (257 | ) | |||||||
Balance – September 30, 2018 | 8,708 | 11,493 | 20,201 | |||||||||
Effect of foreign currency translation | (92 | ) | - | (92 | ) | |||||||
Balance – December 31, 2018 | 8,616 | 11,493 | 20,109 | |||||||||
Acquisition of SWE | 6,474 | - | 6,474 | |||||||||
Effect of foreign currency translation | (210 | ) | - | (210 | ) | |||||||
Balance – September 29, 2019 | $ | 14,880 | $ | 11,493 | $ | 26,373 |
Battery & Energy | Communications | |||||||||||
Products | Systems | Total | ||||||||||
Balance – December 31, 2019 | 15,260 | 11,493 | 26,753 | |||||||||
Effect of foreign currency translation | (48 | ) | 0 | (48 | ) | |||||||
Balance – September 30, 2020 | $ | 15,212 | $ | 11,493 | $ | 26,705 |
Other Intangible Assets, Net
The composition of other intangible assets was:
September 30, 2020 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,406 | $ | 0 | $ | 3,406 | ||||||
Customer relationships | 9,020 | 4,975 | 4,045 | |||||||||
Patents and technology | 5,496 | 4,952 | 544 | |||||||||
Distributor relationships | 377 | 377 | 0 | |||||||||
Trade name | 1,501 | 284 | 1,217 | |||||||||
Total | $ | 19,800 | $ | 10,588 | $ | 9,212 |
at September 29, 2019 | December 31, 2019 | |||||||||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||||||||
Cost | Amortization | Net | Cost | Amortization | Net | |||||||||||||||||||
Trademarks | $ | 3,401 | $ | - | $ | 3,401 | $ | 3,403 | $ | 0 | $ | 3,403 | ||||||||||||
Customer relationships | 8,907 | 4,586 | 4,321 | 9,080 | 4,721 | 4,359 | ||||||||||||||||||
Patents and technology | 5,452 | 4,810 | 642 | 5,521 | 4,869 | 652 | ||||||||||||||||||
Distributor relationships | 377 | 377 | - | 377 | 377 | 0 | ||||||||||||||||||
Trade name | 1,485 | 166 | 1,319 | 1,511 | 204 | 1,307 | ||||||||||||||||||
Total | $ | 19,622 | $ | 9,939 | $ | 9,683 | $ | 19,892 | $ | 10,171 | $ | 9,721 |
at December 31, 2018 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,405 | $ | - | $ | 3,405 | ||||||
Customer relationships | 6,471 | 4,392 | 2,079 | |||||||||
Patents and technology | 5,486 | 4,725 | 761 | |||||||||
Distributor relationships | 377 | 377 | - | |||||||||
Trade name | 370 | 111 | 259 | |||||||||
Total | $ | 16,109 | $ | 9,605 | $ | 6,504 |
The increasechange in the carrying valuecost of othertotal intangible assets from December 31, 2018 2019 to September 29, 2019 reflects the preliminary valuation of identifiable intangible assets acquired in the Company’s acquisition of SWE. The table below summarizes the estimated fair value, useful life and annual amortization for the identifiable intangible assets resulting from the preliminary valuation analysis. Amortization for the SWE intangible assets 30, 2020 is recognized as selling, general and administrative expense.
Annual | ||||||||||||
Estimated | Estimated | |||||||||||
Estimated Fair | Useful Lives | Amortization | ||||||||||
Value | in Years | Expense | ||||||||||
Customer relationships | $ | 2,522 | 15 | $ | 168 | |||||||
Trade name | 1,127 | 15 | 75 | |||||||||
Total | $ | 3,649 | $ | 243 |
The remaining change in the carrying value of other intangible assets from December 31, 2018 to September 29, 2019 is thea result of the effect of foreign currency translations.
Amortization expense for other intangible assets was as follows:
Three-month period ended | Nine-month period ended | Three-month period ended | Nine-month period ended | |||||||||||||||||||||||||||||
September 29, | September 30, | September 29, | September 30, | September 30, | September 29, | September 30, | September 29, | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Amortization included in: | ||||||||||||||||||||||||||||||||
Research and development | $ | 32 | $ | 36 | $ | 98 | $ | 111 | $ | 31 | $ | 32 | $ | 92 | $ | 98 | ||||||||||||||||
Selling, general and administrative | 116 | 61 | 274 | 189 | 118 | 116 | 352 | 274 | ||||||||||||||||||||||||
Total amortization expense | $ | 148 | $ | 97 | $ | 372 | $ | 300 | $ | 149 | $ | 148 | $ | 444 | $ | 372 |
7.6. STOCK-BASED COMPENSATION
We recorded non-cash stock compensation expense in each period as follows:
Three-month period ended | Nine-month period ended | Three-month period ended | Nine-month period ended | |||||||||||||||||||||||||||||
September 29, | September 30, | September 29, | September 30, | September 30, | September 29, | September 30, | September 29, | |||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Stock options | $ | 117 | $ | 344 | $ | 433 | $ | 653 | $ | 204 | $ | 117 | $ | 674 | $ | 433 | ||||||||||||||||
Restricted stock grants | 42 | 19 | 86 | 54 | 18 | 42 | 82 | 86 | ||||||||||||||||||||||||
Total | $ | 159 | $ | 363 | $ | 519 | $ | 707 | $ | 222 | $ | 159 | $ | 756 | $ | 519 |
We have stock options outstanding from various stock-based employee compensation plans for which we record compensation cost relating to share-based payment transactions in our financial statements. As of September 29, 2019, 30, 2020, there was $924$720 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.4 years.
The following table summarizes stock option activity for the nine-monthnine-month period ended September 29, 2019:30, 2020:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2019 | 1,576,087 | $ | 6.58 | |||||||||||||
Granted | 282,500 | 8.27 | ||||||||||||||
Exercised | (194,720 | ) | 4.45 | |||||||||||||
Forfeited or expired | (46,082 | ) | 7.04 | |||||||||||||
Outstanding at September 29, 2019 | 1,617,785 | $ | 7.12 | 3.38 | $ | 3,192 | ||||||||||
Vested and expected to vest at September 29, 2019 | 1,518,161 | $ | 7.05 | 3.21 | $ | 3,113 | ||||||||||
Exercisable at September 29, 2019 | 1,095,661 | $ | 6.29 | 2.31 | $ | 2,870 |
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2020 | 1,541,792 | $ | 6.88 | |||||||||||||
Granted | 256,000 | 6.51 | ||||||||||||||
Exercised | (50,797 | ) | 4.29 | |||||||||||||
Forfeited or expired | (17,584 | ) | 7.72 | |||||||||||||
Outstanding at September 30, 2020 | 1,729,411 | $ | 6.89 | 3.06 | $ | 745 | ||||||||||
Vested and expected to vest at September 30, 2020 | 1,626,494 | $ | 6.84 | 2.88 | $ | 745 | ||||||||||
Exercisable at September 30, 2020 | 1,244,119 | $ | 6.63 | 1.92 | $ | 745 |
The following assumptions were used to value stock options granted during the nine months ended September 29, 2019:30, 2020:
Risk-Free Interest Rate | % | |||
Volatility Factor | % | |||
Weighted Average Expected Life (Years) | 5.3 | |||
Dividends | % | |||
|
The weighted average grant date fair value of options granted during the nine months ended September 29, 2019 30, 2020 was $3.77.$2.78.
Cash received from stock option exercises under our stock-based compensation plans for the three-monththree-month periods ended September 30, 2020 and September 29, 2019 was $142 and September 30, 2018 was $388, and $64, respectively. Cash received from stock option exercises under our stock-based compensation plans for the nine-monthnine-month periods ended September 30, 2020 and September 29, 2019 was $218 and September 30, 2018 was $866, and $1,357, respectively.
In April 2019, 20,000 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $11.12 per share. In January 2018, 17,500 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $7.16 per share. All outstanding restricted shares vest in equal annual installments over three years. Unrecognized compensation cost related to these restricted shares was $188$63 at September 29, 2019.
30, 2020, which is expected to be recognized over a weighted average period of 1.5 years.
8.7. INCOME TAXES
Our effective tax rate for the nine-monthnine-month periods ended September 30, 2020 and September 29, 2019 was 23.9% and September 30, 2018 was 20.5% and 4.0%, respectively. The increase in our effectiveperiod-over-period change was primarily attributable to the geographic mix of earnings and lower discrete tax rate for the current periodbenefits realized on disqualifying dispositions of incentive stock options exercised by employees as compared to the prior period was primarily due to the reversal of the valuation allowance on our U.S. deferred tax assets as of December 31, 2018.
Our effective tax rate for the nine months ended September 29, 2019 was lower than the U.S. federal statutory rate primarily due to tax benefits relating to the exercise of stock options during the period.
As of December 31, 2018, 2019, we have domestic net operating loss (“NOL”) carryforwards of $63,388,$58,400, which expire 20192020 thru 2035, and domestic tax credits of $1,817,$1,907, which expire 2028 thru 2037,2039, available to reduce future taxable income. ManagementAs of September 30, 2020, management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.
As of September 29, 2019, 30, 2020, for certain past operations in the U.K., we continue to report a valuation allowance for NOL carryforwards of approximately $10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating losses may be limited due to the change in the past U.K. operation and cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd.
As of September 29, 2019, 30, 2020, we have not recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.
As of September 29, 2019, 30, 2020, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations.
There were no unrecognized tax benefits related to uncertain tax positions at September 29, 2019 30, 2020 and December 31, 2018.2019.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 2000 through 2018 remain subject to examination by In August 2020, the Internal Revenue Service (“IRS”) due to our net operating loss carryforwards.completed its examination of the Company’s federal tax returns for 2016-2018 with no material adjustments identified. Our U.S. tax matters for 2019 remain subject to IRS examination. Our U.S. tax matters for 2001,2002,2005-2007 and 2011-2015 also remain subject to IRS examination due to the years 2000 through 2018remaining availability of net operating loss carryforwards generated in those years. Our U.S. tax matters for 2001,2002,2005-2007 and 2011-2019 remain subject to examination by various state and local tax jurisdictions due to our net operating loss carryforwards.jurisdictions. Our tax matters for the years 2010 through 20182019 remain subject to examination by the respective foreign tax jurisdiction authorities.
9.8. OPERATING LEASES
The Company has operating leases predominantly for operating facilities. As of September 29, 2019, 30, 2020, the remaining lease terms on our operating leases range from less than one yearapproximately 1 to approximately 54 years. Renewal options to extend our leases have been exercised. Terminationand termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.
The components of lease expense for the current and prior-year comparative periods were as follows:
Three Months Ended | Nine Months Ended | Three months ended | Nine months ended | |||||||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 29, 2019 | September 30, 2018 | September 30, 2020 | September 29, 2019 | September 30, 2020 | September 29, 2019 | |||||||||||||||||||||||||
Operating lease cost | $ | 168 | $ | 145 | $ | 459 | $ | 445 | $ | 172 | $ | 168 | $ | 508 | $ | 459 | ||||||||||||||||
Variable lease cost | 21 | 21 | 63 | 69 | 18 | 21 | 54 | 63 | ||||||||||||||||||||||||
Total lease cost | $ | 189 | $ | 166 | $ | 522 | $ | 514 | $ | 190 | $ | 189 | $ | 562 | $ | 522 |
Supplemental cash flow information related to leases was as follows:
Nine Months Ended | Nine months ended | |||||||||||||||
September 29, 2019 | September 30, 2018 | September 30, 2020 | September 29, 2019 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | $ | 447 | $ | 457 | $ | 506 | $ | 447 | ||||||||
Right-of-use assets obtained in exchange for lease liabilities: | $ | 1,586 | $ | - | $ | 875 | $ | 1,586 |
Supplemental balance sheet information related to leases was as follows:
Balance Sheet Classification | September 29, 2019 | December 31, 2018 | Balance sheet classification | September 30, 2020 | December 31, 2019 | ||||||||||||||
Assets: | |||||||||||||||||||
Operating lease right-of-use asset | Other noncurrent assets | $ | 1,989 | $ | 805 | Other noncurrent assets | $ | 2,303 | $ | 1,866 | |||||||||
Liabilities: | |||||||||||||||||||
Current operating lease liability | Accrued expenses and other current liabilities | $ | 600 | $ | 439 | Accrued expenses and other current liabilities | $ | 669 | $ | 620 | |||||||||
Operating lease liability, net of current portion | Other noncurrent liabilities | 1,387 | 376 | Other noncurrent liabilities | 1,643 | 1,247 | |||||||||||||
Total operating lease liability | $ | 1,987 | $ | 815 | Total operating lease liability | $ | 2,312 | $ | 1,867 | ||||||||||
Weighted-average remaining lease term (years) | 3.9 | 2.1 | Weighted-average remaining lease term (years) | 3.6 | 3.7 | ||||||||||||||
Weighted-average discount rate | 4.5 | % | 4.5 | % | Weighted-average discount rate | 4.5 | % | 4.5 | % |
Future minimum lease payments as of September 29, 2019 30, 2020 are as follows:
Maturity of Operating Lease Liabilities | ||||||||
2019 | $ | 163 | ||||||
2020 | 673 | 177 | ||||||
2021 | 459 | 709 | ||||||
2022 | 347 | 680 | ||||||
2023 | 356 | 700 | ||||||
Thereafter | 178 | |||||||
2024 | 269 | |||||||
Total lease payments | 2,176 | 2,535 | ||||||
Less: Imputed interest | (189 | ) | (223 | ) | ||||
Present value of remaining lease payments | $ | 1,987 | $ | 2,312 |
In July 2019, August 2020, the Company entered into a five-yearan agreement to extend the operating lease term of its Shenzhen facility.Virginia Beach facility through April 2024. Aggregate future minimum lease payments of $959 are required to be made over the three-year extension period.
10.9. COMMITMENTS AND CONTINGENCIES
a. Purchase Commitments
As of September 29, 2019, 30, 2020, we have made commitments to purchase approximately $1,030$783 of production machinery and equipment.
b. Product Warranties
We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in our product warranty liability during the firstnine months of 20192020 and 20182019 were as follows:
Nine-Month Period Ended | Nine-month period ended | |||||||||||||||
September 29, 2019 | September 30, 2018 | September 30, 2020 | September 29, 2019 | |||||||||||||
Accrued warranty obligations – beginning | $ | 95 | $ | 149 | $ | 195 | $ | 95 | ||||||||
Assumed warranty obligations – SWE | 145 | - | 0 | 145 | ||||||||||||
Accruals for warranties issued | 152 | (9 | ) | 75 | 152 | |||||||||||
Settlements made | (167 | ) | (54 | ) | (103 | ) | (167 | ) | ||||||||
Accrued warranty obligations – ending | $ | 225 | $ | 86 | $ | 167 | $ | 225 |
c. Contingencies and Legal Matters
We are subject to legal proceedings and claims that arise from time to time in the normal course of business. We believe that the final disposition of any such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, recognizing that legal matters are subject to inherent uncertainties, there exists the possibility that ultimate resolution of these matters could have a material adverse impact on the Company’s financial position, results of operations or cash flows in the period in which any such effects are recorded.flows. We are not aware of any such situations that are reasonably possible at this time.
10.REVENUE RECOGNITION
Revenues are generated from the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer, which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on the date of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and other taxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For products shipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which point control has transferred and there are no further obligations by the Company.
Revenues recognized from prior period performance obligations for the nine-month periods ended September 30, 2020 and September 29, 2019 were not material. Deferred revenue, unbilled revenue and deferred contract costs recorded on our consolidated balance sheets as of September 30, 2020 and December 31, 2019 were not material. As of September 30, 2020 and December 31, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, we have applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations.
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,includes Lithium 9-volt, cylindrical and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: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 Three-month period ended September 2930, 2019:2020:
Battery & Energy Products | Communications Systems | Corporate | Total | Battery & | Communications Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 22,578 | $ | 4,915 | $ | - | $ | 27,493 | $ | 21,819 | $ | 2,543 | $ | 0 | $ | 24,362 | ||||||||||||||||
Segment contribution | 6,117 | 1,744 | (6,555 | ) | 1,306 | 5,677 | 834 | (5,804 | ) | 707 | ||||||||||||||||||||||
Other expense | (160 | ) | (160 | ) | (53 | ) | (53 | ) | ||||||||||||||||||||||||
Tax provision | (225 | ) | (225 | ) | (192 | ) | (192 | ) | ||||||||||||||||||||||||
Non-controlling interest | (23 | ) | (23 | ) | (55 | ) | (55 | ) | ||||||||||||||||||||||||
Net income attributable to Ultralife | $ | 898 | $ | 407 |
Three-Month Period EndedThree-month period ended September 3029, 2018:2019:
Battery & Energy Products | Communications Systems | Corporate | Total | Battery & | Communications Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 17,289 | $ | 3,041 | $ | - | $ | 20,330 | $ | 22,578 | $ | 4,915 | $ | 0 | $ | 27,493 | ||||||||||||||||
Segment contribution | 4,702 | 1,339 | (4,541 | ) | 1,500 | 6,117 | 1,744 | (6,555 | ) | 1,306 | ||||||||||||||||||||||
Other income | 21 | 21 | ||||||||||||||||||||||||||||||
Other expense | (160 | ) | (160 | ) | ||||||||||||||||||||||||||||
Tax provision | (86 | ) | (86 | ) | (225 | ) | (225 | ) | ||||||||||||||||||||||||
Non-controlling interest | (27 | ) | (27 | ) | (23 | ) | (23 | ) | ||||||||||||||||||||||||
Net income attributable to Ultralife | $ | 1,408 | $ | 898 |
Nine-Month Period Ended -month period ended September 29, 2019:30,2020:
Battery & Energy Products | Communications Systems | Corporate | Total | Battery & | Communications Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 58,876 | $ | 16,896 | $ | - | $ | 75,772 | $ | 66,616 | $ | 12,120 | $ | 0 | $ | 78,736 | ||||||||||||||||
Segment contribution | 16,182 | 5,628 | (16,914 | ) | 4,896 | 17,019 | 4,789 | (17,322 | ) | 4,486 | ||||||||||||||||||||||
Other expense | (301 | ) | (301 | ) | (262 | ) | (262 | ) | ||||||||||||||||||||||||
Tax provision | (942 | ) | (942 | ) | (1,010 | ) | (1,010 | ) | ||||||||||||||||||||||||
Non-controlling interest | (74 | ) | (74 | ) | (90 | ) | (90 | ) | ||||||||||||||||||||||||
Net income attributable to Ultralife | $ | 3,579 | $ | 3,124 |
Nine-Month Period Ended -month period ended September 3029, 2018:2019:
Battery & Energy Products | Communications Systems | Corporate | Total | Battery & | Communications Systems | Corporate | Total | |||||||||||||||||||||||||
Revenues | $ | 52,344 | $ | 13,919 | $ | - | $ | 66,263 | $ | 58,876 | $ | 16,896 | $ | 0 | $ | 75,772 | ||||||||||||||||
Segment contribution | 14,664 | 5,209 | (14,385 | ) | 5,488 | 16,182 | 5,628 | (16,914 | ) | 4,896 | ||||||||||||||||||||||
Other expense | (27 | ) | (27 | ) | (301 | ) | (301 | ) | ||||||||||||||||||||||||
Tax provision | (219 | ) | (219 | ) | (942 | ) | (942 | ) | ||||||||||||||||||||||||
Non-controlling interest | (57 | ) | (57 | ) | (74 | ) | (74 | ) | ||||||||||||||||||||||||
Net income attributable to Ultralife | $ | 5,185 | $ | 3,579 |
The following tables disaggregate our business segment revenues by major source and geography.
Commercial and Government/Defense Revenue Information:
Three-Month Period Ended September 29, 2019: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 22,578 | $ | 17,677 | $ | 4,901 | ||||||
Communications Systems | 4,915 | - | 4,915 | |||||||||
Total | $ | 27,493 | $ | 17,677 | $ | 9,816 | ||||||
64 | % | 36 | % |
Three-month period ended September 30,2020:
Total Revenue | Commercial | Government/ Defense | ||||||||||
Battery & Energy Products | $ | 21,819 | $ | 15,772 | $ | 6,047 | ||||||
Communications Systems | 2,543 | 0 | 2,543 | |||||||||
Total | $ | 24,362 | $ | 15,772 | $ | 8,590 | ||||||
65 | % | 35 | % |
Three-month period ended September 29, 2019:
Total Revenue | Commercial | Government/ Defense | ||||||||||
Battery & Energy Products | $ | 22,578 | $ | 17,677 | $ | 4,901 | ||||||
Communications Systems | 4,915 | 0 | 4,915 | |||||||||
Total | $ | 27,493 | $ | 17,677 | $ | 9,816 | ||||||
64 | % | 36 | % |
Nine-month period ended September 30,2020:
Total Revenue | Commercial | Government/ Defense | ||||||||||
Battery & Energy Products | $ | 66,616 | $ | 46,746 | $ | 19,870 | ||||||
Communications Systems | 12,120 | 0 | 12,120 | |||||||||
Total | $ | 78,736 | $ | 46,746 | $ | 31,990 | ||||||
59 | % | 41 | % |
Nine-month period ended September 29, 2019:
Total Revenue | Commercial | Government/ Defense | ||||||||||
Battery & Energy Products | $ | 58,876 | $ | 42,736 | $ | 16,140 | ||||||
Communications Systems | 16,896 | 0 | 16,896 | |||||||||
Total | $ | 75,772 | $ | 42,736 | $ | 33,036 | ||||||
56 | % | 44 | % |
Three-Month Period Ended September 30, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 17,289 | $ | 10,127 | $ | 7,162 | ||||||
Communications Systems | 3,041 | - | 3,041 | |||||||||
Total | $ | 20,330 | $ | 10,127 | $ | 10,203 | ||||||
50 | % | 50 | % |
Nine-Month Period Ended September 29, 2019: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 58,876 | $ | 42,736 | $ | 16,140 | ||||||
Communications Systems | 16,896 | - | 16,896 | |||||||||
Total | $ | 75,772 | $ | 42,736 | $ | 33,036 | ||||||
56 | % | 44 | % |
Nine-Month Period Ended September 30, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 52,344 | $ | 30,007 | $ | 22,337 | ||||||
Communications Systems | 13,919 | - | 13,919 | |||||||||
Total | $ | 66,263 | $ | 30,007 | $ | 36,256 | ||||||
45 | % | 55 | % |
U.S. and Non-U.S. Revenue Information1:
Three-Month Period Ended September 29, 2019: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 22,578 | $ | 11,459 | $ | 11,119 | ||||||
Communications Systems | 4,915 | 4,397 | 518 | |||||||||
Total | $ | 27,493 | $ | 15,856 | $ | 11,637 | ||||||
58 | % | 42 | % |
Three-month period ended September30,2020:
Total Revenue | United States | Non-United States | ||||||||||
Battery & Energy Products | $ | 21,819 | $ | 10,820 | $ | 10,999 | ||||||
Communications Systems | 2,543 | 2,263 | 280 | |||||||||
Total | $ | 24,362 | $ | 13,083 | $ | 11,279 | ||||||
54 | % | 46 | % |
Three-Month Period Ended September 30, 2018: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 17,289 | $ | 9,389 | $ | 7,900 | ||||||
Communications Systems | 3,041 | 2,140 | 901 | |||||||||
Total | $ | 20,330 | $ | 11,529 | $ | 8,801 | ||||||
57 | % | 43 | % |
Three-month period ended September29, 2019:
Total Revenue | United States | Non-United States | ||||||||||
Battery & Energy Products | $ | 22,578 | $ | 11,459 | $ | 11,119 | ||||||
Communications Systems | 4,915 | 4,397 | 518 | |||||||||
Total | $ | 27,493 | $ | 15,856 | $ | 11,637 | ||||||
58 | % | 42 | % |
Nine-Month Period Ended September 29, 2019: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 58,876 | $ | 29,869 | $ | 29,007 | ||||||
Communications Systems | 16,896 | 15,748 | 1,148 | |||||||||
Total | $ | 75,772 | $ | 45,617 | $ | 30,155 | ||||||
60 | % | 40 | % |
Nine-month period ended September30,2020:
Total Revenue | United States | Non-United States | ||||||||||
Battery & Energy Products | $ | 66,616 | $ | 36,299 | $ | 30,317 | ||||||
Communications Systems | 12,120 | 10,840 | 1,280 | |||||||||
Total | $ | 78,736 | $ | 47,139 | $ | 31,597 | ||||||
60 | % | 40 | % |
Nine-Month Period Ended September 30, 2018: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 52,344 | $ | 29,451 | $ | 22,893 | ||||||
Communications Systems | 13,919 | 12,747 | 1,172 | |||||||||
Total | $ | 66,263 | $ | 42,198 | $ | 24,065 | ||||||
64 | % | 36 | % |
Nine-month period ended September 29, 2019:
Total Revenue | United States | Non-United States | ||||||||||
Battery & Energy Products | $ | 58,876 | $ | 29,869 | $ | 29,007 | ||||||
Communications Systems | 16,896 | 15,748 | 1,148 | |||||||||
Total | $ | 75,772 | $ | 45,617 | $ | 30,155 | ||||||
60 | % | 40 | % |
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
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,to: the effects of the novel coronavirus disease of 2019 (“COVID-19”) or other infectious disease pandemics which may arise in the future; our reliance on certain key customers; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations;operations including changes in U.S. tariffs and trade disputes with China; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our entrance into new end-markets which could lead to additional financial exposure; fluctuations in the price of oil and the resulting impact on the level of downhole drilling by our oil & gas customers; our ability to retain top management and key personnel; our resources being overwhelmed by our growth prospects; our inability to comply with changes to the regulations for the shipment of our products; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; possible impairments of our goodwill and other intangible assets; our customers’ demand falling short of volume expectations in our supply agreements; possible impairments of our goodwill and other intangible assets; negative publicity concerningof Lithium-ion batteries; our exposure to foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; our ability to utilize our net operating loss carryforwards; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to comply with government regulations regarding the use of “conflict minerals;”minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “estimate,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.2019, and Item 1A, “Risk Factors” in Part II of this Form 10-Q.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.
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, 20182019 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 Part I, Item 1 of this Form 10-Q, the Risk Factors in Part II, Item 1A of this Form 10-Q, and the Risk Factors and our Consolidated Financial Statements and Notes thereto containedand Risk Factors in our Form 10-K for the year ended December 31, 2018.2019.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts.
General
We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including:including rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. We continually evaluate ways to grow, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as seeking opportunities to expand through acquisitions.
We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments. We enjoy strong name recognition in our markets under our Ultralife®Ultralife® Batteries, Lithium Power®Power®, McDowell Research®Research®, AMTI™AMTITM, ABLE™ABLETM, ACCUTRONICS™, ACCUPRO™, ENTELLION™, SWE Southwest Electronic Energy Group™, SWE DRILL-DATA™, and ENTELLION™SWE SEASAFE™ brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes:includes Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes:includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. See Note 11 in the Notes to Consolidated Financial Statements.Statements in Item 1 of Part I of this Form 10-Q.
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.
COVID-19
The COVID-19 pandemic has created significant economic disruption and uncertainty around the world. The Company continues to closely monitor the developments surrounding COVID-19 and take actions to mitigate the business risks involved. During this challenging time, we remain focused on ensuring the health and safety of our employees by implementing the protocols established by public health officials in addition to meeting the demand of our customers. As an essential supplier currently exempt from government-mandated shutdown directives, we are striving to ensure an uninterrupted flow of our mission critical products serving medical device, first responder, public safety, energy and national security customers. For the 2020 year-to-date period, we have maintained normal operations at all our facilities with the exception of an approximately one-month closure of our China facility as was mandated by the Chinese government through early March 2020.
For the quarter ended March 31, 2020, our operating results were adversely affected by COVID-19, particularly as a result of the temporary shutdown of our China operation and supply chain disruptions. We estimated the effects of COVID-19 adversely impacted net income by approximately $500 for our first quarter. For the quarter ended June 30, 2020, we estimated that the net impact of COVID-19 to net income was immaterial. Demand for our medical batteries, especially those used in ventilators, respirators and infusion pumps, substantially increased during the second quarter; however, this increase was offset by delays in medical battery orders for devices used for elective surgeries and the overall disruptions in supply chains impacting both commercial and government/defense markets. For the quarter ended September 30, 2020, we estimate that the net impact of COVID-19 to net income was a loss of approximately $1,000. Demand for medical batteries, especially those used in ventilators, respirators and infusion pumps, substantially increased during the third quarter; however, this increase was more than offset by the revenue declines in oil & gas and international industrial markets. Logistics disruptions also delayed certain shipments.
Refer to Item 1A “Risk Factors” in Part II of this Form 10-Q for risks and uncertainties related to COVID-19.
Overview
Consolidated revenues of $24,362 for the three-month period ended September 30, 2020, decreased by $3,131 or 11.4%, from $27,493 for the three-month period ended September 29, 2019, increasedas a significant increase in battery sales to our medical and government/defense customers was offset by $7,163 or 35.2%, from $20,330 during the three-month period ended September 30, 2018, due to higher revenues from our Batterylower oil & Energy Products business reflecting the May 1, 2019 acquisition of SWEgas market and from our Communications Systems business drivensales. We have estimated that COVID-19 adversely impacted our third quarter 2020 sales by shipments of vehicle amplifier adapter systems to support the U.S. Army’s Network Modernization initiatives under the delivery orders received in October 2018.approximately $2,900.
Gross profit for the three-month period ended September 29, 2019 was $6,511, or 26.7% of revenue, compared to $7,861, or 28.6% of revenues, compared to $6,041 or 29.7% of revenues,revenue, for the same quarter a year ago. The 110-basis190-basis point decrease in gross margin for both businessesprimarily resulted from incremental costs associated with the transitioningtransition of new products to higher volume production late cycle product changes and rework associated with vehicle amplifier adapter systems foras well as the U.S. Army and sales mix. The gross margin for the third quartermix of 2019 was reduced by 21 basis points resulting from the completion of the sell-through of acquired SWE inventory written up to fair market value as required by Generally Accepted Accounting Principles (“GAAP”) purchase accounting.products sold in our Communications Systems business.
Operating expenses increaseddecreased to $5,804 during the three-month period ended September 30, 2020, from $6,555 during the three-month period ended September 29, 2019, compared to $4,541 during the three-month period ended September 30, 2018.2019. The increasedecrease of $2,014 or 44.3% was primarily attributable to SWE which contributed operating expenses of $1,494 for the third quarter 2019. Excluding SWE, operating expenses increased $520$751 or 11.5% due primarily to an increase of $353 or 32.1%was consistent with the overall percentage reduction in core business researchrevenues, and developmentincluded certain headcount reductions, lower travel expenses for new product development and testing. Both periods reflect continued tightstrict control over all discretionary spending. Operating expenses as a percentage of sales increased 150 basis points from 22.3% for the third quarter of 2018 torevenues was 23.8% for both the current quarter.2020 and 2019 periods.
Operating income for the three-month period ended September 29, 201930, 2020 was $707 or 2.9% of revenues compared to $1,306 or 4.8% of revenues compared to $1,500 or 7.4% for the year-earlier period. The 45.9% decrease in operating income primarily resulted from the lower gross marginrevenue declines in oil & gas and international industrial markets and the higher researchoverall disruptions in customer/third party logistics impacting both commercial and development costs associated with new product transitions to manufacturing and final development testing. Operating income for the three-month period ending September 29, 2019 includes a $59 purchase accounting adjustment related to the completion of the sell-through of acquired SWE inventory. Net of this adjustment, SWE contributed $1,010 of operating income for the current period.government/defense markets resulting from COVID-19.
Net income attributable to Ultralife was $898,$407, or $0.03 per share – basic and diluted, for the three-month period ended September 30, 2020, compared to $1,124, or $0.06 per share – basic and diluted, for the three-month period ended September 29, 2019, compared to $1,408, or $0.09 per share – basic and2019. Adjusted EPS was $0.04 on a diluted for the three-month period ended September 30, 2018. As a result of our reversal of the allowance on deferred tax assets at year-end 2018, we utilized a statutory tax rate of 19.6% to record our tax provisionbasis for the third quarter of 2019 compared to an effective rate of 5.7% for the year-earlier quarter. Since we do not expect to pay cash taxes in the U.S. for the foreseeable future due to the usage of our deferred tax assets, we have estimated an effective tax rate of 5.2% resulting in2020, representing a 43.8% decrease from Adjusted EPS on a diluted basis of $0.07 for the 2019 third quarter. Includingperiod. Adjusted EPS excludes the one-time adjustmentprovision for deferred taxes of $188 and $165 for the use2020 and 2019 periods, respectively, which primarily represents non-cash charges for U.S. taxes which will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” beginning on Page 27 for a reconciliation of the U.S. statutory tax rate, SWE was accretive by approximately $0.05EPS to Adjusted EPS. The net adverse impact of COVID-19 on Adjusted EPS for the quarter.2020 third quarter was approximately $0.06.
Adjusted EBITDA, defined as net income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $2,307$1,656 or 6.8% of revenues in the third quarter of 20192020 compared to $2,472$2,307 or 8.4% of revenues for the third quarter of 2018.2019. See the section “Adjusted EBITDA” beginning on pagePage 26 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
AsSupported by a solid balance sheet and resilient business model, we near the endare committed to completing our strategic growth projects and are well positioned to withstand current economic headwinds.
Results of 2019, we remain focused on delivering profitable growth in 2019 by continuing to fulfill Communications Systems’ vehicle amplifier adapter system orders in our backlog, solid SWE performance, and ongoing new product development projects in our end markets.
Operations
Three-Month Periods Ended September 29, 201930, 2020 and September 30, 201829, 2019
Revenues. Consolidated revenues for the three-month period ended September 29, 2019 were $27,493, an increase30, 2020 amounted to $24,362, a decrease of $7,163,$3,131 or 35.2%11.4%, from the $20,330 reported$27,493 for the three-month period ended September 30, 2018.29, 2019. Overall, commercial sales increased 74.6% anddecreased 10.8% while government/defense sales decreased 3.8%12.5% from the 20182019 period. RevenuesFor the quarter ended September 30, 2020, we estimate that the net adverse impact of COVID-19 on revenues was approximately $2,900. Demand for medical batteries, especially those used in ventilators, respirators and infusion pumps, substantially increased during the 2019 period include revenues of SWE whichthird quarter; however, this increase was acquiredmore than offset by the Company on May 1, 2019.revenue declines in oil & gas and international industrial markets, and the overall disruptions in customer and third-party logistics which delayed certain shipments.
Battery & Energy Products revenues increased $5,289,decreased $759, or 30.6%3.4%, from $17,289 for the three-month period ended September 30, 2018 to $22,578 for the three-month period ended September 29, 2019 to $21,819 for the three-month period ended September 30, 2020. Excluding oil & gas sales, revenues increased 27.5% over the prior year reflecting a 102.1% increase in medical sales resulting from an increase in demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices associated with COVID-19, and a 23.4% increase in government/defense sales due primarily to higher demand from a large global defense contractor and the shipment of our legacy 5390 batteries under a firm fixed price delivery order received in December 2019. TheThis increase was attributable to the $7,243 revenue of SWE and a $307 or 3.0% increase in core commercial sales partiallymore than offset by a $2,261 or 31.6% reduction68.7% decrease in government/defenseoil & gas market battery sales primarily reflecting the absencerepresentative of revenue from a large 5390 battery order completed in 2018 and the timing of sales to certain defense prime contractors.current market conditions for that sector.
Communications Systems revenues increased $1,874,decreased $2,372, or 61.6%48.3%, from $3,041$4,915 during the three-month period ended September 30, 201829, 2019 to $4,915$2,543 for the three-month period ended September 29, 2019.30, 2020. This increasedecrease is primarily attributable to higher 2019 shipments of vehicle amplifier adapter systemsmounted power amplifiers to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018, shipments of vehicle communication kits under an indefinite-delivery/indefinite-quantity contract with a major defense prime contractor announced in2018. The October 2018 and shipments of Universal Vehicle Adapters under an indefinite-delivery/indefinite-quantity contract withdelivery orders to the Naval Air Warfare Center Aircraft Division announced in June 2019. These shipments exceeded several non-recurring orders shippedU.S. Army were completed in the 2018 third quarter.second quarter of 2020.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $19,632$17,851 for the quarter ended September 29, 2019, an increase30, 2020, a decrease of $5,343,$1,781, or 37.4%9.1%, from the $14,289$19,632 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased tofrom 71.4% for the three-month period ended September 29, 2019 from 70.3%to 73.3% for the three-month period ended September 30, 2018.2020. Correspondingly, consolidated gross margin wasdecreased from 28.6% for the three-month period ended September 29, 2019, compared with 29.7%to 26.7% for the three-month period ended September 30, 2018,2020, primarily reflecting incrementalsales mix and costs associated with the transition of new products to higher volume production, late cycle product changes and rework relating to vehicle amplifier adapter systems for the U.S. Army and product sales mix. The gross margin for the 2019 period includes the completion of the sell-through of the acquired SWE inventory which had been adjusted to fair market value in accordance with purchase accounting and resulted in a 21-basis point reduction in reported gross margin.production.
For our Battery & Energy Products segment, gross profit for the third quarter of 20192020 was $6,117, an increase$5,677, a decrease of $1,415$440 or 30.1%7.2% from gross profit of $4,702$6,117 for the third quarter of 2018.2019. Battery & Energy Products’ gross margin of 27.1%26.0% decreased by 10110 basis points from the 27.2%27.1% gross margin for the year-earlier period, reflecting sales mix and incremental costs associated with the transitioningtransition of new products to higher volume production and the completion of the sell-through of acquired SWE inventory adjusted to fair market value which resulted in a $59 charge to cost of products sold in the third quarter of 2019. Excluding this adjustment, the gross margin for Battery & Energy Products would have been 27.4%. production.
For our Communications Systems segment, gross profit for the third quarter of 20192020 was $1,744$834 or 35.5%32.8% of revenues, an increasea decrease of $405$910 or 30.2%52.2%, from gross profit of $1,339,1,744 or 44.0%35.5% of revenues, for the third quarter of 2018.2019. The 850-basis270-basis point decrease in gross margin during 2019 isthe third quarter of 2020 was driven by late cycle product changessales mix and rework relatinglower factory throughput as compared to the vehicle amplifier adapter systems for the U.S. Army and the larger sales mixthird quarter of competitively bid awards.2019.
Operating Expenses. Operating expenses for the three-month period ended September 29, 201930, 2020 were $6,555, an increase$5,804, a decrease of $2,014$751 or 44.3% over11.5% from the $4,541$6,555 for the three-month period ended September 30, 2018.29, 2019. The increase11.5% decrease in operating expenses, which is primarilyrelatively consistent with the 11.4% decline in revenues, is attributable to the acquisition of SWE, which contributed operating expenses of $1,494 in the third quarter,certain headcount reductions, lower travel and a $353 or 32.1% increase in core research and development expense for new product development and testing. Excluding SWE, operating expenses increased $520 or 11.5% due primarily to the higher research and development expenses. Both periods reflect continued tightstrict control over all discretionary spending.
Overall, operating expenses as a percentage of revenues were 23.8% for both the quarter ended September 30, 2020 and the quarter ended September 29, 2019 compared to 22.3% for the quarter ended September 30, 2018.2019. Amortization expense associated with intangible assets related to our acquisitions was $149 for the third quarter of 2020 ($118 in selling, general and administrative expenses and $31 in research and development costs), including $61 for SWE ($61 in selling, general and administrative expenses), compared with $148 for the third quarter of 2019 ($116 in selling, general, and administrative expenses and $32 in research and development costs), including $60 for SWE ($60 in selling, general and administrative expenses), compared with $97 for the third quarter of 2018 ($61 in selling, general, and administrative expenses and $36 in research and development costs). Research and development costs were $2,029$1,606 for the three-month period ended September 29, 2019, an increase30, 2020, a decrease of $930$423 or 84.6%20.8%, from $1,099$2,029 for the three-months ended September 30, 2018.29, 2019. The increasedecrease is largely attributable to $577the timing of research and development costs incurred by SWEnew product testing in our Communications Systems business and a $353 increase in core business investmentsrealignment of some of the SWE engineering and technical resources to support manufacturing including the short cycle turnaround for new product development and testing.a medical battery pack supporting a respirator application to serve the COVID-19 response. Selling, general, and administrative expenses increased $1,084decreased $328 or 31.5%7.2%, to $4,198 for the third quarter of 2020 from $4,526 for the third quarter of 2019 from $3,442 for the third quarter of 2018.2019. The increasedecrease is primarily attributable to the acquisitionclose monitoring of SWE which contributed $917, including intangible asset amortization of $60, for the third quarter of 2019.all discretionary spending, headcount reductions and lower travel expenses in response to COVID-19.
Other Expense (Income).Expense. Other expense totaled $53 for the three-month period ended September 30, 2020 compared to $160 for the three-month period ended September 29, 2019 compared to other income of $21 for the three-month period ended September 30, 2018.2019. Interest and financing expense, net of interest income, increased $207,decreased $128, or 58.2%, from $13$220 for the third quarter of 20182019 to $220$92 for the comparable period in 2019.2020. The increasedecrease is primarily due primarily to the continued reduction of debt incurred in connection with the financing forof the SWE acquisition, which was $179acquisition. Miscellaneous income amounted to $39 for the third quarter of 2019. Miscellaneous income amounted to2020 compared with $60 for the third quarter of 2019, compared with miscellaneous expense of $34 for the third quarter of 2018, primarily due to transactions impacted by foreign currency fluctuations in the U.S. dollar relative to the Pound Sterling and other currencies, and the strengtheningtranslation of U.S.-denominated transactions and balances of Accutronics (U.K.). The decrease in foreign currency gains in the third quarter of 2020 was attributable to the weakening of the U.SU.S. dollar to the Pound Sterling by 3%approximately 4% from the end ofbeginning to the second quarter to the end of the 2020 third quarter of 2019 and 2% from the end of second quartercompared to the endstrengthening of the third quarter in 2018.U.S. dollar to the Pound Sterling by approximately 3% for the respective 2019 period.
Income Taxes. The tax provision for the 20192020 third quarter was $225$192 compared to $86$225 for the third quarter of 2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based2019. Our effective tax rate increased to 29.4% for the third quarter of 2020 as compared to 19.6% was usedfor the third quarter of 2019, primarily due to record ourthe geographic mix of earnings and discrete tax benefits realized on disqualifying dispositions of incentive stock options exercised by employees during the three-month periods. The income tax provision for the third quarter of 2019 compared2020 is comprised of a $4 current provision for taxes expected to an effective tax rate of 5.7% for the year-earlier quarter. We expect thatbe paid on income from our deferred taxes will offset U.S. taxes for the foreseeable future, and thatforeign operations, representing a cash-based effective tax rate of 0.6%, and a $188 deferred tax provision which primarily represents non-cash charges for U.S. taxes which will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. For the 2019 third quarter would be approximatelyperiod, the income tax provision was comprised of a $60 current tax provision, representing a cash-based effective tax rate of 5.2%., and a $165 deferred tax provision. See Note 87 in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for additional information regarding our income taxes.
Adjusted EPS excludes the provision for deferred taxes of $188 and $165 for the 2020 and 2019 periods, respectively, which primarily represents non-cash charges for U.S. taxes which will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” beginning on Page 27 for a reconciliation of EPS to Adjusted EPS.
Net Income Attributable to Ultralife. Net income attributable to Ultralife was $407, or $0.03 per share – basic and diluted, for the three-month period ended September 30, 2020, compared to $898, or $0.06 per share – basic and diluted, for the three-month period ended September 29, 2019, compared to $1,408, or $0.09 per share – basic and2019. Adjusted EPS was $0.04 on a diluted basis for the three-month period ended September 30, 2018.third quarter of 2020, representing a 45.5% decrease from Adjusted EPS on a diluted basis of $0.07 for the 2019 period. Adjusted EPS excludes the provision for deferred income taxes which represents non-cash charges (benefits) of $188 and $165 for the 2020 and 2019 periods, respectively, for income taxes which will be fully offset by deferred tax assets including past U.S. net operating losses and tax credit carryforwards. The net adverse impact of COVID-19 on Adjusted EPS for the 2020 third quarter was approximately $0.06. See the section “Adjusted EPS” beginning on Page 27 for a reconciliation of Adjusted EPS to EPS. Average weighted common shares outstanding used to compute diluted earnings per share decreased from 16,523,433 in the third quarter of 2018 to 16,162,055 in the third quarter of 2019.2019 to 16,089,170 in the third quarter of 2020. The decrease in 20192020 is attributable to share repurchases under the Company’s Share Repurchase Program which commenced on November 1, 2018, partially offset by stock option exercises since the third quarter of 20182019 and a decrease in the weighted average stock price used to compute diluted shares from $9.29 for the third quarter of 2018 to $8.73 for the third quarter of 2019.2019 to $6.56 for the second quarter of 2020.
Nine-Month Periods Ended September 29, 201930, 2020 and September 30, 201829, 2019
Revenues. Consolidated revenues for the nine-month period ended September 29, 201930, 2020 amounted to $75,772,$78,736, an increase of $9,509$2,964 or 14.4%3.9%, from the $66,263$75,772 reported for the nine-month period ended September 30, 2018.29, 2019. Overall, commercial sales increased 42.4% from $30,007 for the 2018 nine-month period to $42,736 for the nine-month 2019 period,9.4% and government/defense sales decreased 8.9%3.2% from $36,256 for the 2018 period to $33,036 for the 2019 period. Revenues for the nine-month 2019 period include SWE which was acquired by the Company on May 1, 2019.period.
Battery & Energy Products revenues increased $6,532,$7,740 or 12.5%13.1%, from $52,344 for the nine-month period ended September 30, 2018 to $58,876 for the nine-month period ended September 29, 2019.2019 to $66,616 for the nine-month period ended September 30, 2020. The increasegrowth was attributable to the $11,993 revenue contribution from the operations of SWEa $4,010 or 9.4% increase in commercial sales and a $736$3,730 or 2.5%23.1% increase in coregovernment/defense sales. The commercial growth reflects a $8,730 or 54.1% increase in battery commercial sales to medical customers largely driven by an increase in demand for our batteries used in ventilators, respirators, infusion pumps and other medical devices attributable to COVID-19, partially offset by a $6,197 or 27.7% reduction$1,136 decrease in sales to oil and gas customers of our SWE operation due primarily to declining demand attributable to the effects of COVID-19 on the oil and gas market and a $3,583 sales decrease for 9-Volt and other commercial industrial products primarily due to COVID-19. The increase in government/defense sales is due primarily reflecting the absence of revenueto higher demand from a large 5390 battery order completed in 2018global defense contractor and the timingshipment of sales from certain large defense prime contractors.our legacy 5390 batteries under a firm fixed price delivery order received in December 2019.
Communications Systems revenues increased $2,977,decreased $4,776, or 21.4%28.3%, from $13,919$16,896 during the nine-month period ended September 30, 201829, 2019 to $16,896$12,120 for the nine-month period ended September 29, 2019.30, 2020. This increasedecrease is primarily attributable to higher 2019 shipments of mounted power amplifiers and vehicle amplifier adapteramplifier-adaptor systems to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018, shipments of vehicle communication kits under an indefinite-delivery/indefinite-quantity contract with an major defense prime contractor announced in October 2018 and shipments of Universal Vehicle AdaptersAdaptors under an indefinite-delivery/indefinite-quantity contract with the Naval Air Warfare Center Aircraft Division announced in June 2019.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $53,962$56,928 for the nine-month period ended September 29, 2019,30, 2020, an increase of $7,572$2,966 or 16.3%5.5%, from the $46,390$53,962 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 70.0% for the nine-month period ended September 30, 2018 to 71.2% for the nine-month period ended September 29, 2019.2019 to 72.3% for the nine-month period ended September 30, 2020. Correspondingly, consolidated gross margin was 27.7% for the nine-month period ended September 30, 2020, compared with 28.8% for the nine-month period ended September 29, 2019, compared with 30.0% for the nine-month period ended September 30, 2018, due primarily to product mix. The decrease in gross margin for the 20192020 period includeswas unfavorably impacted due to incremental costs associated with COVID-19 including an adjustmentapproximately one-month shutdown of our China operation as mandated by the Chinese government and supply chain and logistics disruptions, partially offset by improved efficiencies and productivity in the production of vehicle amplifier-adaptor systems to increase the book value of the acquired SWE inventory to fair market value in accordance with purchase accounting which resulted in a 40-basis point reduction in reported gross marginfulfill U.S. Army orders for the first nine months of 2019 recognized on the sell through of product.our Communications Systems business.
For our Battery & Energy Products segment, the cost of products sold increased $5,014$6,903 or 13.3%16.2%, from $37,680 during the nine-month period ended September 30, 2018 to $42,694 during the nine-month period ended September 29, 2019.2019 to $49,597 during the nine-month period ended September 30, 2020. Battery & Energy Products’ gross profit for the 20192020 nine-month period was $17,019 or 25.5% of revenues, an increase of $837 or 5.2% from gross profit of $16,182, or 27.5% of revenues, an increase of $1,518 or 10.4% from gross profit of $14,664, or 28.0% of revenues, for the 20182019 nine-month period. Battery & Energy Products’ gross margin decreased for the nine-month period ended September 29, 201930, 2020 by 50200 basis points, primarily due to incremental costs associated with COVID-19 including an approximately one-month shutdown of our China operation as mandated by the purchase accounting adjustment described above which accounted for 40 basis points of the reduction.Chinese government and supply chain disruptions.
For our Communications Systems segment, the cost of products sold increaseddecreased by $2,558$3,937 or 29.4%34.9% from $8,710 during the nine-month period ended September 30, 2018 to $11,268 during the nine-month period ended September 29, 2019.2019 to $7,331 during the nine-month period ended September 30, 2020. Communications Systems’ gross profit for the first nine months of 20192020 was $5,628$4,789 or 33.3%39.5% of revenues, an increasea decrease of $419$839 or 8.0%14.9% from gross profit of $5,209$5,628 or 37.4%33.3% of revenues, for the nine-month period ended September 30, 2018.29, 2019. The decreaseincrease in gross margin was primarily due to costs incurred to transition new products to high volumeimproved efficiencies and productivity in the production of vehicle amplifier-adaptor systems to fulfill large program awards during 2019.U.S. Army orders.
Operating Expenses. OperatingTotal operating expenses for the nine-month period ended September 29, 201930, 2020 totaled $16,914,$17,322, an increase of 2,529$408 or 17.6%2.4% from the $14,385 recorded during$16,914 for the nine-month period ended September 30, 2018.29, 2019. The increase is fullyprimarily attributable to the acquisitioninclusion of the expenses of SWE onfor the full nine months of 2020 as compared to five months of the comparable period in 2019 (SWE acquired May 1, 2019, which contributed operating expenses of $2,650 including $165 of one-time direct acquisition costs and $101 of intangible asset amortization. Excluding SWE results, operating expenses decreased $121 or 0.8% due to lower corporate expenses. Both periods reflected continued tight control over discretionary spending.2019).
Overall, operating expenses as a percentage of revenues were 22.3%22.0% for the nine-month period ended September 29, 201930, 2020 compared to 21.7%22.3% for the comparable 20182019 period. Amortization expense associated with intangible assets related to our acquisitions was $444, including $182 for SWE, for the first nine months of 2020 ($352 in selling, general and administrative expenses and $92 in research and development costs), compared with $372, including $101 for SWE, for the first nine months of 2019 ($274 in selling, general, and administrative expenses and $98 in research and development costs), including $101 for SWE ($101 in selling, general and administrative expenses), compared with $300 for the first nine months of 2018 ($189 in selling, general, and administrative expenses and $111 in research and development costs). Research and development costs were $4,652$4,429 for the nine-month period ended September 29, 2019, an increase30, 2020, a decrease of $1,235$223 or 36.1% over $3,4174.8% from $4,652 for the nine-months ended September 30, 2018.29, 2019. The increase is attributable to $960decrease reflects the timing of research and development costs incurred by SWEtesting of new products and a $275 increase in core business new product developmentrealignment of some of the SWE engineering and testing.technical resources to support manufacturing including the short cycle turnaround for a medical battery pack supporting a respirator application to serve the COVID-19 response. Selling, general, and administrative expenses increased $1,294$631 or 11.8%5.1%, from $10,968 during the first nine months of 2018 to $12,262 during the first nine months of 2019.2019 to $12,893 during the first nine months of 2020. The increase is fully attributable to the inclusion of SWE results which contributed $1,690, including one-time acquisition costs of $165 and intangible asset amortization of $101, partially offset by lower corporate spending.for the full 2020 nine-month period as compared to five months for the comparable 2019 period.
Other Expense. Other expense totaled $262 for the nine-month period ended September 30, 2020 compared to $301 for the nine-month period ended September 29, 2019 compared to $27 for the nine-month period ended September 30, 2018.2019. Interest and financing expense, net of interest income, increased $272$33 to $339$372 for the 20192020 period from $67$339 for the comparable period in 2018,2019, as a result of the financing for the SWE acquisition. Miscellaneous expenseincome amounted to $110 for the first nine months of 2020 compared with $38 for the first nine months of 2019, compared with income of $40 for the first nine months of 2018, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.
Income Taxes. We recognized a tax provision of $1,010 for the first three quarters of 2020 compared with a tax provision of $942 for the first three quarters of 2019 compared with a2019. Our effective tax provision of $219rate increased to 23.9% for the first three quartersnine months of 2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of2020 as compared to 20.5% was used to record our tax provision for the first nine months of 2019, comparedprimarily due to an effectivethe geographic mix of earnings and discrete tax ratebenefits realized on disqualifying dispositions of 4.0%incentive stock options exercised by employees during the nine-month periods. The income tax provision for the year-earlier period. We expect that2020 period is comprised of a $189 current provision for taxes expected to be paid on income from our deferred taxes will offset U.S. taxes for the foreseeable future, and thatforeign operations, representing a cash-based effective tax rate of 4.5%, and a $821 deferred tax provision which primarily represents non-cash charges for U.S. taxes which will be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. For the 2019 first nine months would be approximatelyperiod, the income tax provision was comprised of an $141 current tax provision, representing a cash-based effective tax rate of 3.1%., and a non-cash $801 deferred provision for taxes. See Note 87 in the Notes to Consolidated Financial Statements of 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 $3,579$3,124 and $0.22, respectively, for the nine months ended September 29, 2019, compared to $5,185 and $0.32,$0.19, respectively, for the nine months ended September 30, 2018.2020, compared to $3,653 and $0.22 for the nine months ended September 29, 2019. Adjusted EPS was $0.24 on a diluted basis for the first nine months of 2020, representing an 9.7% decrease from Adjusted EPS on a diluted basis of $0.27 for the comparable 2019 period. Adjusted EPS excludes the provision for deferred income taxes which represents non-cash charges (benefits) of $821 and $801 for the 2020 and 2019 periods, respectively, for income taxes which will be fully offset by deferred tax assets including past U.S. net operating losses and tax credit carryforwards. The net adverse impact of COVID-19 on Adjusted EPS for the 2020 year-to-date period was approximately $0.10. See the section “Adjusted EPS” beginning on Page 27 for a reconciliation of Adjusted EPS to EPS. Average common shares outstanding used to compute diluted earnings per share decreased from 16,407,121 in16,138,335 for the 20182019 period to 16,138,335 in16,102,879 for the 20192020 period, mainly due to share repurchases undera decrease in the Company’s Share Repurchase Program which commenced on November 1, 2018, partially offset byweighted average stock option exercises under our Long-Term Incentive Plans.price used to compute diluted shares from $9.18 for the first nine months of 2019 to $6.89 for the first nine months of 2020.
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance in addition to U.S. GAAP financial measures.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, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ 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 attributable to Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles (“U.S. GAAP”).
We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as income from operations.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 providingpresenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.
The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:
● | Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business; |
● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect |
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We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.on a supplemental basis. We reconcile Adjusted EBITDA to net income attributable to Ultralife Corporation, the most comparable financial measure under GAAP. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
Adjusted EBITDA is calculated as follows for the periods presented:
Three-Month Period Ended | Nine-Month Period Ended | |||||||||||||||
September 29, | September 30, | September 29, | September 30, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income attributable to Ultralife | $ | 898 | $ | 1,408 | $ | 3,579 | $ | 5,185 | ||||||||
Add: | ||||||||||||||||
Interest and financing expense, net | 220 | 13 | 339 | 67 | ||||||||||||
Income tax provision | 225 | 86 | 942 | 219 | ||||||||||||
Depreciation expense | 586 | 496 | 1,548 | 1,476 | ||||||||||||
Amortization of intangible assets and financing fees | 160 | 106 | 404 | 327 | ||||||||||||
Stock-based compensation expense | 159 | 363 | 519 | 707 | ||||||||||||
Non-cash purchase accounting adjustments | 59 | - | 264 | - | ||||||||||||
Adjusted EBITDA | $ | 2,307 | $ | 2,472 | $ | 7,595 | $ | 7,981 |
Three-Month Period Ended | Nine-Month Period Ended | |||||||||||||||
September 30, | September 29, | September 30, | September 29, | |||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income attributable to Ultralife | $ | 407 | $ | 898 | $ | 3,124 | $ | 3,579 | ||||||||
Add: | ||||||||||||||||
Interest and financing expense, net | 92 | 220 | 372 | 339 | ||||||||||||
Income tax provision | 192 | 225 | 1,010 | 942 | ||||||||||||
Depreciation expense | 582 | 586 | 1,743 | 1,548 | ||||||||||||
Amortization of intangible assets and financing fees | 161 | 160 | 480 | 404 | ||||||||||||
Stock-based compensation expense | 222 | 159 | 756 | 519 | ||||||||||||
Non-cash purchase accounting adjustments | - | 59 | - | 264 | ||||||||||||
Adjusted EBITDA | $ | 1,656 | $ | 2,307 | $ | 7,485 | $ | 7,595 |
Adjusted EPSEarnings Per Share
In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance in addition to U.S. GAAP financial measures.performance. We define Adjusted EPS as net income attributable to Ultralife Corporation excluding the provision for deferred taxes divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that will be offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under U.S. GAAP. Neither current nor potential investors in our securities should rely on Adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EPS to EPS and net income attributable to Ultralife.
Adjusted EPS is calculated as follows for the periods presented:
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September 30, 2020 | September 29, 2019 | |||||||||||||||||||||||
Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | |||||||||||||||||||
Net income attributable to Ultralife Corporation | $ | 407 | $ | .03 | $ | .03 | $ | 898 | $ | .06 | $ | .06 | ||||||||||||
Deferred tax provision | 188 | .01 | .01 | 165 | .01 | .01 | ||||||||||||||||||
Adjusted net income attributable to Ultralife Corporation | $ | 595 | $ | .04 | $ | .04 | $ | 1,063 | $ | .07 | $ | .07 | ||||||||||||
Weighted average shares outstanding | 15,908 | 16,089 | 15,785 | 16,162 |
Three-Month Period Ended | ||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | |||||||||||||||||||||||
Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | |||||||||||||||||||
Net income attributable to Ultralife Corporation | $ | 898 | $ | .06 | $ | .06 | $ | 1,408 | $ | .09 | $ | .09 | ||||||||||||
Deferred tax provision | 165 | .01 | .01 | 18 | - | - | ||||||||||||||||||
Adjusted net income attributable to Ultralife Corporation | $ | 1,063 | $ | .07 | $ | .07 | $ | 1,426 | $ | .09 | $ | .09 | ||||||||||||
Weighted average shares outstanding | 15,785 | 16,162 | 15,952 | 16,523 |
Nine-Month Period Ended | Nine-Month Period Ended | |||||||||||||||||||||||||||||||||||||||||||||||
September 29, 2019 | September 30, 2018 | September 30, 2020 | September 29, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | |||||||||||||||||||||||||||||||||||||
Net income attributable to Ultralife Corporate | $ | 3,579 | $ | .23 | $ | .22 | $ | 5,185 | $ | .33 | $ | .32 | $ | 3,124 | $ | .20 | $ | .19 | $ | 3,579 | $ | .23 | $ | .22 | ||||||||||||||||||||||||
Deferred tax provision | 801 | .05 | .05 | 54 | - | - | 821 | .05 | .05 | 801 | .05 | .05 | ||||||||||||||||||||||||||||||||||||
Adjusted net income attributable to Ultralife Corporation | $ | 4,380 | $ | .28 | $ | .27 | $ | 5,239 | $ | .33 | $ | .32 | $ | 3,945 | $ | .25 | $ | .24 | $ | 4,380 | $ | .28 | $ | .27 | ||||||||||||||||||||||||
Weighted average shares outstanding | 15,756 | 16,138 | 15,859 | 16,407 | 15,889 | 16,103 | 15,756 | 16,138 |
Liquidity and Capital Resources
As of September 29, 2019,30, 2020, cash totaled $7,089, a decrease$13,777, an increase of $18,845$6,372, or 86.0%, as compared to $25,934$7,405 of cash held atas of December 31, 2018, primarily driven2019. The increase was attributable to cash generated from operations, including the collection of accounts receivable, partially offset by the acquisitionpaydown of SWE on May 1, 2019, the procurement of inventory to fulfill the higher backlog level entering 2019, an increase in accounts receivable due to the timing of shipments,our debt and strategic capital investments primarily for our Battery & Energy Products business, and repurchases of our common stock under our Share Repurchase Program.business.
During the nine-month period ended September 29, 2019, net30, 2020, operating activities provided cash of $4,847 was used in operations, driven by$21,491, consisting of net income of $3,214, a $7,022 increasedecrease in accounts receivable and $5,021 increase in inventoryof $15,094 due primarily attributable to the large program awards announced in October 2018 for our Communications Systems business. Cash used in operations was largely offset by net incomea high level of $3,653,collections, and non-cash expenses (depreciation, amortization and stock-based compensationcompensation) and deferred taxes)taxes totaling $3,272, and$3,800, partially offset by a net decrease in accounts payable and other working capital of $271. $617 primarily due to the timing of payments for procured inventory and capital projects.
Cash used in investing activities for the nine months ended September 29, 201930, 2020 was $30,094, consisting of the purchase price for SWE of $25,248, net of cash acquired, and$1,782, which was largely attributable to capital expenditures of $4,846$1,902 primarily due to investment in automation equipment pertaining toreflecting strategic investments for our Battery & Energy Products business, including 3-Volt cell production.business.
Net cash provided byused in financing activities for the nine months ended September 29, 201930, 2020 was $16,503,$13,258, primarily consisting of $17,759 of net borrowings drawnpayments totaling $10,182 against our Revolving Credit FacilitiesFacility and $3,279 of principle payments on our Term Loan Facility, including an advance payment of $2,200, partially offset primarily to fund the acquisition of SWE andby stock option exercise proceeds of $866, partially offset by repurchases of our common stock under our Share Repurchase Program totaling $1,957 and debt issuance costs of $157.$218.
As of September 29, 2019,30, 2020, the Company has significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 87 in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for additional information.
As of September 29, 2019,30, 2020, we had made commitments to purchase approximately $1,030$783 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.
While the COVID-19 pandemic poses a high level of uncertainty, management expects that cash flow generated from future operations and the remaining availability under our Revolving Credit Facility will be sufficient under current economic conditions to meet our general funding requirements and capital investments for the foreseeable future.
Debt Commitments
On May 1, 2019, in connection with financing the SWE acquisition (see Note 3 to the Notes to Consolidated Financial Statements)Statements in Item 1 of Part I of this Form 10-Q), the Company drew down $8,000 on its Term Loan Facility and $6,782 under its Revolving Credit Facility. As of September 29, 2019, we30, 2020, the Company had $7,577$3,855 outstanding principal on the Term Loan Facility, of which $1,326$1,537 is due to be paid overincluded in current portion of long-term debt on the next twelve months,balance sheet, and $10,182no amounts outstanding principal on the Revolving Credit Facility. As of September 29, 2019,30, 2020, the Company is in full compliance with its debtall covenants under the Credit Facilities. Management believes that cash flow generated from future operations and remaining availability under our Revolving Credit Facility will be sufficient to meet our general funding requirements for the foreseeable future.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with U.S. GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Operations and Significant Accounting Policies”) to our Consolidated Financial Statements in our 20182019 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the first nine months of 2019,2020, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed. Refer to Note 1 in the notes to consolidated financial statements for updated accounting policies to reflect the Company’s adoption of Topic 842 - Leases as of January 1, 2019.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2.Item 1A. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSRisk Factors
Purchases of Equity SecuritiesAs a smaller reporting company, we are not required to provide the information required by the Issuerthis Item.
ReferInvestors should carefully consider the risk factor set forth below in addition to Note 4 of the Notes to Consolidated Financial Statements (Partrisk factors described in Part I, Item 11A “Risk Factors” of thisour Annual Report on Form 10-Q)10-K for further discussion regarding share repurchases.the year ended December 31, 2019, which could adversely affect our business, financial condition and results of operations. Additional risks and uncertainties not currently known to us or that are not currently believed by us to be material may also harm our business, financial condition and operating results.
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, 2018Our business, operating results and under which the Company was authorized to repurchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Share repurchases under this program were made in accordance with SEC Rule 10b-18 using a variety of methods, which included open market purchases and block trades in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under 10b5-1 Plans, the timing, manner, price and amount of any repurchases were determined at the Company’s discretion.financial condition may be adversely impacted by COVID-19.
The following table sets forth information regardingnovel coronavirus disease of 2019 (COVID-19) has created significant economic disruption and uncertainty around the world. COVID-19 adversely impacted our repurchases of common stock foroperating results during the first nine months of 2019 under2020 with an estimated unfavorable impact to net income of approximately $1,500 primarily as a result of overall disruptions in supply chains impacting both commercial and government/defense markets, revenue declines in oil & gas and international industrial markets, and an approximately one-month closure of our China facility during the first quarter as mandated by the China government, partially offset by increased demand for our medical batteries, especially those used in ventilators, respirators and infusion pumps. While the Chinese government has lifted the suspension of business operations in China and we have maintained normal business operations at all our other facilities throughout the pandemic, the extent to which COVID-19 may impact our business is uncertain and will depend on many evolving factors which we continue to monitor but cannot predict, including the duration and scope of the pandemic and actions taken by governments, businesses and individuals in response to the pandemic. Potential effects of COVID-19 which may adversely impact our business include limited availability and/or increased cost of raw materials and components used in our products, reduced demand and/or pricing for our products, inability of our customers to pay or remain solvent, reduced availability of our workforce, and increased cyber threats to our information technology infrastructure. Prolonged adverse effects of COVID-19 on our business could result in the impairment of long-lived assets including goodwill and other intangible assets. Further, we cannot predict all possible adverse effects the COVID-19 pandemic may cause as a result of which there may be adverse effects in addition to those described in this program:Risk Factor. While we continue to closely monitor the developments surrounding COVID-19 and take actions when possible to mitigate the business risks involved, the potential effects of COVID-19 on our business, alone or taken together, pose a material risk to our future operating results and financial condition.
Total Number of Shares Purchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased As Part of Publicly Announced Program | Maximum Number of Shares That May Yet Be Purchased Under the Program | |||||||||||||
January 2019 | 267,100 | $ | 7.29 | 372,774 | 2,127,226 | |||||||||||
February 2019 | 200 | 7.49 | 372,974 | 2,127,026 | ||||||||||||
March 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
April 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
May 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
June 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
July 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
August 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
September 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
Total | 267,300 | 372,974 |
All repurchases were made using cash resources. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards.
Item 6. EXHIBITSExhibits
Exhibit Index |
Exhibit Description |
Incorporated by Reference from | ||
31.1 | Filed herewith | |||
31.2 | Filed herewith | |||
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101.INS | Inline XBRL Instance Document | Filed herewith | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Filed herewith |
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2020 and September 29, 2019, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 29, 2019, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2020 and September 29, 2019, and (v) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ULTRALIFE CORPORATION | |||
(Registrant) | |||
Date: October | By: /s/ Michael D. Popielec | ||
Michael D. Popielec | |||
President and Chief Executive Officer | |||
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Date: October | By: /s/ Philip A. Fain | ||
Philip A. Fain | |||
Chief Financial Officer and Treasurer | |||
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Principal Accounting Officer) |
Index to Exhibits
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief |
32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section |
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101.INS | Inline XBRL Instance Document |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, (ii) Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2020 and September 29, 2019, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and September 29, 2019, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2020 and September 29, 2019, and (v) Notes to Consolidated Financial Statements.
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