UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)                     

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

For the quarterly period ended March 31, 2020

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

 

As of April 28, 2020, the registrant had 15,879,284 shares of common stock outstanding.

 



 

 

1

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

 

INDEX

 

   

Page

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Consolidated Financial Statements (unaudited):

 
     
 

Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 

3

     
 

Consolidated Statements of Income and Comprehensive Income for the Three-Month Periods Ended March 31, 2020 and March 31, 2019

4

     
 

Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2020 and March 31, 2019

5

     
 

Consolidated Statements of Changes in Shareholders’ Equity for the Three-Month Periods Ended March 31, 2020 and March 31, 2019

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

     

Item 4.

Controls and Procedures

25

     

PART II.

OTHER INFORMATION

 
     

Item 1A.

Risk Factors

26

     

Item 6.

Exhibits

27

     
 

Signatures

28

 

 

2

 

 

PART I.    FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands except share amounts)

(Unaudited)

 

   

March 31,

   

December 31

 
   

2020

   

2019

 
ASSETS  

Current assets:

               

Cash

  $ 6,109     $ 7,405  

Trade accounts receivable, net of allowance for doubtful accounts of $311 and $324, respectively

    35,750       30,106  

Inventories, net

    28,979       29,759  

Prepaid expenses and other current assets

    2,730       3,103  

Total current assets

    73,568       70,373  

Property, plant and equipment, net

    22,039       22,525  

Goodwill

    26,468       26,753  

Other intangible assets, net

    9,405       9,721  

Deferred income taxes, net

    12,887       13,222  

Other noncurrent assets

    1,783       1,963  

Total Assets

  $ 146,150     $ 144,557  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current Liabilities:

               

Accounts payable

  $ 11,731     $ 9,388  

Current portion of long-term debt

    1,467       1,372  

Accrued compensation and related benefits

    1,597       1,655  

Accrued expenses and other current liabilities

    4,133       4,775  

Total current liabilities

    18,928       17,190  

Long-term debt

    15,354       15,780  

Deferred income taxes

    496       559  

Other noncurrent liabilities

    1,103       1,278  

Total liabilities

    35,881       34,807  
                 

Commitments and contingencies (Note 10)

               
                 

Shareholders' equity:

               

Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued

    -       -  

Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,281,516 shares at March 31, 2020 and 20,268,050 shares at December 31, 2019; outstanding – 15,879,284 shares at March 31, 2020 and 15,866,868 shares at December 31, 2019

    2,028       2,026  

Capital in excess of par value

    184,550       184,292  

Accumulated deficit

    (51,771 )     (52,830 )

Accumulated other comprehensive loss

    (3,338 )     (2,531 )

Treasury stock - at cost; 4,402,232 shares at March 31, 2020 and 4,401,182 shares at December 31, 2019

    (21,239 )     (21,231 )

Total Ultralife Corporation equity

    110,230       109,726  

Non-controlling interest

    39       24  

Total shareholders’ equity

    110,269       109,750  
                 

Total liabilities and shareholders' equity

  $ 146,150     $ 144,557  

 

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

 

3

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(Unaudited)

 

   

Three-month period ended

 
   

March 31,

2020

   

March 31,

2019

 
                 

Revenues

  $ 25,814     $ 18,882  

Cost of products sold

    18,480       13,798  

Gross profit

    7,334       5,084  
                 

Operating expenses:

               

Research and development

    1,548       1,036  

Selling, general and administrative

    4,301       3,500  

Total operating expenses

    5,849       4,536  
                 

Operating income

    1,485       548  
                 

Other (expense) income:

               

Interest and financing expense

    (174 )     (5 )

Miscellaneous income (expense)

    82       (53 )

Total other expense

    (92 )     (58 )
                 

Income before income taxes

    1,393       490  

Income tax provision

    319       41  
                 

Net income

    1,074       449  
                 

Net income attributable to non-controlling interest

    (15 )     (24 )
                 

Net income attributable to Ultralife Corporation

    1,059       425  
                 

Other comprehensive (loss) gain:

               

Foreign currency translation adjustments

    (807 )     435  
                 

Comprehensive income attributable to Ultralife Corporation

  $ 252     $ 860  
                 

Net income per share attributable to Ultralife common shareholders – basic

  $ .07     $ .03  
                 

Net income per share attributable to Ultralife common shareholders – diluted

  $ .07     $ .03  
                 

Weighted average shares outstanding – basic

    15,875       15,740  

Potential common shares

    212       485  

Weighted average shares outstanding - diluted

    16,087       16,225  

 

4

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars In Thousands)

(Unaudited)

 

   

Three-month period ended

 
   

March 31,

2020

   

March 31,

2019

 

OPERATING ACTIVITIES:

               

Net income

  $ 1,074     $ 449  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

               

Depreciation

    579       447  

Amortization of intangible assets

    149       92  

Amortization of financing fees

    12       9  

Stock-based compensation

    230       185  

Deferred income taxes

    242       (5 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (5,764 )     2,076  

Inventories

    596       (4,963 )

Prepaid expenses and other assets

    604       (1 )

Accounts payable and other liabilities

    1,913       1,166  

Net cash used in operating activities

    (365 )     (545 )
                 

INVESTING ACTIVITIES:

               

Purchases of property, plant and equipment

    (565 )     (2,581 )

Proceeds from sale of equipment

    120       -  

Net cash used in investing activities

    (445 )     (2,581 )
                 

FINANCING ACTIVITIES:

               

Payment of credit facilities

    (343 )     -  

Proceeds from exercise of stock options

    29       356  

Tax withholdings on stock-based awards

    (8 )     (8 )

Repurchase of common stock

    -       (1,957 )

Net cash used in financing activities

    (322 )     (1,609 )
                 

Effect of exchange rate changes on cash

    (164 )     41  
                 

DECREASE IN CASH

    (1,296 )     (4,694 )
                 

Cash, Beginning of period

    7,405       25,934  

Cash, End of period

  $ 6,109     $ 21,240  

 

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

 

5

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In Thousands except share amounts)

(Unaudited)

 

                   

Capital

   

Accumulated

                                 
   

Common Stock

   

in Excess

   

Other

                   

Non-

         
   

Number of

           

of Par

   

Comprehensive

   

Accumulated

   

Treasury

   

Controlling

         
   

Shares

   

Amount

   

Value

   

Income (Loss)

   

Deficit

   

Stock

   

Interest

   

Total

 
                                                                 

Balance – December 31, 2018

    20,053,335     $ 2,005     $ 182,630     $ (2,786 )   $ (58,035 )   $ (19,266 )   $ (85 )   $ 104,463  

Net income

                                    425               24       449  

Share repurchases

                                            (1,957 )             (1,957 )

Stock option exercises

    75,427       8       348                                       356  

Stock-based compensation – stock options

                    174                                       174  

Stock-based compensation – restricted stock

    5,834               11                                       11  

Tax withholdings on restricted stock

                                            (8 )             (8 )

Foreign currency translation adjustments

                            435                               435  

Balance – March 31, 2019

    20,134,596     $ 2,013     $ 183,163     $ (2,351 )   $ (57,610 )   $ (21,231 )   $ (61 )   $ 103,923  
                                                                 
                                                                 

Balance – December 31, 2019

    20,268,050     $ 2,026     $ 184,292     $ (2,531 )   $ (52,830 )   $ (21,231 )   $ 24     $ 109,750  

Net income

                                    1,059               15       1,074  

Stock option exercises

    7,633       1       28                                       29  

Stock-based compensation – stock options

                    192                                       192  

Stock-based compensation – restricted stock

    5,833               38                                       38  

Tax withholdings on restricted stock

            1                               (8 )             (7 )

Foreign currency translation adjustments

                            (807 )                             (807 )

Balance – March 31, 2020

    20,281,516     $ 2,028     $ 184,550     $ (3,338 )   $ (51,771 )   $ (21,239 )   $ 39     $ 110,269  

 

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

 

6

 

ULTRALIFE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In 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”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2019.

 

The December 31, 2019 consolidated balance sheet information 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.

 

Effective 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 was a 4/4/5 week-based cycle for each fiscal quarter. We do not believe this change materially impacts quarterly comparisons.

 

Recently Adopted Accounting Guidance

 

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 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 will not materially impact the Company’s consolidated financial statements.

 

Recent Accounting Guidance Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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 data 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.

 

 
7

 

 

2.     SUBSEQUENT EVENTS

 

CARES Act Paycheck Protection Program Loan

 

On April 14, 2020, the Company entered into a loan agreement with KeyBank National Association (“Lender”) under the terms of which the Lender agreed to make a loan to the Company in an aggregate principal amount of $3,459 (“PPP Loan”) pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP Loan is evidenced by a promissory note containing the terms and conditions for repayment of the PPP Loan.

 

On April 27, 2020, the Company entered into an agreement with the Lender to repay the PPP loan proceeds of $3,459, which were received by the Company on April 16, 2020 and not used, to ensure compliance with the Frequently Asked Questions and revised guidelines issued by the U.S. Department of Treasury and the Small Business Administration on April 23, 2020.

 

 

 

3.     ACQUISITION

 

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

 

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

 

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

 

The aggregate purchase price for the acquisition was funded by the Company through a combination of cash on hand and borrowings under the Credit Facilities (see Note 4).

 

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

 

8

 

The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below. Management is responsible for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered several factors, including reference to an analysis performed under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.

 

Cash

  $ 942  

Accounts receivable

    3,621  

Inventories

    4,685  

Other current assets

    431  

Property, plant and equipment

    9,177  

Goodwill

    6,534  

Customer relationships

    2,522  

Trade name

    1,127  

Accounts payable

    (1,060 )

Other current liabilities

    (778 )

Deferred tax liability, net

    (1,011 )

Net assets acquired

  $ 26,190  

 

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

 

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

 

For the three months ended March 31, 2020, SWE contributed revenue of $5,437 and net income of $271.

 

 

 

4.     CREDIT FACILITY

 

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

 

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

 

Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of March 31, 2020, the Company had $6,791 outstanding principal on the Term Loan Facility, of which $1,467 is included in current portion of long-term debt on the balance sheet, and $10,182 outstanding principal on the Revolving Credit Facility. As of March 31, 2020, total unamortized debt issuance costs of $152 associated with the Amended Credit Agreement are classified as a reduction of long-term debt on the balance sheet.

 

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

 

In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated fixed charge coverage ratio of equal to or greater than 1.15 to 1.0, and a consolidated senior leverage ratio of equal to or less than 2.5 to 1.0, each as defined in the Amended Credit Agreement. The Company was in full compliance with its covenants as of March 31, 2020.

 

9

 

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.

 

 

 

5.     EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-month period ended March 31, 2020, 878,408 stock options and 25,833 restricted stock awards were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 211,286 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended March 31, 2019, 1,052,410 stock options and 11,666 restricted stock awards were included in the calculation of Diluted EPS resulting in 484,843 additional shares in the calculation of fully diluted earnings per share.

 

There were 653,500 and 448,250 outstanding stock options for the three-month periods ended March 31, 2020 and March 31, 2019, respectively, which were not included in EPS as the effect would be anti-dilutive.

 

 

 

6.     SUPPLEMENTAL BALANCE SHEET INFORMATION

 

Fair Value Measurements and Disclosures

 

The fair value of financial instruments approximated their carrying values at March 31, 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:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Cash

  $ 5,862     $ 7,135  

Restricted cash

    247       270  

Total

  $ 6,109     $ 7,405  

 

10

 

As of March 31, 2020 and December 31, 2019, restricted cash included $166 and $188, respectively, relating to a government grant awarded in the People’s Republic of China to fund specified technological research and development initiatives. The grant proceeds are realized to income as a direct offset to expense as the related expenditures are incurred. For the three-month period ended March 31, 2020, grant proceeds of $20 were realized to income. As of March 31, 2020 and December 31, 2019, restricted cash included euro-denominated deposits of $81 and $82, respectively, withheld by the Dutch tax authorities and third-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.

 

Inventories

 

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

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Raw materials

  $ 18,354     $ 18,485  

Work in process

    3,036       2,548  

Finished goods

    7,589       8,726  

Total

  $ 28,979     $ 29,759  

 

Property, Plant and Equipment, Net

 

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

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 

Land

  $ 1,273     $ 1,273  

Buildings and leasehold improvements

    8,096       8,148  

Machinery and equipment

    62,239       62,562  

Furniture and fixtures

    2,105       2,112  

Computer hardware and software

    6,520       6,528  

Construction in process

    5,078       4,730  
      85,311       85,353  

Less: Accumulated depreciation

    (63,272 )     (62,828 )

Property, plant and equipment, net

  $ 22,039     $ 22,525  

 

Depreciation expense for property, plant and equipment was $579 and $447 for the three-month periods ended March 31, 2020 and March 31, 2019, respectively.

 

Goodwill

 

The following table summarizes the goodwill activity by segment for the three-month period ended March 31, 2020.

 

   

Battery &

Energy

   

Communications

         
   

Products

   

Systems

   

Total

 

Balance – December 31, 2019

    15,260       11,493       26,753  

Effect of foreign currency translation

    (285 )     -       (285 )

Balance – March 31, 2020

  $ 14,975     $ 11,493     $ 26,468  

 

11

 

Other Intangible Assets, Net

 

The composition of other intangible assets was:

 

   

at March 31, 2020

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,402     $ -     $ 3,402  

Customer relationships

    8,922       4,768       4,154  

Patents and technology

    5,458       4,874       584  

Distributor relationships

    377       377       -  

Trade name

    1,487       222       1,265  

Total

  $ 19,646     $ 10,241     $ 9,405  

 

   

at December 31, 2019

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,403     $ -     $ 3,403  

Customer relationships

    9,080       4,721       4,359  

Patents and technology

    5,521       4,869       652  

Distributor relationships

    377       377       -  

Trade name

    1,511       204       1,307  

Total

  $ 19,892     $ 10,171     $ 9,721  

 

The change in the cost of total intangible assets from December 31, 2019 to March 31, 2020 is a result of the effect of foreign currency translations.

 

Amortization expense for intangible assets was $149 and $92 for the three-month periods ended March 31, 2020 and March 31, 2019, respectively. Amortization included in research and development expenses was $31 and $33 for the three-month periods ended March 31, 2020 and March 31, 2019, respectively. Amortization included in selling, general and administrative expenses was $118 and $59 for the three-month periods ended March 31, 2020 and March 31, 2019, respectively.

 

 

 

7.     STOCK-BASED COMPENSATION

 

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

 

   

Three-month period ended

 
   

March 31,

   

March 31,

 
   

2020

   

2019

 

Stock options

  $ 192     $ 174  

Restricted stock grants

    38       11  

Total

  $ 230     $ 185  

 

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 March 31, 2020, there was $557 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.0 year.

 

12

 

The following table summarizes stock option activity for the three-month period ended March 31, 2020:

 

   

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

    -       -                  

Exercised

    (7,633 )     3.75                  

Forfeited or expired

    (4,751 )     8.12                  

Outstanding at March 31, 2020

    1,529,408     $ 6.89       2.98     $ 478  

Vested and expected to vest at March 31, 2020

    1,438,369     $ 6.80       2.81     $ 478  

Exercisable at March 31, 2020

    1,092,278     $ 6.29       1.89     $ 478  

 

Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended March 31, 2020 and March 31, 2019 was $29 and $356, 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 $107 at March 31, 2020, which is expected to be recognized over a weighted average period of 1.9 years.

 

 

 

8.     INCOME TAXES

 

Our effective tax rate for the three-month periods ended March 31, 2020 and March 31, 2019 was 22.9% and 8.4%, respectively. The period-over-period change was primarily attributable to discrete tax benefits realized on disqualifying dispositions of incentive stock options exercised by employees during the three-month period ended March 31, 2019.

 

As of December 31, 2019, we have domestic net operating loss (“NOL”) carryforwards of $58,400, which expire 2020 thru 2035, and domestic tax credits of $1,907, which expire 2028 thru 2039, available to reduce future taxable income. As of March 31, 2020, Management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.

 

As of March 31, 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 March 31, 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 March 31, 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 March 31, 2020 and December 31, 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 2019 remain subject to examination by the Internal Revenue Service (“IRS”) due to our net operating loss carryforwards. Our U.S. tax matters for the years 2000 through 2019 remain subject to examination by various state and local tax jurisdictions due to our net operating loss carryforwards. Our tax matters for the years 2010 through 2019 remain subject to examination by the respective foreign tax jurisdiction authorities.

 

13

 

 

9.     OPERATING LEASES

 

The Company has operating leases predominantly for operating facilities. As of March 31, 2020, the remaining lease terms on our operating leases range from approximately 1 to 4 years. Renewal options to extend our leases have been exercised. Termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants. In July 2019, the Company entered into a five-year agreement to extend the operating lease term of its Shenzhen facility.

 

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

 

   

Three-month period ended March 31,

 
   

2020

   

2019

 

Operating lease cost

  $ 168     $ 145  

Variable lease cost

    18       21  

Total lease cost

  $ 186     $ 166  

 

Supplemental cash flow information related to leases was as follows:

 

   

Three-month period ended

March 31,

 
   

2020

   

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

               

Operating cash flows from operating leases

  $ 164     $ 150  

Right-of-use assets obtained in exchange for lease liabilities:

  $ -     $ 131  

 

Supplemental balance sheet information related to leases was as follows:

 

   

Balance sheet classification

 

March 31,

2020

   

December 31,

2019

 

Assets:

                   

Operating lease right-of-use asset

 

Other noncurrent assets

  $ 1,685     $ 1,866  
                     

Liabilities:

                   

Current operating lease liability

 

Accrued expenses and other current liabilities

  $ 621     $ 620  

Operating lease liability, net of current portion

 

Other noncurrent liabilities

    1,072       1,247  

Total operating lease liability

      $ 1,693     $ 1,867  
                     

Weighted-average remaining lease term (years)

        3.5       3.7  
                     

Weighted-average discount rate

        4.5 %     4.5 %

 

14

 

Future minimum lease payments as of March 31, 2020 are as follows:

 

Maturity of Operating Lease Liabilities

       

2020

    512  

2021

    461  

2022

    348  

2023

    358  

2024

    179  

Total lease payments

    1,858  

Less: Imputed interest

    (165 )

Present value of remaining lease payments

  $ 1,693  

 

 

 

10.     COMMITMENTS AND CONTINGENCIES

 

a. Purchase Commitments

 

As of March 31, 2020, we have made commitments to purchase approximately $1,253 of production machinery and equipment.

 

b. Product Warranties

 

We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in our product warranty liability during the first three months of 2020 and 2019 were as follows:

 

   

Three-month period ended March 31,

 
   

2020

   

2019

 

Accrued warranty obligations – beginning

  $ 195     $ 95  

Accruals for warranties issued

    27       5  

Settlements made

    (12 )     (5 )

Accrued warranty obligations – ending

  $ 210     $ 95  

 

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. We are not aware of any such situations that are reasonably possible at this time.

 

 

 

11.     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 three-month periods ended March 31, 2020 and 2019 were not material.  Deferred revenue, unbilled revenue and deferred contract costs recorded on our consolidated balance sheets as of March 31, 2020 and December 31, 2019 were not material.  As of March 31, 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 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.

 

 

15

 

 

12.     BUSINESS SEGMENT INFORMATION

 

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

 

The components of segment performance were as follows:

 

Three-month period ended March 31, 2020:

 

   

Battery & Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

  $ 20,761     $ 5,053     $ -     $ 25,814  

Segment contribution

    5,316       2,018       (5,849 )     1,485  

Other expense

                    (92 )     (92 )

Tax provision

                    (319 )     (319 )

Non-controlling interest

                    (15 )     (15 )

Net income attributable to Ultralife

                          $ 1,059  

 

Three-month period ended March 31, 2019:

 

   

Battery & Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

  $ 15,998     $ 2,884     $ -     $ 18,882  

Segment contribution

    4,410       674       (4,536 )     548  

Other income

                    (58 )     (58 )

Tax provision

                    (41 )     (41 )

Non-controlling interest

                    (24 )     (24 )

Net income attributable to Ultralife

                          $ 425  

 

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

 

Commercial and Government/Defense Revenue Information: 

 

Three-month period ended March 31, 2020:

 

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 20,761     $ 14,802     $ 5,959  

Communications Systems

    5,053       -       5,053  

Total

  $ 25,814     $ 14,802     $ 11,012  
              57 %     43 %

 

Three-month period ended March 31, 2019:

 

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 15,998     $ 10,010     $ 5,988  

Communications Systems

    2,884       -       2,884  

Total

  $ 18,882     $ 10,010     $ 8,872  
              53 %     47 %

 

16

 

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

 

Three-month period ended March 31, 2020:

 

Total

Revenue

   

United States

   

Non-United States

 

Battery & Energy Products

  $ 20,761     $ 11,284     $ 9,477  

Communications Systems

    5,053       4,354       699  

Total

  $ 25,814     $ 15,638     $ 10,176  
              61 %     39 %

 

Three-month period ended March 31, 2019:

 

Total

Revenue

   

United States

   

Non-United States

 

Battery & Energy Products

  $ 15,998     $ 7,567     $ 8,431  

Communications Systems

    2,884       2,454       430  

Total

  $ 18,882     $ 10,021     $ 8,861  
              53 %     47 %

 

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

 

17

 

 

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, the effects of the novel coronavirus disease of 2019 (COVID-19); our reliance on certain key customers; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our 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; 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 customers’ demand falling short of volume expectations in our supply agreements; possible impairments of our goodwill and other intangible assets; negative publicity of Lithium-ion batteries; our exposure to foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; our ability to utilize our net operating loss carryforwards; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “estimate,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 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.

 

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, 2019 to reflect new information or risks, future events or other developments.

 

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

 

18

 

General

 

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

 

We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTITM, ABLETM, ACCUTRONICS™, ACCUPRO™, ENTELLION™, SWE Southwest Electronic Energy Group™, SWE DRILL-DATA™, and 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: Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance.  As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. See Note 12 in the Notes to Consolidated Financial Statements 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 novel coronavirus disease of 2019 (COVID-19) 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 and 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. 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 estimate the effects of COVID-19 adversely impacted net income by approximately $500.

 

Refer to Item 1A “Risk Factors” in Part II of this Form 10-Q for risks and uncertainties related to COVID-19.

 

19

 

Overview

 

Consolidated revenues of $25,814 for the three-month period ended March 31, 2020, increased by $6,932 or 36.7%, over $18,882 during the three-month period ended March 31, 2019, reflecting the revenues of SWE, which was acquired by the Company on May 1, 2019, and higher Communications Systems sales primarily due to shipments of vehicle amplifier-adaptor systems to support the U.S. Army’s Network Modernization initiatives under the delivery orders announced in October 2018. 

 

Gross profit was $7,334, or 28.4% of revenue, compared to $5,084, or 26.9% of revenue, for the same quarter a year ago.  The 150-basis point improvement resulted from efficiencies in the transition of vehicle amplifier-adaptor systems for the U.S. Army to higher volume production partially offset by the impact of an approximately one-month shutdown of our China operation as mandated by the Chinese government in response to COVID-19.  

 

Operating expenses increased to $5,849 during the three-month period ended March 31, 2020, compared to $4,536 during the three-month period ended March 31, 2019.  The increase of $1,313 or 28.9% was attributable to $1,180 of operating expenses incurred by SWE during the 2020 period, and a $122 or 11.8% increase in core engineering and technology expenses for new product development and testing.  Operating expenses as a percentage of sales decreased 130 basis points from 24.0% for the first quarter of 2019 to 22.7% for the current quarter. 

 

Operating income for the three-month period ended March 31, 2020 was $1,485 or 5.7% of revenues compared to $548 or 2.9% of revenues for the year-earlier period. The 170.5% increase in operating income primarily resulted from higher sales in our Communications Systems business and profitability for SWE.

 

Net income attributable to Ultralife was $1,059, or $0.07 per share – basic and diluted, for the three-month period ended March 31, 2020, compared to $425, or $0.03 per share – basic and diluted, for the three-month period ended March 31, 2019.  Adjusted EPS was $0.08 on a diluted basis for the first quarter of 2020, representing a 212.4% increase over Adjusted EPS on a diluted basis of $0.03 for the 2019 period.  Adjusted EPS excludes the provision for deferred income taxes which primarily represents non-cash charges (benefits) of $242 and ($5) 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.  See the section “Adjusted EPS” on Page 23 for a reconciliation of Adjusted EPS to EPS.

 

Adjusted EBITDA, defined as net income attributable to Ultralife before net interest expense, provision 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 $2,522 or 9.8% of revenues in the first quarter of 2020 compared to $1,204 or 6.4% of revenues for the first quarter of 2019. See the section “Adjusted EBITDA” on Page 22 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

With a backlog increasing approximately 20% over year-end 2019 to over $50 million, ample liquidity, end-market diversity and tight control over discretionary spending, we are well positioned to both sustain operations and continue investing in growth initiatives.

 

20

 

Three-Month Periods Ended March 31, 2020 and March 31, 2019

 

Revenues. Consolidated revenues for the three-month period ended March 31, 2020 amounted to $25,814, an increase of $6,932 or 36.7%, over $18,882 for the three-month period ended March 31, 2019. Overall, commercial sales increased 47.9% while government/defense sales increased 24.1% from the 2019 period. Revenues for the 2020 period include revenues of SWE which was acquired by the Company on May 1, 2019.

 

Battery & Energy Products revenues increased $4,763, or 29.8%, from $15,998 for the three-month period ended March 31, 2019 to $20,761 for the three-month period ended March 31, 2020.  The increase was attributable to the $5,437 revenue of SWE partially offset by a $674 or 4.2% reduction in core sales due primarily to an approximately one-month shutdown of our China operation and supply chain disruptions resulting from COVID-19. 

 

Communications Systems revenues increased $2,169, or 75.2%, from $2,884 during the three-month period ended March 31, 2019 to $5,053 for the three-month period ended March 31, 2020. This increase is primarily attributable to higher shipments of vehicle amplifier-adaptor systems to support the U.S. Army’s Network Modernization initiatives under the delivery orders announced in October 2018.

 

Cost of Products Sold / Gross Profit.  Cost of products sold totaled $18,480 for the quarter ended March 31, 2020, an increase of $4,682, or 33.9%, from the $13,798 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 73.1% for the three-month period ended March 31, 2019 to 71.6% for the three-month period ended March 31, 2020. Correspondingly, consolidated gross margin increased from 26.9% for the three-month period ended March 31, 2019, to 28.4% for the three-month period ended March 31, 2020, primarily reflecting efficiencies in the transition of vehicle amplifier-adaptor systems for the U.S. Army to higher volume production and favorable sales mix for our Communications Systems business.  This increase was partially offset by the impact of an approximately one-month shutdown of our China operation as mandated by the Chinese government in response to COVID-19. 

 

For our Battery & Energy Products segment, gross profit for the first quarter of 2020 was $5,316, an increase of $906 or 20.5% from gross profit of $4,410 for the first quarter of 2019. Battery & Energy Products’ gross margin of 25.6% decreased by 200 basis points from the 27.6% gross margin for the year-earlier period, reflecting the temporary shutdown of our China operation in response to COVID-19, as well as the transitioning of new products to higher volume production. 

 

For our Communications Systems segment, gross profit for the first quarter of 2020 was $2,018 or 39.9% of revenues, an increase of $1,344 or 199.4%, from gross profit of $674, or 23.4% of revenues, for the first quarter of 2019. The 1,650-basis point increase in gross margin during 2020 is driven by the transition of vehicle amplifier-adaptor systems for the U.S. Army to higher volume production and favorable sales mix.

 

Operating Expenses. Operating expenses for the three-month period ended March 31, 2020 were $5,849, an increase of $1,313 or 28.9% over the $4,536 for the three-month period ended March 31, 2019. The increase is attributable to $1,180 of operating expense incurred by SWE during the 2020 period, and a $122 or 11.8% increase in core engineering and technology expenses for new product development and testing.  Operating expenses as a percentage of sales decreased 130 basis points from 24.0% for the first quarter of 2019 to 22.7% for the 2020 first quarter. 

 

Overall, operating expenses as a percentage of revenues were 22.7% for the quarter ended March 31, 2020 compared to 24.0% for the quarter ended March 31, 2019. Amortization expense associated with intangible assets related to our acquisitions was $149 for the first quarter of 2020 ($117 in selling, general and administrative expenses and $32 in research and development costs), including $61 for SWE ($61 in selling, general and administrative expenses), compared with $92 for the first quarter of 2019 ($59 in selling, general, and administrative expenses and $33 in research and development costs). Research and development costs were $1,548 for the three-month period ended March 31, 2020, an increase of $512 or 49.4%, from $1,036 for the three-months ended March 31, 2019. The increase is attributable to $390 of research and development costs incurred by SWE and a $122 increase in core business investments for new product development and testing. Selling, general, and administrative expenses increased $801 or 22.9%, to $4,301 for the first quarter of 2020 from $3,500 for the first quarter of 2019. The increase is primarily attributable to the acquisition of SWE which contributed $790 of direct costs, including intangible asset amortization of $61, for the first quarter of 2020.

 

21

 

Other Expense. Other expense totaled $92 for the three-month period ended March 31, 2020 compared to $58 for the three-month period ended March 31, 2019. Interest and financing expense, net of interest income, increased $169, from $5 for the first quarter of 2019 to $174 for the comparable period in 2020. The increase is due primarily to the financing for the SWE acquisition. Miscellaneous income amounted to $82 for the first quarter of 2020 compared with miscellaneous expense of $53 for the first quarter of 2019, primarily representing foreign currency gains and losses, respectively, realized on the translation of U.S.-denominated transactions and balances of Accutronics (U.K.). The gains realized in the first quarter of 2020 were attributable to the strengthening of the U.S dollar to the Pound Sterling by 6.2% (from the beginning to the end of the quarter), versus losses realized in the year-earlier period due to a 2.4% weakening of the U.S dollar to the Pound Sterling.

 

Income Taxes. The tax provision for the 2020 first quarter was $319 compared to $41 for the first quarter of 2019. Our effective tax rate increased to 22.9% for the first quarter of 2020 as compared to 8.4% for the first quarter of 2019, primarily due to discrete tax benefits realized on disqualifying dispositions of incentive stock options exercised by employees during the three-month period ended March 31, 2019. The income tax provision for the first quarter of 2020 is comprised of a $77 current provision for taxes expected to be paid on income from our foreign operations, representing a cash-based effective tax rate of 5.5%, and a non-cash $242 deferred provision for taxes to be fully offset by deferred tax assets including past U.S. net operating losses and tax credit carryforwards which we expect to carryforward to offset U.S. income taxes for the foreseeable future. See Note 8 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 was $1,059, or $0.07 per share – basic and diluted, for the three-month period ended March 31, 2020, compared to $425, or $0.03 per share – basic and diluted, for the three-month period ended March 31, 2019. Adjusted EPS was $0.08 on a diluted basis for the first quarter of 2020, representing a 212.4% increase over Adjusted EPS on a diluted basis of $0.03 for the 2019 period. Adjusted EPS excludes the provision for deferred income taxes which represents non-cash charges (benefits) of $242 and ($5) 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. See the section “Adjusted EPS” on Page 23 for a reconciliation of Adjusted EPS to EPS. Average weighted common shares outstanding used to compute diluted earnings per share decreased from 16,224,790 in the first quarter of 2019 to 16,086,744 in the first quarter of 2020. The decrease in 2020 is attributable to stock option exercises since the first quarter of 2019 and a decrease in the weighted average stock price used to compute diluted shares from $9.40 for the first quarter of 2019 to $6.71 for the first quarter 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. We define Adjusted EBITDA as net income attributable to Ultralife before interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ understanding of operating performance 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 amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and 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 GAAP.

 

22

 

We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with GAAP financial measures such as operating income. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our 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 presenting 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 GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with 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 GAAP. Some of these limitations include, but are not limited to, the following:

 

 

Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business;

 

 

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements;

 

 

While stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and

 

 

Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only on a supplemental basis. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

Adjusted EBITDA is calculated as follows for the periods presented:

 

   

Three-month period

ended

 
   

March 31,

   

March 31,

 
   

2020

   

2019

 
                 

Net income attributable to Ultralife

  $ 1,059     $ 425  

Add:

               

Interest expense

    174       5  

Income tax provision

    319       41  

Depreciation expense

    579       447  

Amortization of intangible assets and financing fees

    161       101  

Stock-based compensation expense

    230       185  

Adjusted EBITDA

  $ 2,522     $ 1,204  

 

Adjusted EPS

 

In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance in addition to GAAP financial measures. We define Adjusted EPS as net income attributable to Ultralife Corporation excluding the provision for deferred taxes, divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that will be offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under 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.

 

23

 

Adjusted EPS is calculated as follows for the periods presented:

 

   

Three-month period ended

 
   

March 31, 2020

   

March 31, 2019

 
   

Amount

   

Per Basic Share

   

Per Diluted Share

   

Amount

   

Per Basic Share

   

Per Diluted Share

 

Net income attributable to Ultralife Corporation

  $ 1,059     $ .07     $ .07     $ 425     $ .03     $ .03  

Deferred tax provision

    242       .01       .01       (5 )     -       -  

Adjusted net income attributable to Ultralife Corporation

  $ 1,301     $ .08     $ .08     $ 420     $ .03     $ .03  
                                                 

Weighted average shares outstanding

            15,875       16,087               15,740       16,225  

 

Liquidity and Capital Resources

 

As of March 31, 2020, cash totaled $6,109, a decrease of $1,296 as compared to $7,405 of cash held at December 31, 2019, primarily driven by an increase in accounts receivable due to the timing of shipments and collections, and strategic capital investments for our Battery & Energy Products business.

 

During the three-month period ended March 31, 2020, net cash of $365 was used in operations, driven by a $5,764 increase in accounts receivable primarily relating to the timing of collections attributable to the large government and defense program awards announced in October 2018 for our Communications Systems business.  Cash used in operations was largely offset by net income of $1,074, non-cash expenses (depreciation, amortization, stock-based compensation and deferred taxes) totaling $1,212, and a decrease in other working capital of $3,113 primarily driven by an increase in accounts payable. 

 

Cash used in investing activities for the three months ended March 31, 2020 was $445, which included $565 for capital expenditures primarily for investment in automation equipment for our Battery & Energy Products business, including 3-Volt cell and thionyl chloride cell production.

 

Net cash used by financing activities for the three-months ended March 31, 2020 was $322, consisting of $343 of principle payments against our term loan used to fund the acquisition of SWE partially offset primarily by stock option exercise proceeds of $29.

 

As of March 31, 2020, the Company has significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 8 in the Notes to Consolidated Financial Statements of this Form 10-Q for additional information.

 

As of March 31, 2020, we had made commitments to purchase approximately $1,253 of production machinery and equipment globally. We are also investing approximately $1 million in the second quarter 2020 for additional test equipment to meet the increased demand for our power supplies for ventilators, respirators and infusion pumps. 

 

While the COVID-19 pandemic poses a high level of uncertainty, Management expects that cash flow generated from future operations, the collection of accounts receivable for the large government and defense award shipments relating to our Communications Systems business and the remaining availability under our Revolving Credit Facility will be sufficient to meet our general funding requirements and capital investments for the foreseeable future.

 

24

 

Debt Commitments

 

On May 1, 2019, in connection with financing the SWE acquisition (see Note 4 to the Notes to Consolidated Financial Statements 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 March 31, 2020, the Company had $6,791 outstanding principal on the Term Loan Facility, of which $1,467 is included in current portion of long-term debt on the balance sheet, and $10,182 outstanding principal on the Revolving Credit Facility. As of March 31, 2020, the Company is in full compliance with all covenants under the Credit Facilities.

 

Critical Accounting Policies

 

Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with U.S. GAAP, but they also reflect management’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 2019 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 quarter of 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.

 

 

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.

 

25

 

PART II.     OTHER INFORMATION

 

Item 1A. Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

Investors should carefully consider the risk factor set forth below in addition to the risk factors described in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for 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.

 

Our business, operating results and financial condition may be adversely impacted by COVID-19.

 

The novel coronavirus disease of 2019 (COVID-19) has created significant economic disruption and uncertainty around the world.  COVID-19 adversely impacted our operating results in the first quarter of 2020 primarily as a result of an approximately one-month closure of our China facility as mandated by the China government and supply chain disruptions.  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, 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.  While we continue to closely monitor the developments surrounding COVID-19 and take actions to mitigate the business risks involved, the potential effects of COVID-19 on our business, alone or taken together, pose material risk to our future operating results and financial condition.

 

 

26

 

Item 6.     Exhibits

 

Exhibit

Index

 

 

Exhibit Description

 

 

Incorporated by Reference from

31.1

 

Rule 13a-14(a) / 15d-14(a) CEO Certifications

 

Filed herewith

31.2

 

Rule 13a-14(a) / 15d-14(a) CFO Certifications

 

Filed herewith

32

 

Section 1350 Certifications

 

Filed herewith

101.INS

 

XBRL Instance Document

   

101.SCH

 

XBRL Taxonomy Extension Schema Document

   

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

   

101.LAB

 

XBRL Taxonomy Label Linkbase Document

   

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

   

101.DEF

 

XBRL Taxonomy Definition Document

   

 

27

 

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: April 30, 2020

By: /s/ Michael D. Popielec                               

 
   

Michael D. Popielec

 
   

President and Chief Executive Officer

 
   

(Principal Executive Officer)

 
       
 

Date: April 30, 2020

By: /s/ Philip A. Fain                                         

 
   

Philip A. Fain

 
   

Chief Financial Officer and Treasurer

 
   

(Principal Financial Officer and

 
   

    Principal Accounting Officer)

 

 

 

28

 

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 Financial 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

 

32

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Calculation Linkbase Document

 

101.LAB

XBRL Taxonomy Label Linkbase Document

 

101.PRE

XBRL Taxonomy Presentation Linkbase Document

 

101.DEF

XBRL Taxonomy Definition Document

 

 

29
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