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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)                     

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

 

For the quarterly period ended September 30, 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 October 26, 2020, the registrant had 15,928,055 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 September 30, 2020 and December 31, 2019 

3

     
 

Consolidated Statements of Income and Comprehensive Income for the Three and Nine-Month Periods Ended September 30, 2020 and September 29, 2019

4

     
 

Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2020 and September 29, 2019

5

     
 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine-Month Periods Ended September 30, 2020 and September 29, 2019

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

30

     

PART II.

OTHER INFORMATION

 
     

Item 1A.

Risk Factors

31

     

Item 6.

Exhibits

32

     
 

Signatures

33

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands except share amounts)

(Unaudited)

 

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 
ASSETS  

Current assets:

               

Cash

  $ 13,777     $ 7,405  

Trade accounts receivable, net of allowance for doubtful accounts of $303 and $324, respectively

    15,012       30,106  

Inventories, net

    29,746       29,759  

Prepaid expenses and other current assets

    3,661       3,103  

Total current assets

    62,196       70,373  

Property, plant and equipment, net

    22,605       22,525  

Goodwill

    26,705       26,753  

Other intangible assets, net

    9,212       9,721  

Deferred income taxes, net

    12,425       13,222  

Other noncurrent assets

    2,411       1,963  

Total Assets

  $ 135,554     $ 144,557  
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current Liabilities:

               

Accounts payable

  $ 8,875     $ 9,388  

Current portion of long-term debt

    1,537       1,372  

Accrued compensation and related benefits

    1,258       1,655  

Accrued expenses and other current liabilities

    5,702       4,775  

Total current liabilities

    17,372       17,190  

Long-term debt

    2,190       15,780  

Deferred income taxes

    480       559  

Other noncurrent liabilities

    1,675       1,278  

Total liabilities

    21,717       34,807  
                 

Commitments and contingencies (Note 9)

                 
                 

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 – 20,331,348 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

    185,261       184,292  

Accumulated deficit

    (49,706 )     (52,830 )

Accumulated other comprehensive loss

    (2,619 )     (2,531 )

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

    113,723       109,726  

Non-controlling interest

    114       24  

Total shareholders’ equity

    113,837       109,750  
                 

Total liabilities and shareholders' equity

  $ 135,554     $ 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

   

Nine-month period ended

 
   

September 30,

2020

   

September 29,

2019

   

September 30,

2020

   

September 29,

2019

 
                                 

Revenues

  $ 24,362     $ 27,493     $ 78,736     $ 75,772  

Cost of products sold

    17,851       19,632       56,928       53,962  

Gross profit

    6,511       7,861       21,808       21,810  
                                 

Operating expenses:

                               

Research and development

    1,606       2,029       4,429       4,652  

Selling, general and administrative

    4,198       4,526       12,893       12,262  

Total operating expenses

    5,804       6,555       17,322       16,914  
                                 

Operating income

    707       1,306       4,486       4,896  
                                 

Other expense (income):

                               

Interest and financing expense

    92       220       372       339  

Miscellaneous income

    (39 )     (60 )     (110 )     (38 )

Total other expense

    53       160       262       301  
                                 

Income before income tax provision

    654       1,146       4,224       4,595  

Income tax provision

    192       225       1,010       942  
                                 

Net income

    462       921       3,214       3,653  
                                 

Net income attributable to non-controlling interest

    55       23       90       74  
                                 

Net income attributable to Ultralife Corporation

    407       898       3,124       3,579  
                                 

Other comprehensive gain (loss):

                               

Foreign currency translation adjustments

    677       (668 )     (88 )     (685 )
                                 

Comprehensive income attributable to Ultralife Corporation

  $ 1,084     $ 230     $ 3,036     $ 2,894  
                                 

Net income per share attributable to Ultralife common shareholders – basic

  $ .03     $ .06     $ .20     $ .23  
                                 

Net income per share attributable to Ultralife common shareholders – diluted

  $ .03     $ .06     $ .19     $ .22  
                                 

Weighted average shares outstanding – basic

    15,908       15,785       15,889       15,756  

Potential common shares

    181       377       214       382  

Weighted average shares outstanding - diluted

    16,089       16,162       16,103       16,138  

 

 

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

 

4

 

 

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       -  

Purchase of SWE, net of cash acquired

    -       (25,248 )

Net cash used in investing activities

    (1,782 )     (30,094 )
                 

FINANCING ACTIVITIES:

               

Proceeds from Paycheck Protection Program loan

    3,459       -  

Repayment of Paycheck Protection Program loan

    (3,459 )     -  

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

    -       8,000  

Repurchase of common stock

    -       (1,957 )

Payment of debt issuance costs

    -       (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.

 

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

                                    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

                                    3,124               90       3,214  

Stock option exercises

    50,797       5       213                                       218  

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

                    18                                       18  

Foreign currency translation adjustments

                            677                               677  

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.

 

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 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-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 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 & gas exploration and production, and subsea electrification markets, which were 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.

 

7

 

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 Benckenstein, an individual (the “Shareholder”). The Stock Purchase Agreement contains customary terms and conditions including representations, warranties and indemnification provisions.

 

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

 

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

 

The allocation of 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.

 

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 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.

 

8

 

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

 

The supplemental pro forma results are presented for informational purposes only and should not be considered indicative of the financial position or results of operations had the acquisition been completed as of the dates indicated and does not purport to indicate the future combined financial position or results of operation.

 

Set forth below are the unaudited supplemental pro forma results of the Company and SWE for the nine-month periods ended September 30, 2020 and September 29, 2019 as if the acquisition had occurred as of January 1, 2018.

 

   

Nine months ended

   

September 30,

2020

 

September 29,

2019

Revenue

  $ 78,736       $ 84,567    

Operating income

  $ 4,486         5,536    

Net income attributable to Ultralife Corporation

  $ 3,124         3,900    

Net income per share attributable to Ultralife Corporation:

                   

Basic

  $ .20       $ .25    

Diluted

  $ .19       $ .24    

 

 

 

3.     DEBT

 

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 “Credit Agreement”, and together with the First Amendment Agreement, the “Amended Credit Agreement”).

 

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

 

Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of September 30, 2020, the Company had $3,855 outstanding principal on the Term Loan Facility, of which $1,537 is included in current portion of long-term debt on the balance sheet, and no amounts outstanding on the Revolving Credit Facility. As of September 30, 2020, total unamortized debt issuance costs of $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) 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 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.

 

9

 

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.     EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period.  Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method.  For the three-month period ended September 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 diluted EPS resulting in 377,200 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended September 30, 2020 and September 29, 2019, 831,244   and 914,535 stock options and 19,165 and 31,666 restricted stock awards, respectively, were included in the calculation of diluted EPS as such securities are dilutive.  Inclusion of these securities resulted in 213,574 and 382,711 additional shares, respectively, in the calculation of fully diluted earnings per share. 

 

There were 898,167 and 703,250 outstanding stock options for the three-month periods ended September 30, 2020 and September 29, 2019, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 898,167 and 703,250 outstanding stock options for the nine-month periods ended September 30, 2020 and September 29, 2019, respectively, which were not included in EPS as the effect would be anti-dilutive.

 

 

 

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 30,

   

December 31,

 
   

2020

   

2019

 

Cash

  $ 13,690     $ 7,135  

Restricted cash

    87       270  

Total

  $ 13,777     $ 7,405  

 

As of September 30, 2020 and December 31, 2019, restricted cash included $87 and $82, respectively, of 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 as a direct offset to qualifying expenditures as incurred. For the nine-month period ended September 30, 2020, grant proceeds of $188 were used to fund qualifying capital expenditures and material and labor costs incurred. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.

 

10

 

Inventories

 

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

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Raw materials

  $ 17,600     $ 18,485  

Work in process

    3,861       2,548  

Finished goods

    8,285       8,726  

Total

  $ 29,746     $ 29,759  

 

Property, Plant and Equipment, Net

 

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

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Land

  $ 1,273     $ 1,273  

Buildings and leasehold improvements

    15,365       15,386  

Machinery and equipment

    55,869       55,058  

Furniture and fixtures

    2,219       2,194  

Computer hardware and software

    6,812       6,712  

Construction in process

    5,622       4,730  
      87,160       85,353  

Less: Accumulated depreciation

    (64,555 )     (62,828 )

Property, plant and equipment, net

  $ 22,605     $ 22,525  

 

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

 

 

   

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 period ended September 30, 2020.

 

   

Battery &

Energy

   

Communications

         
   

Products

   

Systems

   

Total

 

Balance – December 31, 2019

    15,260       11,493       26,753  

Effect of foreign currency translation

    (48 )     -       (48 )

Balance – September 30, 2020

  $ 15,212     $ 11,493     $ 26,705  

 

11

 

Other Intangible Assets, Net

 

The composition of other intangible assets was:

   

September 30, 2020

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,406     $ -     $ 3,406  

Customer relationships

    9,020       4,975       4,045  

Patents and technology

    5,496       4,952       544  

Distributor relationships

    377       377       -  

Trade name

    1,501       284       1,217  

Total

  $ 19,800     $ 10,588     $ 9,212  

 

   

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 September 30, 2020 is a result of the effect of foreign currency translations.

 

Amortization expense for other intangible assets was as follows:

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

   

September 29,

   

September 30,

   

September 29,

 
   

2020

   

2019

   

2020

   

2019

 

Amortization included in:

                               

Research and development

  $ 31     $ 32     $ 92     $ 98  

Selling, general and administrative

    118       116       352       274  

Total amortization expense

  $ 149     $ 148     $ 444     $ 372  

 

12

 
 

6.     STOCK-BASED COMPENSATION

 

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

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

   

September 29,

   

September 30,

   

September 29,

 
   

2020

   

2019

   

2020

   

2019

 

Stock options

  $ 204     $ 117     $ 674     $ 433  

Restricted stock grants

    18       42       82       86  

Total

  $ 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 30, 2020, there was $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-month period ended September 30, 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

    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 30, 2020:

 

Risk-Free Interest Rate

    0.4 %

Volatility Factor

    49 %

Weighted Average Expected Life (Years)

    5.3  

Dividends

    0.0 %

 

The weighted average grant date fair value of options granted during the nine months ended September 30, 2020 was $2.78.

 

Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended September 30, 2020 and September 29, 2019 was $142 and $388, respectively. Cash received from stock option exercises under our stock-based compensation plans for the nine-month periods ended September 30, 2020 and September 29, 2019 was $218 and $866, 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 $63 at September 30, 2020, which is expected to be recognized over a weighted average period of 1.5 years.

 

13

 
 

7.     INCOME TAXES

 

Our effective tax rate for the nine-month periods ended September 30, 2020 and September 29, 2019 was 23.9% and 20.5% respectively. The period-over-period change was primarily attributable to the geographic mix of earnings and lower discrete tax benefits realized on disqualifying dispositions of incentive stock options exercised by employees as compared to the prior period.

 

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 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 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 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 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 30, 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.  In August 2020, the Internal Revenue Service (“IRS”) 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 remaining 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. Our tax matters for the years 2010 through 2019 remain subject to examination by the respective foreign tax jurisdiction authorities.

 

 

 

8.     OPERATING LEASES

 

The Company has operating leases predominantly for operating facilities. As of September 30, 2020, the remaining lease terms on our operating leases range from approximately 1 to 4 years. Renewal options and termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.

 

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

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2020

   

September 29, 2019

   

September 30, 2020

   

September 29, 2019

 

Operating lease cost

  $ 172     $ 168     $ 508     $ 459  

Variable lease cost

    18       21       54       63  

Total lease cost

  $ 190     $ 189     $ 562     $ 522  

 

14

 

Supplemental cash flow information related to leases was as follows:

 

   

Nine months ended

 
   

September 30,

2020

   

September 29,

2019

 

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

               

Operating cash flows from operating leases

  $ 506     $ 447  

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

  $ 875     $ 1,586  

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance sheet classification

 

September 30,

2020

   

December 31,

2019

 

Assets:

                 

Operating lease right-of-use asset

Other noncurrent assets

  $ 2,303     $ 1,866  
                   

Liabilities:

                 

Current operating lease liability

Accrued expenses and other current liabilities

  $ 669     $ 620  

Operating lease liability, net of current portion

Other noncurrent liabilities

    1,643       1,247  

Total operating lease liability

  $ 2,312     $ 1,867  
                   

Weighted-average remaining lease term (years)

    3.6       3.7  
                   

Weighted-average discount rate

    4.5 %     4.5 %

 

Future minimum lease payments as of September 30, 2020 are as follows:

 

Maturity of Operating Lease Liabilities

       

2020

    177  

2021

    709  

2022

    680  

2023

    700  

2024

    269  

Total lease payments

    2,535  

Less: Imputed interest

    (223 )

Present value of remaining lease payments

  $ 2,312  

 

In August 2020, the Company entered into an agreement to extend the operating lease term of its Virginia Beach facility through April 2024.  Aggregate future minimum lease payments of $959 are required to be made over the three-year extension period. 

 

15

 
 

9.     COMMITMENTS AND CONTINGENCIES

 

a. Purchase Commitments

 

As of September 30, 2020, we have made commitments to purchase approximately $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 first nine months of 2020 and 2019 were as follows:

 

   

Nine-month period ended

 
   

September 30,

2020

   

September 29,

2019

 

Accrued warranty obligations – beginning

  $ 195     $ 95  

Assumed warranty obligations – SWE

    -       145  

Accruals for warranties issued

    75       152  

Settlements made

    (103 )     (167 )

Accrued warranty obligations – ending

  $ 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. 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.

 

16

 
 

11.     BUSINESS SEGMENT INFORMATION

 

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes Lithium 9-volt, cylindrical and 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 September 30, 2020:

 

   

Battery &
Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

  $ 21,819     $ 2,543     $ -     $ 24,362  

Segment contribution

    5,677       834       (5,804 )     707  

Other expense

                    (53 )     (53 )

Tax provision

                    (192 )     (192 )

Non-controlling interest

                    (55 )     (55 )

Net income attributable to Ultralife

                          $ 407  

 

Three-month period ended September 29, 2019:

 

   

Battery &
Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

  $ 22,578     $ 4,915     $ -     $ 27,493  

Segment contribution

    6,117       1,744       (6,555 )     1,306  

Other expense

                (160 )     (160 )

Tax provision

                    (225 )     (225 )

Non-controlling interest

                    (23 )     (23 )

Net income attributable to Ultralife

                          $ 898  

 

Nine-month period ended September 30, 2020:

 

   

Battery &
Energy Products

   

Communications Systems

   

Corporate

   

Total

 

Revenues

  $ 66,616     $ 12,120     $ -     $ 78,736  

Segment contribution

    17,019       4,789       (17,322 )     4,486  

Other expense

                    (262 )     (262 )

Tax provision

                    (1,010 )     (1,010 )

Non-controlling interest

                    (90 )     (90 )

Net income attributable to Ultralife

                          $ 3,124  

 

17

 

Nine-month period ended September 29, 2019:

 

   

Battery &
Energy Products

   

Communications Systems

   

Corporate

   

Total

 

Revenues

  $ 58,876     $ 16,896     $ -     $ 75,772  

Segment contribution

    16,182       5,628       (16,914 )     4,896  

Other expense

                    (301 )     (301 )

Tax provision

                    (942 )     (942 )

Non-controlling interest

                    (74 )     (74 )

Net income attributable to Ultralife

                          $ 3,579  

 

 

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

 

Commercial and Government/Defense Revenue Information: 

 

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       -       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       -       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       -       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       -       16,896  

Total

  $ 75,772     $ 42,736     $ 33,036  
              56 %     44 %

 

18

 

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

 

Three-month period ended September 30, 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 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 %

 

Nine-month period ended September 30, 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 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.

 

19

 
 

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”) 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 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 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,” “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. 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. 

 

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.

 

20

 

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 11 in the Notes to Consolidated Financial 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.

 

21

 

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, as a significant increase in battery sales to our medical and government/defense customers was offset by lower oil & gas market and Communications Systems sales.  We have estimated that COVID-19 adversely impacted our third quarter 2020 sales by approximately $2,900.

 

Gross profit was $6,511, or 26.7% of revenue, compared to $7,861, or 28.6% of revenue, for the same quarter a year ago. The 190-basis point decrease primarily resulted from costs associated with the transition of new products to higher volume production as well as the mix of products sold in our Communications Systems business.

 

Operating expenses decreased to $5,804 during the three-month period ended September 30, 2020, from $6,555 during the three-month period ended September 29, 2019.  The decrease of $751 or 11.5% was consistent with the overall percentage reduction in revenues, and included certain headcount reductions, lower travel expenses and strict control over all discretionary spending.  Operating expenses as a percentage of revenues was 23.8% for both the 2020 and 2019 periods. 

 

Operating income for the three-month period ended September 30, 2020 was $707 or 2.9% of revenues compared to $1,306 or 4.8% of revenues for the year-earlier period. The 45.9% decrease in operating income primarily resulted from revenue declines in oil & gas and international industrial markets and the overall disruptions in customer/third party logistics impacting both commercial and government/defense markets resulting from COVID-19.

 

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 $1,124, or $0.06 per share – basic and diluted, for the three-month period ended September 29, 2019.  Adjusted EPS was $0.04 on a diluted basis for the third quarter of 2020, representing a 43.8% decrease from Adjusted EPS on a diluted basis of $0.07 for the 2019 period.  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.  The net adverse impact of COVID-19 on Adjusted EPS for the 2020 third quarter was approximately $0.06.

 

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 $1,656 or 6.8% of revenues in the third quarter of 2020 compared to $2,307 or 8.4% of revenues for the third quarter of 2019. See the section “Adjusted EBITDA” beginning on Page 26 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

Supported by a solid balance sheet and resilient business model, we are committed to completing our strategic growth projects and are well positioned to withstand current economic headwinds.

 

Results of Operations

 

Three-Month Periods Ended September 30, 2020 and September 29, 2019

 

Revenues.  Consolidated revenues for the three-month period ended September 30, 2020 amounted to $24,362, a decrease of $3,131 or 11.4%, from $27,493 for the three-month period ended September 29, 2019.  Overall, commercial sales decreased 10.8% while government/defense sales decreased 12.5% from the 2019 period.  For 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 third quarter; however, this increase was more than offset by the 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 decreased $759, or 3.4%, from $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.  This increase was more than offset by a 68.7% decrease in oil & gas market battery sales representative of current market conditions for that sector. 

 

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Communications Systems revenues decreased $2,372, or 48.3%, from $4,915 during the three-month period ended September 29, 2019 to $2,543 for the three-month period ended September 30, 2020. This decrease is primarily attributable to higher 2019 shipments of mounted power amplifiers to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018.  The October 2018 delivery orders to the U.S. Army were completed in the second quarter of 2020. 

 

Cost of Products Sold / Gross Profit. Cost of products sold totaled $17,851 for the quarter ended September 30, 2020, a decrease of $1,781, or 9.1%, from the $19,632 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 71.4% for the three-month period ended September 29, 2019 to 73.3% for the three-month period ended September 30, 2020. Correspondingly, consolidated gross margin decreased from 28.6% for the three-month period ended September 29, 2019, to 26.7% for the three-month period ended September 30, 2020, primarily reflecting sales mix and costs associated with the transition of new products to higher volume production.

 

For our Battery & Energy Products segment, gross profit for the third quarter of 2020 was $5,677, a decrease of $440 or 7.2% from gross profit of $6,117 for the third quarter of 2019. Battery & Energy Products’ gross margin of 26.0% decreased by 110 basis points from the 27.1% gross margin for the year-earlier period, reflecting sales mix and incremental costs associated with the transition of new products to higher volume production.

 

For our Communications Systems segment, gross profit for the third quarter of 2020 was $834 or 32.8% of revenues, a decrease of $910 or 52.2%, from gross profit of 1,744 or 35.5% of revenues, for the third quarter of 2019. The 270-basis point decrease in gross margin during the third quarter of 2020 was driven by sales mix and lower factory throughput as compared to the third quarter of 2019.

 

Operating Expenses. Operating expenses for the three-month period ended September 30, 2020 were $5,804, a decrease of $751 or 11.5% from the $6,555 for the three-month period ended September 29, 2019. The 11.5% decrease in operating expenses, which is relatively consistent with the 11.4% decline in revenues, is attributable to certain headcount reductions, lower travel and strict 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. 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). Research and development costs were $1,606 for the three-month period ended September 30, 2020, a decrease of $423 or 20.8%, from $2,029 for the three-months ended September 29, 2019. The decrease is largely attributable to the timing of new product testing in our Communications Systems business and a realignment of some of the SWE engineering and 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 decreased $328 or 7.2%, to $4,198 for the third quarter of 2020 from $4,526 for the third quarter of 2019. The decrease is primarily attributable to close monitoring of all discretionary spending, headcount reductions and lower travel expenses in response to COVID-19.

 

Other 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. Interest and financing expense, net of interest income, decreased $128, or 58.2%, from $220 for the third quarter of 2019 to $92 for the comparable period in 2020. The decrease is primarily due to the continued reduction of debt incurred in connection with the financing of the SWE acquisition. Miscellaneous income amounted to $39 for the third quarter of 2020 compared with $60 for the third quarter of 2019, primarily due to transactions impacted by foreign currency fluctuations in the U.S. dollar relative to the Pound Sterling and other currencies, and the translation 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.S. dollar to the Pound Sterling by approximately 4% from the beginning to the to the end of the 2020 third quarter compared to the strengthening of the U.S. dollar to the Pound Sterling by approximately 3% for the respective 2019 period.

 

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Income Taxes. The tax provision for the 2020 third quarter was $192 compared to $225 for the third quarter of 2019. Our effective tax rate increased to 29.4% for the third quarter of 2020 as compared to 19.6% for the third quarter of 2019, primarily due to the 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 2020 is comprised of a $4 current provision for taxes expected to be paid on income from our foreign 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 period, 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 7 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.  Adjusted EPS was $0.04 on a diluted basis for the 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 16,162,055 in the third quarter of 2019 to 16,089,170 in the third quarter of 2020.  The decrease in 2020 is attributable to stock option exercises since the third quarter of 2019 and a decrease in the weighted average stock price used to compute diluted shares from $8.73 for the third quarter of 2019 to $6.56 for the second quarter of 2020.

 

 

Nine-Month Periods Ended September 30, 2020 and September 29, 2019

 

Revenues. Consolidated revenues for the nine-month period ended September 30, 2020 amounted to $78,736, an increase of $2,964 or 3.9%, from the $75,772 reported for the nine-month period ended September 29, 2019. Overall, commercial sales increased 9.4% and government/defense sales decreased 3.2% from the nine-month 2019 period.

 

Battery & Energy Products revenues increased $7,740 or 13.1%, from $58,876 for the nine-month period ended September 29, 2019 to $66,616 for the nine-month period ended September 30, 2020. The growth was attributable to a $4,010 or 9.4% increase in commercial sales and a $3,730 or 23.1% increase in government/defense sales.  The commercial growth reflects a $8,730 or 54.1% increase in battery 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 $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 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.

 

Communications Systems revenues decreased $4,776, or 28.3%, from $16,896 during the nine-month period ended September 29, 2019 to $12,120 for the nine-month period ended September 30, 2020. This decrease is primarily attributable to higher 2019 shipments of mounted power amplifiers and vehicle amplifier-adaptor systems to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018, and shipments of Universal Vehicle Adaptors under an indefinite-delivery/indefinite-quantity contract with the Naval Air Warfare Center Aircraft Division announced in June 2019.

 

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Cost of Products Sold / Gross Profit. Cost of products sold totaled $56,928 for the nine-month period ended September 30, 2020, an increase of $2,966 or 5.5%, from the $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 71.2% for the nine-month period ended September 29, 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, due primarily to product mix. The decrease in gross margin for the 2020 period was unfavorably impacted due to incremental costs associated with COVID-19 including an approximately 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 fulfill U.S. Army orders for our Communications Systems business.

 

For our Battery & Energy Products segment, the cost of products sold increased $6,903 or 16.2%, from $42,694 during the nine-month period ended September 29, 2019 to $49,597 during the nine-month period ended September 30, 2020. Battery & Energy Products’ gross profit for the 2020 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, for the 2019 nine-month period. Battery & Energy Products’ gross margin decreased for the nine-month period ended September 30, 2020 by 200 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 Chinese government and supply chain disruptions.

 

For our Communications Systems segment, the cost of products sold decreased by $3,937 or 34.9% from $11,268 during the nine-month period ended September 29, 2019 to $7,331 during the nine-month period ended September 30, 2020. Communications Systems’ gross profit for the first nine months of 2020 was $4,789 or 39.5% of revenues, a decrease of $839 or 14.9% from gross profit of $5,628 or 33.3% of revenues, for the nine-month period ended September 29, 2019. The increase in gross margin was primarily due to improved efficiencies and productivity in the production of vehicle amplifier-adaptor systems to fulfill U.S. Army orders.

 

Operating Expenses.  Total operating expenses for the nine-month period ended September 30, 2020 totaled $17,322, an increase of $408 or 2.4% from the $16,914 for the nine-month period ended September 29, 2019.  The increase is primarily attributable to the inclusion of the expenses of SWE for the full nine months of 2020 as compared to five months of the comparable period in 2019 (SWE acquired May 1, 2019). 

 

Overall, operating expenses as a percentage of revenues were 22.0% for the nine-month period ended September 30, 2020 compared to 22.3% for the comparable 2019 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). Research and development costs were $4,429 for the nine-month period ended September 30, 2020, a decrease of $223 or 4.8% from $4,652 for the nine-months ended September 29, 2019. The decrease reflects the timing of testing of new products and a realignment of some of the SWE engineering and 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 $631 or 5.1%, from $12,262 during the first nine months of 2019 to $12,893 during the first nine months of 2020. The increase is fully attributable to the inclusion of SWE results 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. Interest and financing expense, net of interest income, increased $33 to $372 for the 2020 period from $339 for the comparable period in 2019, as a result of the financing for the SWE acquisition. Miscellaneous income amounted to $110 for the first nine months of 2020 compared with $38 for the first nine months of 2019, 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.  Our effective tax rate increased to 23.9% for the first nine months of 2020 as compared to 20.5% for the first nine months of 2019, primarily due to the geographic mix of earnings and discrete tax benefits realized on disqualifying dispositions of incentive stock options exercised by employees during the nine-month periods.  The income tax provision for the 2020 period is comprised of a $189 current provision for taxes expected to be paid on income from our foreign 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 period, 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 7 in the Notes to Consolidated Financial Statements of this Form 10-Q for additional information regarding our income taxes.

 

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Net Income Attributable to Ultralife.  Net income attributable to Ultralife and net income attributable to Ultralife common shareholders per diluted share was $3,124 and $0.19, respectively, for the nine months ended September 30, 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 16,138,335 for the 2019 period to 16,102,879 for the 2020 period, mainly due to a decrease in the weighted average stock 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. We define Adjusted EBITDA 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. 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 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

 

26

 

We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only 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 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 Earnings 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.  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.

 

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Adjusted EPS is calculated as follows for the periods presented:

 

   

Three-Month Period Ended

 
   

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  

 

   

Nine-Month Period Ended

 
   

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 Corporate

  $ 3,124     $ .20     $ .19     $ 3,579     $ .23     $ .22  

Deferred tax provision

    821       .05       .05       801       .05       .05  

Adjusted net income attributable to Ultralife Corporation

  $ 3,945     $ .25     $ .24     $ 4,380     $ .28     $ .27  
                                                 

Weighted average shares outstanding

            15,889       16,103               15,756       16,138  

 

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Liquidity and Capital Resources

 

As of September 30, 2020, cash totaled $13,777, an increase of $6,372, or 86.0%, as compared to $7,405 of cash held as of December 31, 2019. The increase was attributable to cash generated from operations, including the collection of accounts receivable, partially offset by the paydown of our debt and strategic capital investments primarily for our Battery & Energy Products business.

 

During the nine-month period ended September 30, 2020, operating activities provided cash of $21,491, consisting of net income of $3,214, a decrease in accounts receivable of $15,094 due primarily to a high level of collections, and non-cash expenses (depreciation, amortization and stock-based compensation) and deferred taxes totaling $3,800, partially offset by a net decrease in accounts payable and other working capital of $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 30, 2020 was $1,782, which was largely attributable to capital expenditures of $1,902 primarily reflecting strategic investments for our Battery & Energy Products business.

 

Net cash used in financing activities for the nine months ended September 30, 2020 was $13,258, primarily consisting of payments totaling $10,182 against our Revolving Credit Facility and $3,279 of principle payments on our Term Loan Facility, including an advance payment of $2,200, partially offset primarily by stock option exercise proceeds of $218.

 

As of September 30, 2020, the Company has significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 7 in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for additional information.

 

As of September 30, 2020, we had made commitments to purchase approximately $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 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 30, 2020, the Company had $3,855 outstanding principal on the Term Loan Facility, of which $1,537 is included in current portion of long-term debt on the balance sheet, and no amounts outstanding on the Revolving Credit Facility. As of September 30, 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 nine months 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.

 

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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.

 

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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 during the first nine months of 2020 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 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.