UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended Septemberquarterly period ended June 30, 20182019
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
☐ | 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 0-27460file number: 0-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of 2000 Technology Parkway Newark, New York 14513 (Address of principal executive offices) (Zip Code) | 16-1387013 (I.R.S. Employer Identification No.) |
(315) 332-7100 ( |
|
None
Registrant’s telephone number, including area code: (315) 332-7100(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 [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| Accelerated filer☒ |
| ||
Non-accelerated filer |
| Smaller reporting company☒ |
|
| |
Emerging |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]Yes☐ No [ X ]☒
TheAPPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐ Not applicable
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, was 15,956,677, net of 4,019,711 treasury shares, as of October 31, 2018.the latest practicable date.
As of July 30, 2019, the registrant had 15,762,574 shares of common stock outstanding.
ULTRALIFE CORPORATION AND SUBSIDIARIES
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION | |
| Consolidated Financial Statements (unaudited): | |
Consolidated Balance Sheets as of | 3 | |
Consolidated Statements of Income and Comprehensive Income | 4 | |
Consolidated Statements of Cash Flows | 5 | |
Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six-Month Periods Ended June 30, 2019 and July 1, 2018 | 6 | |
Notes to Consolidated Financial Statements |
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| 20 |
| Controls and Procedures |
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PART II. | OTHER INFORMATION | |
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| 29 |
Item 6. |
| 30 |
| 31 |
PART I. FINANCIAL INFORMATION
ITEMItem 1. CONSOLIDATED FINANCIAL STATEMENTS
ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) |
December 31, | ||||||||
June 30, | 2018 | |||||||
2019 | Adjusted (1) | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 6,816 | $ | 25,934 | ||||
Trade accounts receivable, net of allowance for doubtful accounts of $328 and $296, respectively | 25,119 | 16,015 | ||||||
Inventories, net | 34,315 | 22,843 | ||||||
Prepaid expenses and other current assets | 2,374 | 2,368 | ||||||
Total current assets | 68,624 | 67,160 | ||||||
Property, equipment and improvements, net | 22,078 | 10,744 | ||||||
Goodwill | 26,574 | 20,109 | ||||||
Other intangible assets, net | 9,932 | 6,504 | ||||||
Deferred income taxes, net | 13,746 | 15,444 | ||||||
Other noncurrent assets | 784 | 887 | ||||||
Total Assets | $ | 141,738 | $ | 120,848 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 14,179 | $ | 9,919 | ||||
Current portion of long-term debt | 1,291 | - | ||||||
Accrued compensation and related benefits | 1,526 | 1,494 | ||||||
Accrued expenses and other current liabilities | 3,289 | 3,973 | ||||||
Total current liabilities | 20,285 | 15,386 | ||||||
Long-term debt | 14,491 | - | ||||||
Deferred income taxes | 534 | 591 | ||||||
Other noncurrent liabilities | 377 | 408 | ||||||
Total liabilities | 35,687 | 16,385 | ||||||
Commitments and contingencies (Note 10) | ||||||||
Shareholders' equity: | ||||||||
Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | - | - | ||||||
Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,163,756 | ||||||||
shares at June 30, 2019 and 20,053,335 shares at December 31, 2018; outstanding – 15,762,574 | ||||||||
shares at June 30, 2019 and 15,920,585 shares at December 31, 2018 | 2,016 | 2,005 | ||||||
Capital in excess of par value | 183,457 | 182,630 | ||||||
Accumulated deficit | (55,354 | ) | (58,035 | ) | ||||
Accumulated other comprehensive loss | (2,803 | ) | (2,786 | ) | ||||
Treasury stock - at cost; 4,401,182 shares at June 30, 2019 and 4,132,750 shares at December 31, 2018 | (21,231 | ) | (19,266 | ) | ||||
Total Ultralife Corporation equity | 106,085 | 104,548 | ||||||
Non-controlling interest | (34 | ) | (85 | ) | ||||
Total shareholders’ equity | 106,051 | 104,463 | ||||||
Total liabilities and shareholders' equity | $ | 141,738 | $ | 120,848 |
(1) | Effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. Prior period balances have been adjusted for the effects of the new standard. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||
CONSOLIDATED | ||||
( | ||||
(Unaudited) |
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | 25,013 | $ | 18,241 | ||||
Restricted Cash | 441 | 89 | ||||||
Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $277 and $292, Respectively | 14,533 | 14,657 | ||||||
Inventories, Net | 23,118 | 26,326 | ||||||
Prepaid Expenses and Other Current Assets | 2,900 | 2,603 | ||||||
Total Current Assets | 66,005 | 61,916 | ||||||
Property, Equipment and Improvements, Net | 8,792 | 7,570 | ||||||
Goodwill | 20,201 | 20,458 | ||||||
Other Intangible Assets, Net | 6,670 | 7,085 | ||||||
Deferred Income Taxes | 32 | 32 | ||||||
Other Non-Current Assets | 96 | 125 | ||||||
Total Assets | $ | 101,796 | $ | 97,186 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable | $ | 7,260 | $ | 8,787 | ||||
Accrued Compensation and Related Benefits | 1,641 | 2,413 | ||||||
Accrued Expenses and Other Current Liabilities | 3,342 | 2,871 | ||||||
Income Taxes Payable | 121 | 168 | ||||||
Total Current Liabilities | 12,364 | 14,239 | ||||||
Deferred Income Taxes | 3,904 | 3,867 | ||||||
Other Non-Current Liabilities | 32 | 31 | ||||||
Total Liabilities | 16,300 | 18,137 | ||||||
Commitments and Contingencies (Note 11) | ||||||||
Shareholders' Equity: | ||||||||
Preferred Stock – Par Value $.10 Per Share; Authorized 1,000,000 Shares; None Issued | - | - | ||||||
Common Stock – Par Value $.10 Per Share; Authorized 40,000,000 Shares; Issued – 19,976,388 and 19,670,928 Shares, respectively; Outstanding – 15,956,677 and 15,651,217 Shares, respectively | 1,998 | 1,966 | ||||||
Capital in Excess of Par Value | 182,246 | 180,211 | ||||||
Accumulated Deficit | (77,709 | ) | (82,894 | ) | ||||
Accumulated Other Comprehensive Loss | (2,473 | ) | (1,611 | ) | ||||
Treasury Stock - At Cost; 4,019,711 Shares | (18,469 | ) | (18,469 | ) | ||||
Total Ultralife Corporation Equity | 85,593 | 79,203 | ||||||
Non-Controlling Interest | (97 | ) | (154 | ) | ||||
Total Shareholders’ Equity | 85,496 | 79,049 | ||||||
Total Liabilities and Shareholders' Equity | $ | 101,796 | $ | 97,186 |
Three-Month Period Ended | Six-Month Period Ended | |||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | |||||||||||||
Revenues | $ | 29,397 | $ | 22,864 | $ | 48,279 | $ | 45,933 | ||||||||
Cost of products sold | 20,532 | 16,314 | 34,330 | 32,101 | ||||||||||||
Gross profit | 8,865 | 6,550 | 13,949 | 13,832 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,587 | 1,218 | 2,623 | 2,318 | ||||||||||||
Selling, general and administrative | 4,236 | 3,700 | 7,736 | 7,526 | ||||||||||||
Total operating expenses | 5,823 | 4,918 | 10,359 | 9,844 | ||||||||||||
Operating income | 3,042 | 1,632 | 3,590 | 3,988 | ||||||||||||
Other expense (income): | ||||||||||||||||
Interest and financing expense | 114 | 21 | 119 | 54 | ||||||||||||
Miscellaneous | (31 | ) | (107 | ) | 22 | (6 | ) | |||||||||
Total other expenses (income) | 83 | (86 | ) | 141 | 48 | |||||||||||
Income before income tax provision | 2,959 | 1,718 | 3,449 | 3,940 | ||||||||||||
Income tax provision | 676 | 78 | 717 | 133 | ||||||||||||
Net income | 2,283 | 1,640 | 2,732 | 3,807 | ||||||||||||
Net income attributable to non-controlling interest | 27 | 13 | 51 | 30 | ||||||||||||
Net income attributable to Ultralife Corporation | 2,256 | 1,627 | 2,681 | 3,777 | ||||||||||||
Other comprehensive loss: | ||||||||||||||||
Foreign currency translation adjustments | (452 | ) | (1,177 | ) | (17 | ) | (425 | ) | ||||||||
Comprehensive income attributable to Ultralife Corporation | $ | 1,804 | $ | 450 | $ | 2,664 | $ | 3,352 | ||||||||
Net income per share attributable to Ultralife common shareholders – basic | $ | .14 | $ | .10 | $ | .17 | $ | .24 | ||||||||
Net income per share attributable to Ultralife common shareholders – diluted | $ | .14 | $ | .10 | $ | .17 | $ | .23 | ||||||||
Weighted average shares outstanding – basic | 15,742 | 15,922 | 15,741 | 15,813 | ||||||||||||
Potential common shares | 451 | 598 | 439 | 541 | ||||||||||||
Weighted average shares outstanding - diluted | 16,193 | 16,520 | 16,180 | 16,354 |
The accompanying notes are an integral part of these consolidated financial statements. |
ULTRALIFE CORPORATION AND SUBSIDIARIES | |||||||
CONSOLIDATED STATEMENTS OF | |||||||
(In | |||||||
(Unaudited) |
Three month periods ended | Nine month periods ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | 20,330 | $ | 21,047 | $ | 66,263 | $ | 63,022 | ||||||||
Cost of products sold | 14,289 | 14,792 | 46,390 | 43,656 | ||||||||||||
Gross profit | 6,041 | 6,255 | 19,873 | 19,366 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 1,099 | 1,355 | 3,417 | 3,678 | ||||||||||||
Selling, general and administrative | 3,442 | 3,637 | 10,968 | 11,262 | ||||||||||||
Total operating expenses | 4,541 | 4,992 | 14,385 | 14,940 | ||||||||||||
Operating income | 1,500 | 1,263 | 5,488 | 4,426 | ||||||||||||
Other expense (income): | ||||||||||||||||
Interest and financing expense | 13 | 38 | 67 | 147 | ||||||||||||
Miscellaneous | (34 | ) | 20 | (40 | ) | 53 | ||||||||||
Income before income tax provision | 1,521 | 1,205 | 5,461 | 4,226 | ||||||||||||
Income tax provision | 86 | 104 | 219 | 370 | ||||||||||||
Net income | 1,435 | 1,101 | 5,242 | 3,856 | ||||||||||||
Net income attributable to non-controlling interest | 27 | 3 | 57 | 8 | ||||||||||||
Net income attributable to Ultralife Corporation | 1,408 | 1,098 | 5,185 | 3,848 | ||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Foreign currency translation adjustments | (436 | ) | 440 | (862 | ) | 1,193 | ||||||||||
Comprehensive (loss) income attributable to Ultralife Corporation | $ | 972 | $ | 1,538 | $ | 4,323 | $ | 5,041 | ||||||||
Net income per share attributable to Ultralife common shareholders – basic | $ | .09 | $ | .07 | $ | .33 | $ | .25 | ||||||||
Net income per share attributable to Ultralife common shareholders – diluted | $ | .09 | $ | .07 | $ | .32 | $ | .24 | ||||||||
Weighted average shares outstanding – basic | 15,952 | 15,564 | 15,859 | 15,495 | ||||||||||||
Potential common shares | 571 | 407 | 548 | 323 | ||||||||||||
Weighted average shares outstanding - diluted | 16,523 | 15,971 | 16,407 | 15,818 |
Six-Month Period Ended | ||||||||
June 30, 2019 | July 1, 2018 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 2,732 | $ | 3,807 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Depreciation | 962 | 980 | ||||||
Amortization of intangible assets | 224 | 203 | ||||||
Amortization of financing fees | 20 | 18 | ||||||
Stock-based compensation | 360 | 344 | ||||||
Deferred income taxes | 636 | 36 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (5,466 | ) | (872 | ) | ||||
Inventories | (6,779 | ) | 1,338 | |||||
Prepaid expenses and other assets | 362 | 141 | ||||||
Accounts payable and other liabilities | 2,703 | (4,177 | ) | |||||
Net cash (used in) provided by operating activities | (4,246 | ) | 1,818 | |||||
INVESTING ACTIVITIES: | ||||||||
Purchase of SWE, net of cash acquired | (25,248 | ) | - | |||||
Purchases of property, equipment and improvements | (3,793 | ) | (999 | ) | ||||
Net cash used in investing activities | (29,041 | ) | (999 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from revolving credit facility | 8,182 | - | ||||||
Proceeds from term loan facility | 8,000 | - | ||||||
Payment of term loan facility | (212 | ) | - | |||||
Repurchase of common stock | (1,957 | ) | - | |||||
Payment of debt issuance costs | (157 | ) | - | |||||
Proceeds from exercise of stock options | 478 | 1,293 | ||||||
Tax withholdings on stock-based awards | (8 | ) | - | |||||
Proceeds from government grant | - | 397 | ||||||
Net cash provided by financing activities | 14,326 | 1,690 | ||||||
Effect of exchange rate changes on cash | (157 | ) | (90 | ) | ||||
(DECREASE) INCREASE IN CASH | (19,118 | ) | 2,419 | |||||
Cash, Beginning of period | 25,934 | 18,330 | ||||||
Cash, End of period | $ | 6,816 | $ | 20,749 |
The accompanying notes are an integral part of these consolidated financial statements. |
ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||
CONSOLIDATED STATEMENTS OF
| ||||||
(Unaudited) |
Nine Month Periods Ended | ||||||||
September 30, | October 1, | |||||||
2018 | 2017 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net Income | $ | 5,242 | $ | 3,856 | ||||
Adjustments to Reconcile Net Income to Net Cash Provided By Operating Activities: | ||||||||
Depreciation | 1,476 | 1,507 | ||||||
Amortization of Intangible Assets | 300 | 315 | ||||||
Amortization of Financing Fees | 27 | 42 | ||||||
Stock-Based Compensation | 707 | 529 | ||||||
Deferred Income Taxes | 54 | 117 | ||||||
Changes in Operating Assets and Liabilities: | ||||||||
Accounts Receivable | (8 | ) | (2,412 | ) | ||||
Inventories | 2,947 | (1,221 | ) | |||||
Prepaid Expenses and Other Assets | (338 | ) | (582 | ) | ||||
Accounts Payable and Other Liabilities | (2,876 | ) | 1,506 | |||||
Net Cash Provided By Operating Activities | 7,531 | 3,657 | ||||||
INVESTING ACTIVITIES: | ||||||||
Purchases of Property, Equipment and Improvements | (1,994 | ) | (971 | ) | ||||
Net Cash Used In Investing Activities | (1,994 | ) | (971 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from Stock Option Exercises | 1,357 | 1,120 | ||||||
Proceeds from Government Grant | 397 | - | ||||||
Net Cash Provided By Financing Activities | 1,754 | 1,120 | ||||||
Effect of Exchange Rate Changes on Cash | (167 | ) | 172 | |||||
INCREASE IN CASH | 7,124 | 3,978 | ||||||
Cash, Beginning of Period | 18,330 | 10,629 | ||||||
Cash, End of Period | $ | 25,454 | $ | 14,607 |
Capital | Accumulated | |||||||||||||||||||||||||||||||
Common Stock | in Excess | Other | Non- | |||||||||||||||||||||||||||||
Number of | of Par | Comprehensive | Accumulated | Treasury | Controlling | |||||||||||||||||||||||||||
Shares | Amount | Value | Income (Loss) | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||
Balance – December 31, 2017 | 19,670,928 | $ | 1,966 | $ | 180,211 | $ | (1,611 | ) | $ | (82,894 | ) | $ | (18,469 | ) | $ | (154 | ) | $ | 79,049 | |||||||||||||
Cumulative effect adjustment (1) | (71 | ) | (71 | ) | ||||||||||||||||||||||||||||
Net income | 3,777 | 30 | 3,807 | |||||||||||||||||||||||||||||
Stock option exercises | 290,476 | 30 | 1,296 | 1,326 | ||||||||||||||||||||||||||||
Stock-based compensation -stock options | 309 | 309 | ||||||||||||||||||||||||||||||
Stock-based compensation -restricted stock | 35 | 35 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (425 | ) | (425 | ) | ||||||||||||||||||||||||||||
Cash settlement of outstanding options | (33 | ) | (33 | ) | ||||||||||||||||||||||||||||
Balance – July 1, 2018 (1) | 19,961,404 | $ | 1,996 | $ | 181,818 | $ | (2,036 | ) | $ | (79,188 | ) | $ | (18,469 | ) | $ | (124 | ) | $ | 83,997 | |||||||||||||
Balance – December 31, 2018 (1) | 20,053,335 | $ | 2,005 | $ | 182,630 | $ | (2,786 | ) | $ | (58,035 | ) | $ | (19,266 | ) | $ | (85 | ) | $ | 104,463 | |||||||||||||
Net Income | 2,681 | 51 | 2,732 | |||||||||||||||||||||||||||||
Share repurchases | (1,957 | ) | (1,957 | ) | ||||||||||||||||||||||||||||
Stock option exercises | 104,587 | 11 | 467 | 478 | ||||||||||||||||||||||||||||
Stock-based compensation -stock options | 316 | 316 | ||||||||||||||||||||||||||||||
Stock-based compensation -restricted stock | 5,834 | 44 | 44 | |||||||||||||||||||||||||||||
Tax withholdings on restricted stock | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | (17 | ) | (17 | ) | ||||||||||||||||||||||||||||
Balance – June 30, 2019 | 20,163,756 | $ | 2,016 | $ | 183,457 | $ | (2,803 | ) | $ | (55,354 | ) | $ | (21,231 | ) | $ | (34 | ) | $ | 106,051 | |||||||||||||
Balance – April 1, 2018 (1) | 19,891,937 | $ | 1,989 | $ | 181,312 | $ | (859 | ) | $ | (80,814 | ) | $ | (18,469 | ) | $ | (137 | ) | $ | 83,022 | |||||||||||||
Net income | 1,626 | 13 | 1,639 | |||||||||||||||||||||||||||||
Stock option exercises | 69,467 | 7 | 301 | 308 | ||||||||||||||||||||||||||||
Stock-based compensation -stock options | 186 | 186 | ||||||||||||||||||||||||||||||
Stock-based compensation -restricted stock | 19 | 19 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (1,177 | ) | (1,177 | ) | ||||||||||||||||||||||||||||
Balance – July 1, 2018 (1) | 19,961,404 | $ | 1,996 | $ | 181,818 | $ | (2,036 | ) | $ | (79,188 | ) | $ | (18,469 | ) | $ | (124 | ) | $ | 83,997 | |||||||||||||
Balance – March 31, 2019 | 20,134,596 | $ | 2,013 | $ | 183,163 | $ | (2,351 | ) | $ | (57,610 | ) | $ | (21,231 | ) | $ | (61 | ) | $ | 103,923 | |||||||||||||
Net income | 2,256 | 27 | 2,283 | |||||||||||||||||||||||||||||
Stock option exercises | 29,160 | 3 | 119 | 122 | ||||||||||||||||||||||||||||
Stock-based compensation -stock options | 142 | 142 | ||||||||||||||||||||||||||||||
Stock-based compensation -restricted stock | 33 | 33 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustments | (452 | ) | (452 | ) | ||||||||||||||||||||||||||||
Balance – June 30, 2019 | 20,163,756 | $ | 2,016 | $ | 183,457 | $ | (2,803 | ) | $ | (55,354 | ) | $ | (21,231 | ) | $ | (34 | ) | $ | 106,051 |
(1) | Effective January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 (ASC 842), Leases. Prior period balances have been adjusted for the effects of the new standard. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands – except share and per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Ultralife Corporation (the “Company”) and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-038-03 of Regulation S-X.S-X. Accordingly, they do not include all of the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K10-K for the year ended December 31, 2017.2018.
The December 31, 2017 2018 consolidated balance sheet data referenced herein was derived from audited financial statements but does not include all disclosures required by GAAP.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.
Our monthly closing schedule is a 4/4/5 weekly-based cycle for each fiscal quarter, as opposed to a calendar month-based cycle for each fiscal quarter. While the actual dates for the quarter-ends will change slightly each year, we believe that there are not any material differences when making quarterly comparisons.
Recently Adopted Accounting Guidance
Leases
Effective January 1, 2019, the Company adopted Accounting Standards Update 2016-02 – Leases (Topic 842). Adoption of the new standard did not materially impact the prior year consolidated statements of operations and cash flows. The prior year consolidated balance sheet has been revised for the effects of the new standard. The effects to our consolidated balance sheet as of December 31, 2018 are presented below.
The Company adopted the new standard applying the modified retrospective approach. The Company measured and recognized leases upon adoption which had commenced as of the beginning or during the prior year. The package of practical expedients permitted under the transition guidance of the new standard was elected which allowed us to carry forward the historical lease classification and determination of whether an arrangement is or contains a lease on existing leases. The use-of-hindsight transition practical expedient was applied to determine the lease term for existing leases, which resulted in the lengthening of the lease term at commencement for one of our operating facilities.
At contract inception, the Company determines whether the arrangement is or contains a lease and determines the lease classification. The lease term is determined based on the non-cancellable term of the lease adjusted to the extent optional renewal terms and termination rights are reasonably certain. Lease expense is recognized evenly over the lease term. Variable lease payments are recognized as period costs. The present value of remaining lease payments is recognized as a liability on the balance sheet with a corresponding right-of-use asset adjusted for prepaid or accrued lease payments. The Company uses its incremental borrowing rate for the discount rate, unless the interest rate implicit in the lease contract is readily determinable. The Company has adopted the practical expedients to not separate non-lease components from lease components and to not present short-term leases on the balance sheet.
The impact on the consolidated balance sheet as of December 31, 2018 is shown below.
Impact to Previously Reported Results
Consolidated Balance Sheet as of December 31, 2018:
As Previously Reported | Lease Standard Adjustment | As Adjusted | ||||||||||
Other noncurrent assets | $ | 82 | $ | 805 | $ | 887 | ||||||
Prepaid expenses and other current assets | 2,429 | (61 | ) | 2,368 | ||||||||
Accrued expenses and other current liabilities | 3,534 | 439 | 3,973 | |||||||||
Other noncurrent liabilities | 32 | 376 | 408 | |||||||||
Accumulated deficit | (57,964 | ) | (71 | ) | (58,035 | ) |
See Note 9 for further disclosure regarding lease accounting.
Recent Accounting Guidance Not Yet Adopted
There have been no developments to recently issued accounting standards, including the expected dates of adoption and anticipated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2018 Annual Report on Form 10-K.
2. ACQUISITION
On May 1, 2019, the Company completed the acquisition of 100% of the issued and outstanding shares of Southwest Electronic Energy Corporation, a Texas corporation (“SWE”), for an aggregate purchase price of $26,190 inclusive of $942 cash acquired and post-closing adjustments.
SWE is a leading independent designer and manufacturer of high-performance smart battery systems and battery packs to customer specifications using lithium cells. SWE serves a variety of industrial markets, including oil & gas, remote monitoring, process control and marine, which demand uncompromised safety, service, reliability and quality. The Company acquired SWE as a bolt-on acquisition to further support our strategy of commercial revenue diversification by providing entry to the oil and gas exploration and production, and subsea electrification markets, which are currently unserved by Ultralife. Another key benefit includes obtaining a highly valuable technical team of battery pack and charger system engineers and technicians to add to our new product development-based revenue growth initiatives in our commercial end-markets particularly asset tracking, smart metering and other industrial applications.
The acquisition of SWE was completed pursuant to a Stock Purchase Agreement dated May 1, 2019 (the “Stock Purchase Agreement”) by and among Ultralife, SWE, Southwest Electronic Energy Medical Research Institute, a Texas non-profit (the “Seller”), and Claude Leonard Benckenstein, an individual (the “Shareholder”). The Stock Purchase Agreement contains customary terms and conditions including representations, warranties and indemnification provisions. A portion of the consideration paid to the Seller is being held in escrow for indemnification purposes.
The aggregate purchase price for the acquisition was funded by the Company through a combination of cash on hand and borrowings under the Credit Facilities (see Note 3).
The purchase price allocation was determined in accordance with the accounting treatment of a business combination pursuant to FASB ASC Topic 805, Business Combinations (ASC 805). Accordingly, the fair value of the consideration was determined, and the assets acquired and liabilities assumed have been recorded at their fair values at the date of the acquisition. The excess of the purchase price over the estimated fair values has been recorded as goodwill.
The allocation of purchase price to the assets acquired and liabilities assumed at the date of the acquisition is presented in the table below. Management is responsible for determining the fair value of the tangible and intangible assets acquired and liabilities assumed as of the date of acquisition. Management considered several factors, including reference to an analysis performed under ASC 805 solely for the purpose of allocating the purchase price to the assets acquired and liabilities assumed. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that occur. The resulting purchase price allocation is considered preliminary and could differ materially from the final allocation based on further analysis and future events. The final purchase price allocation may include changes in the valuation of assets acquired and liabilities assumed, including intangible assets, inventories, fixed assets, deferred taxes and residual goodwill.
Cash | $ | 942 | ||
Accounts receivable | 3,621 | |||
Inventories | 4,685 | |||
Prepaid expenses and other current assets | 431 | |||
Property, equipment and improvements | 9,177 | |||
Goodwill | 6,474 | |||
Other intangible assets | 3,649 | |||
Accounts payable | (1,060 | ) | ||
Other current liabilities | (718 | ) | ||
Deferred tax liability, net | (1,011 | ) | ||
Net assets acquired | $ | 26,190 |
The goodwill included in the Company’s purchase price allocation presented above represents the value of SWE’s assembled and trained workforce, the incremental value that SWE engineering and technology will bring to the Company and the revenue growth which is expected to occur over time which is attributable to increased market penetration from future new products and customers. The goodwill acquired in connection with the acquisition is not deductible for income tax purposes.
The operating results and cash flows of SWE are reflected in the Company’s consolidated financial statements from the date of acquisition. SWE is included in the Battery & Energy Products segment.
For the six-month period ended June 30, 2019, SWE contributed revenue of $4,750 and net income of $101, inclusive of a $205 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 $110 directly related to the financing of the SWE acquisition, amortization expense of $41 on acquired identifiable intangible assets and a $23 reduction of depreciation expense as a result of fair value adjustments and useful life changes.
During the three and six-month periods ended June 30, 2019, the Company incurred non-recurring transaction costs of $322 directly attributable to the acquisition. Debt issuance costs of $157, including placement, renewal and legal fees, are amortized to interest expense over a weighted average life of 4.6 years based on the terms of the related Credit Facilities. Other non-recurring transaction costs of $165, including one-time accounting, legal and due diligence services, were expensed during the period.
The following supplemental pro forma information presents the combined results of operations, inclusive of the purchase accounting adjustments and one-time acquisition-related expenses described above, as if the acquisition of SWE had been completed on January 1, 2018, the beginning of the comparable prior period.
The supplemental pro forma results do not reflect the agreed upon departure of the Shareholder from SWE and dissolution of the SWE Board of Directors upon consummation of the acquisition or the realization of any expected synergies or other cost reductions following the completion of the business combination. The supplemental pro forma results are presented for informational purposes only and should not be considered indicative of the financial position or results of operations had the acquisition been completed as of the dates indicated and does not purport to indicate the future combined financial position or results of operation.
Set forth below are the unaudited supplemental pro forma results of the Company and SWE for the six-month periods ended June 30, 2019 and July 1, 2018 as if the acquisition had occurred as of January 1, 2018.
Six Months Ended | ||||||||
July 1, 2018 | June 30, 2019 | |||||||
Revenue | $ | 58,957 | $ | 57,074 | ||||
Operating income | $ | 3,046 | $ | 4,171 | ||||
Net Income attributable to Ultralife Corporation | $ | 2,851 | $ | 2,955 | ||||
Net income per share attributable to Ultralife Corporation: | ||||||||
Basic | $ | 0.18 | $ | 0.19 | ||||
Diluted | $ | 0.17 | $ | 0.18 |
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3. CREDIT FACILITY
On May 1, 2019, Ultralife, SWE, and CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), as borrowers, entered into the First Amendment Agreement (the “First Amendment Agreement”) with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to amend the Credit and Security Agreement by and among Ultralife and KeyBank dated May 31, 2017 (the “Credit Agreement”, and together with the First Amendment Agreement, the “Amended Credit Agreement”).
The Amended Credit Agreement, among other things, provides for a five-year, $8,000 senior secured term loan (the “Term Loan Facility”) and extends the term of the $30,000 senior secured revolving credit facility (the “Revolving Credit Facility”, and together with the Term Loan Facility, the “Credit Facilities”) through May 31, 2022. Up to six months prior to May 31, 2022, the Revolving Credit Facility may be increased to $50,000 with the Bank’s concurrence.
Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of June 30, 2019, the Company had $7,788 outstanding principal on the Term Loan Facility, of which $1,291 is included in current portion of long-term debt on the balance sheet, and $8,182 outstanding principal on the Revolving Credit Facility. As of June 30, 2019, total unamortized debt issuance costs of $188 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 June 30, 2019.
Borrowings under the Credit Facilities are secured by substantially all the assets of the Company. Availability under the Revolving Credit Facility is subject to certain borrowing base limits based on receivables and inventories.
Interest will accrue on outstanding indebtedness under the Credit Facilities at the Base Rate or the Overnight LIBOR Rate, as selected by the Company, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 50 basis points, and (c) the Overnight LIBOR Rate plus one hundred basis points. The applicable margin ranges from zero to negative 50 basis points for the Base Rate and from 185 to 215 basis points for the Overnight LIBOR Rate and are determined based on the Company’s senior leverage ratio.
The Company must pay a fee of 0.1% to 0.2% based on the average daily unused availability under the Revolving Credit Facility.
Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.
4. SHARE REPURCHASE PROGRAM
On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Under the Share Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may be suspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligate the Company to purchase any specific number of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.
Effective January 1, 2018, For the Company adopted Accounting Standards Update 2014-09 (Topic 606) “Revenue from Contracts with Customers”. Adoptionsix-month period ended June 30, 2019, we repurchased a total of Topic 606 did not impact267,300 shares of our common stock for an aggregate consideration (including fees and commissions) of $1,957. There were no shares repurchased during the timing of revenue recognition in our Consolidated Financial Statements for the current or prior interim or annual periods. Accordingly, no adjustments have been made to opening retained earnings or priorthree-month period amounts.ended June 30, 2019.
Revenue Recognition
Revenues are generated fromFrom the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer, which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on the date of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and other taxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For products shipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which point control has transferred and there are no further obligations by the Company.
Revenues recognized from prior period performance obligations for the three and nine months ended September 30, 2018 were not material.
As of September 30, 2018, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, we have applied the practical expedient with respect to disclosureinception of the deferral and future expected timingShare Repurchase Program on November 1, 2018, we repurchased a total of revenue recognition for transaction price allocated to remaining performance obligations.
Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 were not material.
Accounts Receivable
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and generally do not require collateral. Payment terms are generally 30 days. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy372,974 shares of our allowancecommon stock for doubtful accounts quarterly. Accounts outstanding for longer than contractual payment terms are considered past duean aggregate consideration (including fees and are reviewed for collectability. We maintain reserves for potential credit losses based upon our historical experience and the agingcommissions) of specific receivables. Receivable balances are written off when collection is deemed unlikely.
Sales Commissions
Sales commissions are expensed as incurred for contracts with an expected duration of one year or less. There were no sales commissions capitalized as of September 30, 2018.
Shipping and Handling Costs
Costs incurred by us related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.
Product Warranties
We generally offer warranties against product defects. Costs incurred to service warranty claims are recorded as costs of products sold. We provide for potential warranty costs based on historical experience. Provision for warranty costs is recorded in other current liabilities and other long-term liabilities on our Consolidated Balance Sheets based on the duration of the warranty. The Company does not offer separate service-type warranties on its products.
See Note 12 for disaggregated revenue information.$2,699.
5. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-month period ended June 30, 2019, 1,016,668 stock options and 31,666 restricted stock awards were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 450,793 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended July 1, 2018, 1,268,286 stock options and 17,500 restricted stock awards were included in the calculation of Diluted EPS resulting in 598,061 additional shares in the calculation of fully diluted earnings per share. For the six-month periods ended June 30, 2019 and July 1, 2018, 1,016,668 and 1,254,286 stock options and 31,666 and 17,500 restricted stock awards, respectively, were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 438,969 and 540,836 additional shares, respectively, in the calculation of fully diluted earnings per share.
There were 446,250 and 401,750 outstanding stock options for the three-month periods ended June 30, 2019 and July 1, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 446,250 and 415,750 outstanding stock options for the six-month periods ended June 30, 2019 and July 1, 2018, respectively, which were not included in EPS as the effect would be anti-dilutive.
6. SUPPLEMENTAL BALANCE SHEET INFORMATION
Cash
The Company hadcomposition of the Company’s cash was as follows:
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Cash | $ | 6,528 | $ | 25,583 | ||||
Restricted cash | 288 | 351 | ||||||
Total | $ | 6,816 | $ | 25,934 |
As of June 30, 2019 and December 31, 2018, restricted cash totaling $25,454included $205 and $18,330 as of September 30, 2018 and December 31, 2017, respectively.
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Cash | $ | 25,013 | $ | 18,241 | ||||
Restricted Cash | 441 | 89 | ||||||
Total | $ | 25,454 | $ | 18,330 |
Restricted cash at September 30, 2018 consists of$266, respectively, relating to a government grant awarded in the People’s Republic of China to fund specified technological research and development expenditures.initiatives. The grant proceeds will beare realized to income as a direct offset to expense as the related expenditures are incurred. No expenditures have been incurred orFor the six-month period ended June 30, 2019, grant proceeds of $61 were realized with respect to the grant asincome. As of SeptemberJune 30, 2018. Restricted2019 and December 31, 2018, restricted cash also includesincluded euro-denominated deposits of $83 and $85, respectively, withheld by the Dutch tax authorities and third partythird-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the statementconsolidated statements of cash flows.
Inventories
Inventories are stated at the lower of cost or market, net of obsolescence reserves, with cost determined under the first-in, first-outfirst-in, first-out (FIFO) method. The composition of inventories, net was:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Raw Materials | $ | 13,448 | $ | 14,606 | ||||
Work In Process | 1,857 | 2,013 | ||||||
Finished Goods | 7,813 | 9,707 | ||||||
Total | $ | 23,118 | $ | 26,326 |
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Raw materials | $ | 18,379 | $ | 13,274 | ||||
Work in process | 2,679 | 2,016 | ||||||
Finished goods | 13,257 | 7,553 | ||||||
Total | $ | 34,315 | $ | 22,843 |
Property, Equipment and Improvements, Net
Major classes of property, equipment and improvements consisted of the following:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Land | $ | 123 | $ | 123 | ||||
Buildings and Leasehold Improvements | 7,924 | 7,858 | ||||||
Machinery and Equipment | 51,054 | 50,852 | ||||||
Furniture and Fixtures | 1,983 | 2,005 | ||||||
Computer Hardware and Software | 5,549 | 5,338 | ||||||
Construction In Process | 2,601 | 535 | ||||||
69,234 | 66,711 | |||||||
Less: Accumulated Depreciation | (60,442 | ) | (59,141 | ) | ||||
Property, Equipment and Improvements, Net | $ | 8,792 | $ | 7,570 |
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Land | $ | 1,273 | $ | 123 | ||||
Buildings and leasehold improvements | 15,285 | 8,267 | ||||||
Machinery and equipment | 53,774 | 51,261 | ||||||
Furniture and fixtures | 2,177 | 2,058 | ||||||
Computer hardware and software | 6,120 | 5,590 | ||||||
Construction in process | 5,036 | 4,302 | ||||||
83,665 | 71,601 | |||||||
Less: Accumulated depreciation | (61,587 | ) | (60,857 | ) | ||||
Property, equipment and improvements, net | $ | 22,078 | $ | 10,744 |
Depreciation expense for property, equipment and improvements was as follows:
Three-month periods ended | Nine-month periods ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Depreciation expense | $ | 496 | $ | 497 | $ | 1,476 | $ | 1,507 |
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depreciation expense | $ | 515 | $ | 496 | $ | 962 | $ | 980 |
a. Goodwill
The following table summarizes the goodwill activity by segment for the nine-monthsix-month periods ended SeptemberJune 30, 2018 2019 and OctoberJuly 1, 2017:2018:
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Battery & Energy | Communi- cations | |||||||||||
Products | Systems | Total | ||||||||||
Balance - December 31, 2017 | $ | 8,965 | $ | 11,493 | $ | 20,458 | ||||||
Effect of foreign currency translation | (136 | ) | - | (136 | ) | |||||||
Balance – July 1, 2018 | 8,829 | 11,493 | 20,322 | |||||||||
Effect of foreign currency translation | (213 | ) | - | (213 | ) | |||||||
Balance - December 31, 2018 | 8,616 | 11,493 | 20,109 | |||||||||
Acquisition of SWE | 6,474 | - | 6,474 | |||||||||
Effect of foreign currency translation | (9 | ) | - | (9 | ) | |||||||
Balance – June 30, 2019 | $ | 15,081 | $ | 11,493 | $ | 26,574 |
b.
Other Intangible Assets,
Net
The composition of other intangible assets was:
at September 30, 2018 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,405 | $ | - | $ | 3,405 | ||||||
Customer Relationships | 6,529 | 4,352 | 2,177 | |||||||||
Patents and Technology | 5,509 | 4,696 | 813 | |||||||||
Distributor Relationships | 377 | 377 | - | |||||||||
Trade Name | 379 | 104 | 275 | |||||||||
Total Other Intangible Assets | $ | 16,199 | $ | 9,529 | $ | 6,670 |
at June 30, 2019 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,405 | $ | - | $ | 3,405 | ||||||
Customer relationships | 8,986 | 4,509 | 4,477 | |||||||||
Patents and technology | 5,483 | 4,789 | 694 | |||||||||
Distributor relationships | 377 | 377 | - | |||||||||
Trade name | 1,497 | 141 | 1,356 | |||||||||
Total | $ | 19,748 | $ | 9,816 | $ | 9,932 |
at December 31, 2017 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,411 | $ | - | $ | 3,411 | ||||||
Customer Relationships | 6,618 | 4,208 | 2,410 | |||||||||
Patents and Technology | 5,545 | 4,595 | 950 | |||||||||
Distributor Relationships | 377 | 377 | - | |||||||||
Trade Name | 393 | 79 | 314 | |||||||||
Total Other Intangible Assets | $ | 16,344 | $ | 9,259 | $ | 7,085 |
at December 31, 2018 | ||||||||||||
Accumulated | ||||||||||||
Cost | Amortization | Net | ||||||||||
Trademarks | $ | 3,405 | $ | - | $ | 3,405 | ||||||
Customer relationships | 6,471 | 4,392 | 2,079 | |||||||||
Patents and technology | 5,486 | 4,725 | 761 | |||||||||
Distributor relationships | 377 | 377 | - | |||||||||
Trade name | 370 | 111 | 259 | |||||||||
Total | $ | 16,109 | $ | 9,605 | $ | 6,504 |
Amortization expense for intangible assets was as follows:
Three-month periods ended | Nine-month periods ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Amortization included in: | ||||||||||||||||
Research and development | $ | 36 | $ | 42 | $ | 111 | $ | 123 | ||||||||
Selling, general and administrative | 61 | 64 | 189 | 192 | ||||||||||||
Total amortization expense | $ | 97 | $ | 106 | $ | 300 | $ | 315 |
The decreaseincrease in the costcarrying value of total other intangible assets from December 31, 2017 2018 to SeptemberJune 30, 2019 reflects the preliminary valuation of identifiable intangible assets acquired in the Company’s acquisition of SWE. The table below summarizes the estimated fair value, useful life and annual amortization for the identifiable intangible assets resulting from the preliminary valuation analysis. Amortization for the SWE intangible assets is recognized as selling, general and administrative expense.
Annual | ||||||||||||
Estimated | Estimated | |||||||||||
Estimated Fair | Useful Lives | Amortization | ||||||||||
Value | in Years | Expense | ||||||||||
Customer relationships | $ | 2,522 | 15 | $ | 168 | |||||||
Trade name | 1,127 | 15 | 75 | |||||||||
Total | $ | 3,649 | $ | 243 |
The remaining change in the carrying value of other intangible assets from December 31, 2018 of $145to June 30, 2019 is the result of the effect of foreign currency translations.
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Credit Facilities
On May 31, 2017, Ultralife Corporation entered into a Credit and Security Agreement (the “Credit Agreement”) and related security agreements with KeyBank National Association (“KeyBank” or the “Bank”) to establish a $30,000 senior secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with the Bank’s concurrence to $50,000 prior to the last six months of the term and is scheduled to expire on May 30, 2020. The Credit Facility replaces the Company’s asset-based revolving credit facility with PNC Bank National Association which expired in accordance with its terms on May 24, 2017 (the “Prior Credit Agreement”).
The Credit Facility provides the Company with an aggregate of up to $30,000 of loan and letter of credit availability determined based on a borrowing base formula. The Company may use advances under the Credit FacilityAmortization expense for general working capital purposes, to reimburse drawings under letters of credit and to fund capital expenditures and acquisitions, all subject to the terms of the Credit Agreement. The Company had no amounts drawn under the Prior Credit Agreement at the time of its expiration and has not borrowed under the Credit Facility.
Interest will accrue on outstanding indebtedness under the Credit Agreement at the Overnight LIBOR Rate plus the applicable margin, or at the Base Rate plus the applicable margin,other intangible assets was as selected by the Company. During the period beginning May 31, 2017 and ending April 1, 2018, the applicable margin for Overnight LIBOR Loans is 185 basis points, the applicable margin for Base Rate Loans is negative 50 basis points and applicable margin for the Unused Fee is 20 basis points. Beginning April 2, 2018 and thereafter, the applicable margins will be determined based on the chart below.follows:
Three-month period ended Six-month period ended June 30, July 1, June 30, July 1, 2019 2018 2019 2018 Amortization included in: Research and development Selling, general and administrative Total amortization expense |
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The Company must pay a fee on its unused availability equal to the applicable margin for the Unused Fee and customary letter of credit fees.
In addition to the affirmative and negative covenants, the Company must maintain a fixed charge coverage ratio of 1.15 to 1.0, tested each fiscal quarter for the trailing four fiscal quarters, and a minimum tangible net worth of $40,000, tested as of the end of each calendar year. The Company was in full compliance with its covenants as of September 30, 2018.
Any outstanding borrowings must be repaid upon expiration of the term of the Credit Facility. Payments must be made during the term to the extent outstanding borrowings exceed the maximum amount then permitted to be drawn as borrowings under the Credit Facility and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations of the Company under the Credit Facility may be accelerated in addition to the other remedies available to the Bank under the terms of the Credit Agreement. The Credit Facility is secured by substantially all the assets of the Company.
As of September 30, 2018, we had no outstanding balance under the Credit Facility and no outstanding letters of credit related to the Credit Facility.
7. STOCK-BASED COMPENSATION
We recorded non-cash stock compensation expense in each period as follows:
Three-month periods ended | Nine-month periods ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stock Options | $ | 344 | $ | 130 | $ | 653 | $ | 518 | ||||||||
Restricted Stock Grants | 19 | 3 | 54 | 11 | ||||||||||||
Total | $ | 363 | $ | 133 | $ | 707 | $ | 529 |
Three-month period ended | Six-month period ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Stock options | $ | 142 | $ | 186 | $ | 316 | $ | 309 | ||||||||
Restricted stock grants | 33 | 19 | 44 | 35 | ||||||||||||
Total | $ | 175 | $ | 205 | $ | 360 | $ | 344 |
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 SeptemberJune 30, 2018, 2019, there was $681$284 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.1 years.
The following table summarizes stock option activity for the nine-monthsix-month period ended SeptemberJune 30, 2018:2019:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2018 | 1,860,211 | $ | 6.10 | |||||||||||||
Granted | 217,500 | 9.68 | ||||||||||||||
Exercised | (305,460 | ) | 4.54 | |||||||||||||
Forfeited or Expired | (17,499 | ) | 5.61 | |||||||||||||
Outstanding at September 30, 2018 | 1,754,752 | $ | 6.68 | 3.50 | $ | 3,986 | ||||||||||
Vested and Expected to Vest at September 30, 2018 | 1,650,364 | $ | 6.66 | 3.36 | $ | 3,791 | ||||||||||
Exercisable at September 30, 2018 | 1,174,378 | $ | 5.75 | 2.68 | $ | 3,193 |
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at January 1, 2019 | 1,576,087 | $ | 6.58 | |||||||||||||
Granted | - | - | ||||||||||||||
Exercised | (104,587 | ) | 4.56 | |||||||||||||
Forfeited or expired | (6,916 | ) | 4.59 | |||||||||||||
Outstanding at June 30, 2019 | 1,464,584 | $ | 6.74 | 3.03 | $ | 2,917 | ||||||||||
Vested and expected to vest at June 30, 2019 | 1,409,866 | $ | 6.69 | 2.94 | $ | 2,860 | ||||||||||
Exercisable at June 30, 2019 | 1,189,793 | $ | 6.13 | 2.65 | $ | 2,704 |
The following assumptions were used to value stock options granted during the nine months ended September 30, 2018:
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The weighted average grant date fair value of options granted during the nine months ended September 30, 2018 was $4.22.
On July 25, 2018, the Company’s Board of Directors, at the recommendation of the Compensation and Management Committee and pursuant to the Company’s Amended and Restated 2004 Long-Term Incentive Plan, modified the option previously granted to the Company’s President and Chief Executive Officer to purchase an aggregate 200,000 shares of the Company’s common stock at $10.00, such that the option will fully vest immediately upon the Company’s common stock first reaching a closing price $10.00 for 15 trading days in a 30 trading-day period. The option as previously granted provided for vesting in annual increments of 50,000 shares on each of the four anniversaries of the date the Company’s common stock first reached a closing price $10.00 for 15 trading days in a 30 trading-day period. The option became fully vested during the third quarter 2018 and expires December 30, 2020. The transaction has been accounted for as an equity award modification pursuant to Accounting Standards Codification Topic 718, Compensation – Stock Compensation. The Company has recognized for the third quarter 2018 compensation cost of approximately $182, representing the incremental fair value of the modified award computed as of the modification date as the difference between the fair value of the modified award and the fair value of the original award immediately before it was modified. The incremental fair value was determined using a Monte Carlo simulation option-pricing model consistent with the valuation methodology used to value and recognize the original award.
FASB’s guidance for share-based payments requires cash flows from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options in excess of the deferred tax asset attributable to stock compensation costs for such stock options. We did not record any excess tax benefits in the firstnine months of 2018 or 2017.
Cash received from stock option exercises under our stock-based compensation plans for the three-monththree-month periods ended SeptemberJune 30, 2019 and July 1, 2018 was $122 and October 1, 2017 was $64 and $131,$354, respectively. Cash received from stock option exercises under our stock-based compensation plans for the nine-monthsix-month periods ended SeptemberJune 30, 2019 and July 1, 2018 was $478 and October 1, 2017 was $1,357 and $1,120,$1,293, respectively.
In January 2018, 17,500April 2019, 20,000 shares of restricted stock were awarded to certain of our employees. Theseemployees 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. The weighted average grant date fair value of these awards was $7.16 per share. Unrecognized compensation cost related to these restricted shares was $71$230 at SeptemberJune 30, 2018.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized; (3) changing rules related to usage and limitation of net operating loss carryforwards created in tax years beginning after December 31, 2017; (4) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries for tax years beginning after December 31, 2017; and (5) implementing a territorial tax system and imposing a transition toll tax on deemed repatriated earnings of foreign subsidiaries.
The Act provided for a one-time deemed mandatory repatriation for post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the year ended December 31, 2017. The Company had a deficit in foreign E&P and is not expected to be subject to the deemed mandatory repatriation.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No.118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. At September 30, 2018, the amounts recorded for the Tax Act remain provisional for the transition tax, the remeasurement of deferred taxes, and our reassessment of permanently reinvested earnings, uncertain tax positions and valuation allowances. These estimates may be impacted by further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and the impact of the Global Intangible Low-Taxed Income (“GILTI”) provisions. At September 30, 2018, we were not able to reasonably estimate, and therefore have not recorded, deferred taxes for the GILTI provisions. We have not yet determined our policy election with respect to whether to record deferred taxes for basis differences expected to reverse as a result of the GILTI provisions in future periods or use the period cost method.2019.
For8. INCOME TAXES
Our effective tax rate for the three-monthsix-month periods ended SeptemberJune 30, 2019 and July 1, 2018 was 20.8% and October 1, 2017, we recognized $86 and $104, respectively,3.4%, respectively. The increase in incomeour effective tax expense. For the nine-month periods ended September 30, 2018 and October 1, 2017, we recognized $219 and $370, respectively, in income tax expense. These are detailed as follows:
Three-month periods ended | Nine-month periods ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Current Income Tax Provision: | ||||||||||||||||
Foreign | $ | 64 | $ | 48 | $ | 153 | $ | 199 | ||||||||
Federal | - | 14 | - | 42 | ||||||||||||
State | 4 | 4 | 12 | 12 | ||||||||||||
Deferred Income Tax Provision | 18 | 38 | 54 | 117 | ||||||||||||
Total | $ | 86 | $ | 104 | $ | 219 | $ | 370 |
The deferred income tax provisionrate for the three-month and nine-month periods ended September 30, 2018 representscurrent period compared to the increase in the taxable temporary difference related to goodwill and certain other indefinite-lived intangible assets of the U.S. operations that cannot be predicted to reverse for book purposes during our loss carryforward periods, partially offset by the amortization of certain intangible assets of Accutronics (U.K.). The deferred income tax provision for the three-month and nine-month periods ended October 1, 2017 reflects the higher previously-enacted U.S corporate tax rate. The current income tax provisions for 2018 and 2017 areprior period was primarily due to the income generated byreversal of the valuation allowance on our foreign operations during the respective periods.U.S. deferred tax assets as of December 31, 2018.
Our effective consolidated tax ratesrate for the nine-month periodssix months ended SeptemberJune 30, 2018 and October 1, 2017 were:
Nine-Month Periods Ended | ||||||
September 30, | October 1, | |||||
2018 | 2017 | |||||
Income Before Income Taxes | $5,461 | $4,226 | ||||
Income Tax Provision | 219 | 370 | ||||
Effective Income Tax Rate | 4.0% | 8.8% |
2019 was lower than the U.S. federal statutory rate primarily due to tax benefits relating to the exercise of stock options during the period.
In As of December 31, 2018, we have domestic net operating loss (“NOL”) carryforwards of $63,388, which expire 2019 thru 2035, and 2017, in the U.S.domestic tax credits of $1,817, which expire 2028 thru 2037, available to reduce future taxable income. Management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.
As of June 30, 2019, for certain past operations in the U.K., we recognizecontinue to report a valuation allowance for ourNOL carryforwards of approximately $10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating loss carryforwards and other deferred tax assets that cannot be offset by reversing temporary differences. The recognition of the valuation allowance is based on an assessment of all available evidence, both positive and negative, weighted based on objective verifiability. The assessment of the realizability of the U.S. deferred tax assets was based on a number of factors including our history of operating losses our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate. The use of our U.K. net operating loss carryforwards may be limited due to the change in the past U.K. operation. Based onoperation and cannot currently be used to reduce taxable income at our assessmentother U.K. subsidiary, Accutronics Ltd.
As of all available evidence and its weighting based on objective verifiability, we concluded that the realizability of these deferred tax assets is not more likely than not at SeptemberJune 30, 2018. In both 2018 and 2017,2019, we have not recognized a valuation allowance against our other foreign deferred tax assets, as we believe that itrealization is considered to be more likely than not that they will be realized. We will continue to evaluate the realizability of our deferred tax assets in future periods.
As of December 31, 2017, we have domestic and foreign net operating losses (“NOL”) totaling approximately $69,594 and $12,760, respectively, and domestic tax credits of approximately $1,837, available to reduce future taxable income. Included in our NOL carryforwards are foreign loss carryforwards of approximately $12,760, nearly all of which can be carried forward indefinitely. The domestic NOL carryforward of $69,594 expires beginning in 2020 through 2034.not.
As of SeptemberJune 30, 2018, 2019, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations.
There were no unrecognized tax benefits related to uncertain tax positions at SeptemberJune 30, 2018 2019 and December 31, 2017.2018.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 20022000 through 20172018 remain subject to examination by the Internal Revenue Service (“IRS”) anddue to our net operating loss carryforwards. Our U.S. tax matters for the years 2000 through 2018 remain subject to examination by various state and local tax jurisdictions due to our NOLnet operating loss carryforwards. Our tax matters for the years 20092010 through 20172018 remain subject to examination by the respective foreign tax jurisdiction authorities.
9. OPERATING LEASES
Basic earnings per share (“EPS”) is computed by dividing net income attributableThe Company has operating leases predominantly for operating facilities. As of June 30, 2019, the remaining lease terms on our operating leases range from less than one year to Ultralife Corporationapproximately 3 years. Renewal options to extend our leases have been exercised. Termination options are not reasonably certain of exercise by the weighted-average shares outstanding duringCompany. There is no transfer of title or option to purchase 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, 2018, 1,252,502 stock options and 17,500 restricted stock awards were included in the calculation of Diluted EPS as such securitiesleased assets upon expiration. There are dilutive. Inclusion of these securities resulted in 571,829 additional shares in the calculation of fully diluted earnings per share. For the comparable three-month period ended October 1, 2017, 1,481,844 stock options and no restricted stock awards were included in the calculation of Diluted EPS resulting in 407,668 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended September 30, 2018 and October 1, 2017, 1,252,502 and 1,066,844 stock options and 17,500 and zero restricted stock awards, respectively, were included in the calculation of Diluted EPS as such securities are dilutive. Inclusion of these securities resulted in 548,004 and 323,217 additional shares, respectively, in the calculation of fully diluted earnings per share. residual value guarantees or material restrictive covenants.
There were 502,250 and 569,000 outstanding stock optionsThe components of lease expense for the three-monthcurrent and prior-year comparative periods ended September 30, 2018 and October 1, 2017, respectively, which were not included in EPS as the effect would be anti-dilutive. There were 502,250 and 984,000 outstanding stock options for the nine-month periods ended September 30, 2018 and October 1, 2017, respectively, which were not included in EPSfollows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, 2019 | July 1, 2018 | June 30, 2019 | July 1, 2018 | |||||||||||||
Operating lease cost | $ | 145 | $ | 150 | $ | 290 | $ | 301 | ||||||||
Variable lease cost | 21 | 29 | 42 | 47 | ||||||||||||
Total lease cost | $ | 166 | $ | 179 | $ | 332 | $ | 348 |
Supplemental cash flow information related to leases was as the effect would be anti-dilutive.follows:
Six Months Ended | ||||||||
June 30, 2019 | July 1, 2018 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 283 | $ | 308 | ||||
Right-of-use assets obtained in exchange for lease liabilities: | $ | 131 | $ | - |
Supplemental balance sheet information related to leases was as follows:
Balance Sheet Classification | June 30, 2019 | December 31, 2018 | |||||||
Assets: | |||||||||
Operating lease right-of-use asset | Other noncurrent assets | $ | 720 | $ | 805 | ||||
Liabilities: | |||||||||
Current operating lease liability | Accrued expenses and other current liabilities | $ | 374 | $ | 439 | ||||
Operating lease liability, net of current portion | Other noncurrent liabilities | 344 | 376 | ||||||
Total operating lease liability | $ | 718 | $ | 815 | |||||
Weighted-average remaining lease term (years) | 2.1 | 2.1 | |||||||
Weighted-average discount rate | 4.5 | % | 4.5 | % |
Future minimum lease payments as of June 30, 2019 are as follows:
Maturity of Operating Lease Liabilities | ||||
2019 | $ | 191 | ||
2020 | 389 | |||
2021 | 160 | |||
2022 | 18 | |||
2023 | - | |||
Thereafter | - | |||
Total lease payments | 758 | |||
Less: Imputed interest | (40 | ) | ||
Present value of remaining lease payments | $ | 718 |
In July 2019, the Company entered into an agreement effective July 8, 2019 to extend the operating lease term of its Shenzhen facility. Future minimum lease payments of approximately $1,650 are required to be made over the five-year term of the lease. There is no contractual renewal option. There is no transfer of title or option to purchase the facility upon expiration. There are no residual value guarantees or material restrictive covenants.
10. COMMITMENTS AND CONTINGENCIES
a. Purchase Commitments
As of SeptemberJune 30, 2018, 2019, we have made commitments to purchase approximately $3,230$1,418 of production machinery and equipment.
b. Product Warranties
We estimate future warranty costs associated with expectedto be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Warranty reservesEstimated future costs are based on historicalactual past experience of warranty claims and are generally will be estimated as a percentage of sales over the warranty period. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded. Changes in our product warranty liability during the firstnine six months of 20182019 and 20172018 were as follows:
Nine-Month Periods Ended | ||||||||
September 30, 2018 | October 1, 2017 | |||||||
Accrued Warranty Obligations – Beginning | $ | 149 | $ | 172 | ||||
Accruals for Warranties Issued | (9 | ) | 66 | |||||
Settlements Made | (54 | ) | (58 | ) | ||||
Accrued Warranty Obligations – Ending | $ | 86 | $ | 180 |
Six-Month Period Ended | ||||||||
June 30, 2019 | July 1, 2018 | |||||||
Accrued warranty obligations – beginning | $ | 95 | $ | 149 | ||||
Assumed warranty obligations – SWE | 145 | - | ||||||
Accruals for warranties issued | 18 | 7 | ||||||
Settlements made | (22 | ) | (5 | ) | ||||
Accrued warranty obligations – ending | $ | 236 | $ | 151 |
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 ourthe Company’s financial position, results of operations or cash flows. However, recognizing that legal matters are subject to inherent uncertainties, and there exists the possibility that ultimate resolution of these matters could have a material adverse impact on the Company’s financial position and results of operations in the period in which any such effects are recorded. We are not aware of any such situations at this time.
Dreamliner Litigation
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by fire while parked at London Heathrow Airport. Following an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, a final report was issued by the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company. A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell, which Ultralife has produced since 2001, with wide-use in global defense and commercial applications.
On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire, which was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. We immediately referred this matter to our insurers.
This lawsuit has now been resolved ( February 2018), the claimant has terminated the action against the Company, and the Court has acknowledged and consented to this termination. The matter was terminated without financial consequences to the Company.
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,9-volt, cylindrical and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as corporate charges.
The components of segment performance were as follows:
Three-Month Period Ended SeptemberJune 30,, 2018: 2019:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 17,289 | $ | 3,041 | $ | - | $ | 20,330 | ||||||||
Segment Contribution | 4,702 | 1,339 | (4,541 | ) | 1,500 | |||||||||||
Interest, Financing and Miscellaneous Income, Net | 21 | 21 | ||||||||||||||
Tax Provision | (86 | ) | (86 | ) | ||||||||||||
Non-Controlling Interest | (27 | ) | (27 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 1,408 |
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 20,300 | $ | 9,097 | $ | - | $ | 29,397 | ||||||||
Segment contribution | 5,655 | 3,210 | (5,823 | ) | 3,042 | |||||||||||
Other expense | (83 | ) | (83 | ) | ||||||||||||
Tax provision | (676 | ) | (676 | ) | ||||||||||||
Non-controlling interest | (27 | ) | (27 | ) | ||||||||||||
Net income attributable to Ultralife | $ | 2,256 |
Three-Month Period Ended OctoberJuly 1, 2017:2018:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 18,616 | $ | 2,431 | $ | - | $ | 21,047 | ||||||||
Segment Contribution | 5,186 | 1,069 | (4,992 | ) | 1,263 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (58 | ) | (58 | ) | ||||||||||||
Tax Provision | (104 | ) | (104 | ) | ||||||||||||
Non-Controlling Interest | (3 | ) | (3 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 1,098 |
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 17,831 | $ | 5,033 | $ | - | $ | 22,864 | ||||||||
Segment contribution | 4,926 | 1,624 | (4,918 | ) | 1,632 | |||||||||||
Other income | 86 | 86 | ||||||||||||||
Tax provision | (78 | ) | (78 | ) | ||||||||||||
Non-controlling interest | (13 | ) | (13 | ) | ||||||||||||
Net income attributable to Ultralife | $ | 1,627 |
Six-Month Period Ended June 30, 2019:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 36,298 | $ | 11,981 | $ | - | $ | 48,279 | ||||||||
Segment contribution | 10,065 | 3,884 | (10,359 | ) | 3,590 | |||||||||||
Other expense | (141 | ) | (141 | ) | ||||||||||||
Tax provision | (717 | ) | (717 | ) | ||||||||||||
Non-controlling interest | (51 | ) | (51 | ) | ||||||||||||
Net income attributable to Ultralife | $ | 2,681 |
Six-Month Period Ended July 1, 2018:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 35,055 | $ | 10,878 | $ | - | $ | 45,933 | ||||||||
Segment contribution | 9,962 | 3,870 | (9,844 | ) | 3,988 | |||||||||||
Other expense | (48 | ) | (48 | ) | ||||||||||||
Tax provision | (133 | ) | (133 | ) | ||||||||||||
Non-controlling interest | (30 | ) | (30 | ) | ||||||||||||
Net income attributable to Ultralife | $ | 3,777 |
Nine-Month Period Ended September 30, 2018:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 52,344 | $ | 13,919 | $ | - | $ | 66,263 | ||||||||
Segment Contribution | 14,664 | 5,209 | (14,385 | ) | 5,488 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (27 | ) | (27 | ) | ||||||||||||
Tax Provision | (219 | ) | (219 | ) | ||||||||||||
Non-Controlling Interest | (57 | ) | (57 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 5,185 |
Nine-Month Period Ended October 1, 2017:
Battery & Energy Products | Communi- cations Systems | Corporate | Total | |||||||||||||
Revenues | $ | 52,977 | $ | 10,045 | $ | - | $ | 63,022 | ||||||||
Segment Contribution | 14,858 | 4,508 | (14,940 | ) | 4,426 | |||||||||||
Interest, Financing and Miscellaneous Expense, Net | (200 | ) | (200 | ) | ||||||||||||
Tax Provision | (370 | ) | (370 | ) | ||||||||||||
Non-Controlling Interest | (8 | ) | (8 | ) | ||||||||||||
Net Income Attributable to Ultralife | $ | 3,848 |
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, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Three-Month Period Ended June 30, 2019: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Battery & Energy Products | $ | 17,289 | $ | 10,127 | $ | 7,162 | $ | 20,300 | $ | 15,049 | $ | 5,251 | ||||||||||||
Communications Systems | 3,041 | - | 3,041 | 9,097 | - | 9,097 | ||||||||||||||||||
Total | $ | 20,330 | $ | 10,127 | $ | 10,203 | $ | 29,397 | $ | 15,049 | $ | 14,348 | ||||||||||||
50 | % | 50 | % | 51 | % | 49 | % |
Three-Month Period Ended October 1, 2017: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 18,616 | $ | 10,817 | $ | 7,799 | ||||||
Communications Systems | 2,431 | - | 2,431 | |||||||||
Total | $ | 21,047 | $ | 10,817 | $ | 10,230 | ||||||
51 | % | 49 | % |
Nine-Month Period Ended September 30, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Three-Month Period Ended July 1, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Battery & Energy Products | $ | 52,344 | $ | 30,007 | $ | 22,337 | $ | 17,831 | $ | 10,254 | $ | 7,577 | ||||||||||||
Communications Systems | 13,919 | - | 13,919 | 5,033 | - | 5,033 | ||||||||||||||||||
Total | $ | 66,263 | $ | 30,007 | $ | 36,256 | $ | 22,864 | $ | 10,254 | $ | 12,610 | ||||||||||||
45 | % | 55 | % | 45 | % | 55 | % |
Nine-Month Period Ended October 1, 2017: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Six-Month Period Ended June 30, 2019: | Total Revenue | Commercial | Government/ Defense | |||||||||||||||||||||
Battery & Energy Products | $ | 52,977 | $ | 30,988 | $ | 21,989 | $ | 36,298 | $ | 25,059 | $ | 11,239 | ||||||||||||
Communications Systems | 10,045 | - | 10,045 | 11,981 | - | 11,981 | ||||||||||||||||||
Total | $ | 63,022 | $ | 30,988 | $ | 32,034 | $ | 48,279 | $ | 25,059 | $ | 23,220 | ||||||||||||
49 | % | 51 | % | 52 | % | 48 | % |
Six-Month Period Ended July 1, 2018: | Total Revenue | Commercial | Government/ Defense | |||||||||
Battery & Energy Products | $ | 35,055 | $ | 19,880 | $ | 15,175 | ||||||
Communications Systems | 10,878 | - | 10,878 | |||||||||
Total | $ | 45,933 | $ | 19,880 | $ | 26,053 | ||||||
43 | % | 57 | % |
U.S. and Non-U.S. Revenue Information1:
Three-Month Period Ended June 30, 2019: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 20,300 | $ | 10,843 | $ | 9,457 | ||||||
Communications Systems | 9,097 | 8,897 | 200 | |||||||||
Total | $ | 29,397 | $ | 19,740 | $ | 9,657 | ||||||
67 | % | 33 | % |
Three-Month Period Ended September 30, 2018: | Total Revenue | United States | Non-United States | |||||||||||||||||||||
Three-Month Period Ended July 1, 2018: | Total Revenue | United States | Non-United States | |||||||||||||||||||||
Battery & Energy Products | $ | 17,289 | $ | 9,389 | $ | 7,900 | $ | 17,831 | $ | 10,647 | $ | 7,184 | ||||||||||||
Communications Systems | 3,041 | 2,140 | 901 | 5,033 | 5,033 | - | ||||||||||||||||||
Total | $ | 20,330 | $ | 11,529 | $ | 8,801 | $ | 22,864 | $ | 15,680 | $ | 7,184 | ||||||||||||
57 | % | 43 | % | 69 | % | 31 | % |
Six-Month Period Ended June 30, 2019: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 36,298 | $ | 18,410 | $ | 17,888 | ||||||
Communications Systems | 11,981 | 11,351 | 630 | |||||||||
Total | $ | 48,279 | $ | 29,761 | $ | 18,518 | ||||||
62 | % | 38 | % |
Three-Month Period Ended October 1, 2017: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 18,616 | $ | 9,161 | $ | 9,455 | ||||||
Communications Systems | 2,431 | 2,144 | 287 | |||||||||
Total | $ | 21,047 | $ | 11,305 | $ | 9,742 | ||||||
54 | % | 46 | % |
Nine-Month Period Ended September 30, 2018: | Total Revenue | United States | Non-United States | |||||||||
Battery & Energy Products | $ | 52,344 | $ | 29,451 | $ | 22,893 | ||||||
Communications Systems | 13,919 | 12,747 | 1,172 | |||||||||
Total | $ | 66,263 | $ | 42,198 | $ | 24,065 | ||||||
64 | % | 36 | % |
Nine-Month Period Ended October 1, 2017: | Total Revenue | United States | Non-United States | |||||||||||||||||||||
Six-Month Period Ended July 1, 2018: | Total Revenue | United States | Non-United States | |||||||||||||||||||||
Battery & Energy Products | $ | 52,977 | $ | 25,832 | $ | 27,145 | $ | 35,055 | $ | 20,062 | $ | 14,993 | ||||||||||||
Communications Systems | 10,045 | 9,399 | 646 | 10,878 | 10,606 | 272 | ||||||||||||||||||
Total | $ | 63,022 | $ | 35,231 | $ | 27,791 | $ | 45,933 | $ | 30,668 | $ | 15,265 | ||||||||||||
56 | % | 44 | % | 67 | % | 33 | % |
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09 (Topic 606) “Revenue from Contracts with Customers” related to revenue from contracts with customers. Under this standard, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP and permits the use of either the retrospective or cumulative effect transition method. Topic 606 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company has adopted Topic 606 effective January 1, 2018. See Note 2 for further discussion.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The standard is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years, and should be applied using a retrospective transition method for each period presented. The standard requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statements of cash flows. The Company has adopted this standard effective January 1, 2018. As a result, restricted cash has been included in the total cash amounts on the Company’s Consolidated Statement of Cash Flows for all periods presented and the required disclosures have been included in the Notes to Consolidated Financial Statements.
In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. The standard makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The standard requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company has adopted this standard effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial Statements for the current or prior periods presented.
In May 2017, the FASB issued Accounting Standards Update 2017-09, “Compensation – Stock Compensation (Topic 718) – Scope of Modification Accounting”, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The standard is to be applied on a prospective basis to an award modified on or after the adoption date. The Company has adopted this standard effective January 1, 2018. Adoption of this standard did not impact our Consolidated Financial Statements.
There have been no developments to recently issued accounting standards, including the expected dates of adoption and anticipated effects on the Company’s Consolidated Financial Statements, from those disclosed in the Company’s 2017 Annual Report on Form 10-K, except for the following:
In March 2018, the FASB issued Accounting Standards Update 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.118”. The standard adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No.118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118. We have determined reasonable estimates for those effects and have recorded provisional amounts in our Consolidated Financial Statements as of September 30, 2018 and December 31, 2017.
ITEMItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, our reliance on certain key customers; potential costs because of the warranties we supply with our products and services; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; possible breaches in security and other disruptions; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; potential disruptionspossible breaches in our supply of raw materialssecurity and components;other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our inability to comply with changes to the regulations for the shipment of our products; safety risks, including the risk of fire; possible impairments of our goodwill and other intangible assets; negative publicity of Lithium-ion batteries; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; possible impairments of our exposure to foreign currency fluctuations;goodwill and other intangible assets; our customers’ demand falling short of volume expectations in our supply agreements; negative publicity concerning Lithium-ion batteries; our exposure to foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; our ability to utilize our net operating loss carryforwards; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to utilize our net operating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals”;minerals;” possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect”“anticipate,” “believe,” “estimate,” “expect,” “estimate,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 20172018 to reflect new information or risks, future events or other developments.
The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and the Risk Factors and our Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts.
General
We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. We continually striveevaluate ways to increase the size and profitability of our business throughgrow, 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 and government agencies.departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTI™, ABLE™, ACCUTRONICS™, ACCUPRO™, and ENTELLION™ brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. See Note 11 in the Notes to Consolidated Financial Statements.
Our website address is www.ultralifecorporation.com. We make available free of charge via a hyperlink on our website (see Investor Relations link on the website) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
Overview
Consolidated revenues of $20,330$29,397 for the three-month period ended SeptemberJune 30, 2018, decreased2019, increased by $717$6,533 or 3.4%28.6%, from $21,047$22,864 during the three-month period ended OctoberJuly 1, 2017,2018, due to lower non-U.S. government/defensehigher revenues from our Battery & Energy Products business reflecting the May 1, 2019 acquisition of SWE and 9-Volt battery sales.from our Communications Systems business driven by shipments of mounted power amplifiers to support the U.S. Army’s Network Modernization initiatives under the delivery orders received in October 2018.
Gross profit for the three-month period ended SeptemberJune 30, 20182019 was $6,041$8,865 or 29.7%30.2% of revenues, compared to $6,255$6,550 or 29.7%28.6% of revenues, for the same quarter a year ago. The decline160-basis point increase in gross profitmargin for both businesses resulted from lower sales.a favorable product mix. The gross margin for the second quarter of 2019 was reduced by 70 basis points resulting from the write-up of certain SWE inventory to fair market value as required by Generally Accepted Accounting Principles (“GAAP”) purchase accounting and the subsequent sell-through of that inventory during the second quarter.
Operating expenses decreasedincreased to $4,541$5,823 during the three-month period ended SeptemberJune 30, 2018,2019, compared to $4,992$4,918 during the three-month period ended OctoberJuly 1, 2017.2018. The $451increase of $905 or 9.0% decrease reflects18.4% was fully attributable to SWE which contributed operating expenses of $1,156 in the second quarter, including $165 of one-time direct acquisition costs incurred by the Company. Excluding SWE, operating expenses decreased $251 or 5.1% due primarily to lower corporate expenses. Both periods reflect continued tight control over discretionary spending. Operating expenses as a percentage of sales declined 170 basis points from 21.5% for the second quarter of 2018 to 19.8% for the current quarter.
Operating income for the three-month period ended SeptemberJune 30, 20182019 was $1,500$3,042 or 7.4%10.3% of revenues, compared to $1,263$1,632 or 6.0%7.1% for the year-earlier period. The 18.7% increase in operating income resulted from lowerrevenue growth and operating expenses.expense leverage. Operating income for the three-month period ending June 30, 2019 includes purchase accounting adjustments and non-recurring costs related to the acquisition of SWE totaling $388, or equivalent to $0.02 per share. Net of these costs, SWE contributed $241 of operating income for the current period.
Net income attributable to Ultralife was $1,408$2,256, or $0.09$0.14 per share – basic and diluted, for the three-month period ended SeptemberJune 30, 2018,2019, compared to $1,098,$1,627, or $0.07$0.10 per share – basic and diluted, for the three-month period ended OctoberJuly 1, 2017.2018. As a result of our reversal of the allowance on deferred tax assets at year-end 2018, we utilized a statutory tax rate of 23.3% to record our tax provision for the second quarter of 2019 compared to an effective rate of 4.5% for the year-earlier quarter. Since we do not expect to pay cash taxes in the U.S. for the foreseeable future due to the usage of our deferred tax assets, we have estimated an effective tax rate of 1.2 % resulting in Adjusted EPS of $0.18 for the 2019 second quarter. Including the one-time adjustments and expenses and the use of the U.S. statutory tax rate, SWE was accretive by approximately $0.01 of EPS for the quarter.
Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $2,472$4,084 in the thirdsecond quarter of 20182019 compared to $1,985$2,537 for the thirdsecond quarter of 2017.2018. See the section “Adjusted EBITDA” beginning on page 25 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
We are delighted aboutenter the two recently announced Communications Systems delivery contracts totaling $19.2 millionsecond half of 2019 prepared to supply our Vehicle Amplifier-Adaptorsfulfill remaining amplifier orders and Mounted Power Amplifiers for the U.S. Army, asto capture opportunities available to us from several new products serving commercial end markets. As a result, we remain well as the $9.5 million IDIQ contract to supply our communication kits for an undisclosed branch of the U.S. Department of Defense.
We remain focused on our revenue diversification strategy, pursuing commercial opportunities and government/defense opportunities as U.S. spending continues to recover, and are positioned to deliver another year of profitable growth in 2018.2019 now boosted by our acquisition of SWE.
Results of Operations
Three-Month Periods Ended SeptemberJune 30 2018, 2019 and October July 1, 20172018
Revenues. Consolidated revenues for the three-month period ended SeptemberJune 30, 2018 amounted to $20,330, a decrease2019 were $29,397, an increase of $717,$6,533, or 3.4%28.6%, from the $21,047$22,864 reported for the three-month period ended OctoberJuly 1, 2017.2018. Overall, commercial sales increased 46.8% and government/defense sales increased 13.6% over the 2018 period. Revenues for the 2019 period include revenues of SWE which was acquired by the Company on May 1, 2019.
Battery & Energy Products revenues decreased $1,327,increased $2,469, or 7.1%13.9%, from $18,616$17,831 for the three-month period ended OctoberJuly 1, 20172018 to $17,289$20,300 for the three-month period ended SeptemberJune 30, 2019. The increase was attributable to the $4,750 revenue of SWE partially offset by a $2,281 reduction in sales reflecting the absence of revenue from a large 5390 battery order completed in 2018 reflectingand lower 9-Volt battery sales to our Europe-based customers, timingin the second quarter of orders to non-U.S. government/defense customers and large shipments to an industrial commercial customer in 2017 which did not re-occur in 2018. Our U.S. government/defense sales increased 9.6% for the quarter due primarily to higher sales of our primary 5390 batteries to the U.S. Department of Defense, consistent with the recovery in domestic defense spending. 2019.
Communications Systems revenues increased $610,$4,064, or 25.1%80.7%, from $2,431$5,033 during the three-month period ended OctoberJuly 1, 20172018 to $3,041$9,097 for the three-month period ended SeptemberJune 30, 2018.2019. This increase is primarily attributable to higher shipments of core products such as our 20-wattmounted power amplifiers universal vehicle adaptorsto support the U.S. Army’s Network Modernization and other radio accessories.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. These shipments exceeded 2018 second quarter sales to fulfill a Vehicle Amplifier Adapters award received in December 2017 for the U.S. Army’s Security Force Assistance Brigades award from a large global defense prime contractor, and shipments of our Vehicle Installed Power Enhanced Riflemen Appliqué (“VIPER”).
Cost of Products Sold / Gross Profit.Profit. Cost of products sold totaled $14,289$20,532 for the quarter ended SeptemberJune 30, 2018, a decrease2019, an increase of $503,$4,218, or 3.4%25.9%, from the $14,792$16,314 reported for the same three-month period a year ago. The decrease was primarily due to lower year-over-year sales of our Battery & Energy Products business. Consolidated cost of products sold as a percentage of total revenue remained constant at 70.3%decreased from 71.4% for the three-month period ended July 1, 2018 and 2017to 69.8% for the three-month periods.period ended June 30, 2019. Correspondingly, consolidated gross margin was 29.7%30.2% for both periods.the three-month period ended June 30, 2019, compared with 28.6% for the three-month period ended July 1, 2018, primarily reflecting a more favorable product sales mix. The gross margin for the 2019 period includes an adjustment to increase the opening inventory of SWE to fair market value in accordance with purchase accounting which resulting in a 70-basis point reduction in reported gross margin upon sell through of the product during the second quarter of 2019.
For our Battery & Energy Products segment, gross profit for the thirdsecond quarter of 20182019 was $4,702$5,655, an increase of $729 or 27.2% of revenues, a decrease of $484 or 9.3%14.8% from gross profit of $5,186, or 27.9% of revenues,$4,926 for the thirdsecond quarter of 2017.2018. Battery & Energy Products’ gross margin decreasedof 27.9% increased by 30 basis points over the 27.6% gross margin for the three-monthyear-earlier period, ended September 30, 2018 by 70 basis points, reflecting favorable product mix.mix, despite the purchase accounting adjustment to write-up SWE opening inventory to fair market value which resulted in a $205 charge to cost of products sold in the second quarter of 2019. Excluding this adjustment, the gross margin for Battery & Energy Products would have been 28.9%.
For our Communications Systems segment, gross profit for the thirdsecond quarter of 20182019 was $1,339$3,210 or 44.0%35.3% of revenues, an increase of $270$1,586 or 25.2%97.7%, from gross profit of $1,069,$1,624, or 44.0%32.3% of revenues, for the thirdsecond quarter of 2017. Both three-month periods reflect2018. The 300-basis point increase in gross margin during 2019 is driven by the product mix of our high-value proposition core products such as our 20-watt amplifiers, universal vehicle adaptors and other radio accessories.favorable sales mix.
Operating Expenses. Total operating expenses for the three-month period ended SeptemberJune 30, 2018 totaled $4,541, a decrease2019 were $5,823, an increase of $451$905 or 9.0% from18.4% over the $4,992$4,918 reported during the three-month period ended OctoberJuly 1, 2017.2018. The reduction forincrease is fully attributable to the 2018 thirdacquisition of SWE, which contributed operating expenses of $1,156 in the second quarter, reflects theincluding $165 of one-time direct acquisition costs and $41 of intangible asset amortization. Excluding operating expenses of SWE, operating expenses decreased $251 or 5.1% due to lower corporate expenses. Both periods reflected continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 22.3%19.8% for the quarter ended SeptemberJune 30, 20182019 compared to 23.7%21.5% for the quarter ended OctoberJuly 1, 2017.2018. Amortization expense associated with intangible assets related to our acquisitions was $97$132, including $41 for SWE, for the thirdsecond quarter of 20182019 ($6199 in selling, general and administrative expenses and $36$33 in research and development costs), compared with $106$101 for the thirdsecond quarter of 20172018 ($64 in selling, general, and administrative expenses and $42$37 in research and development costs). Research and development costs were $1,099$1,587 for the three-month period ended SeptemberJune 30, 2018, a decrease2019, an increase of $256$369 or 18.9%30.3%, from $1,355$1,218 for the three-months ended OctoberJuly 1, 2017.2018. The decrease primarily reflects the timingincrease is fully attributable to $383 of research and development and testing costs associated with new products.incurred by SWE. Selling, general, and administrative expenses decreased $195increased $536 or 5.4%14.5%, to $3,442$4,236 for the thirdsecond quarter of 20182019 from $3,637$3,700 for the third quarter of 2017. The decrease is attributable to continued tight control over discretionary administrative spending and lower sales commissions due to lower sales in the thirdsecond quarter of 2018. The increase is fully attributable to the acquisition of SWE which contributed operating expenses of $773, including one-time acquisition costs of $165 and intangible asset amortization of $41 for the second quarter of 2019.
Other Expense (Income). Other incomeexpense totaled $21$83 for the three-month period ended SeptemberJune 30, 20182019 compared to other expenseincome of $58$86 for the three-month period ended OctoberJuly 1, 2017.2018. Interest and financing expense, net of interest income, decreased $25increased $93, from $38$21 for the thirdsecond quarter of 20172018 to $13$114 for the comparable period in 2018.2019. The decreaseincrease is due to higher interest income resulting from our increased cash balance in 2018 as compared to 2017.the financing for the SWE acquisition, which were $110 for the second quarter of 2019. Miscellaneous income amounted to $34$31 for the thirdsecond quarter of 20182019 compared with miscellaneous expense of $20$107 for the thirdsecond quarter of 2017,2018, primarily due to transactions impacted by foreign currency fluctuations in the U.S. dollar relative to the Pound Sterling, and the strengthening of the U.S dollar to the Pound Sterling by 4% from the end of the first quarter to the end of the second quarter of 2019 and 6% from the end of first quarter to the end of the thirdsecond quarter in 2018.
Income Taxes. The tax provision for the 2018 third2019 second quarter was $86$676 compared to $104$78 for the thirdsecond quarter of 2017.2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of 22.8% was used to record our tax provision for the second quarter of 2019 compared to an effective tax rate of 4.5% for the year-earlier quarter. We expect that our deferred taxes will offset U.S. taxes for the foreseeable future, and that a cash-based effective tax rate for the 2019 second quarter would be approximately 1.2%. See Note 98 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.
Net Income Attributable to Ultralife. Net income attributable to Ultralife was $1,408,$2,256, or $0.09$0.14 per share – basic and diluted, for the three-month period ended SeptemberJune 30, 2018,2019, compared to $1,098,$1,627, or $0.07$0.10 per share – basic and diluted, for the three-month period ended OctoberJuly 1, 2017.2018. Average weighted common shares outstanding used to compute diluted earnings per share increaseddecreased from 15,971,24316,519,593 in the thirdsecond quarter of 20172018 to 16,523,43316,192,692 in the thirdsecond quarter of 2018.2019. The increasedecrease in 20182019 is attributable to share repurchases under the Company’s Share Repurchase Program which commenced on November 1, 2018 partially offset by stock option exercises since the thirdsecond quarter of 20172018 and an increase in the weighted average stock price to compute diluted shares from $6.86$9.64 for the thirdsecond quarter of 20172018 to $9.29$9.15 for the thirdsecond quarter of 2018.2019.
Nine-Month Periods Ended SeptemberSix-Month Periods Ended June 30 2018, 2019 and October July 1, 20172018
Revenues. Consolidated revenues for the nine-monthsix-month period ended SeptemberJune 30, 20182019 amounted to $66,263,$48,279, an increase of $3,241$2,346 or 5.1%, from the $63,022$45,933 reported for the nine-monthsix-month period ended OctoberJuly 1, 2017.2018. Overall, commercial sales increased 26.0% and government/defense sales decreased 10.9% from the six-month 2018 period. Revenues for the six-month 2019 period include SWE which was acquired by the Company on May 1, 2019.
Battery & Energy Products revenues decreased $633,increased $1,243, or 1.2%3.5%, from $52,977$35,055 for the nine-monthsix-month period ended OctoberJu1y 1, 20172018 to $52,344$36,298 for the nine-monthsix-month period ended SeptemberJune 30, 2018. Government and defense sales of this segment increased 1.6%2019. The increase was attributable to the $4,750 revenue contribution from the 2017 nine-month period, reflectingoperations of SWE and a 21.5%4.0% increase in U.S. governmentbattery sales to medical customers partially offset by a $3,507 or 10.0% reduction in sales primarily reflecting the absence of revenue from a large 5390 battery order completed in 2018 and defense sales, and now comprise 42.7% of total segment sales versus 41.5% last year. The increase primarily reflects sales of our primary 5390 batteries to the U.S. Department of Defense. While shipments of batteries and chargers for medical applications increased 6.9%, overall commercial revenues of this segment decreased 3.2% from the 2017 nine-month period and now comprise 57.3% of total segment sales versus 58.5% last year. The year-over-year decrease resulted from lower shipments of 9-Volt batteries and non-recurring industrial commercial product sales in 2017. the first half of 2019.
Communications Systems revenues increased $3,874,$1,103, or 38.6%10.1%, from $10,045$10,878 during the nine-monthsix-month period ended OctoberJuly 1, 20172018 to $13,919$11,981 for the nine-monthsix-month period ended SeptemberJune 30, 2018.2019. This increase is primarily attributable to the fulfillmentshipments of a Vehicle Amplifier Adaptors award received in December 2017 from a large global defense prime contractor formounted power amplifiers to support the U.S. Army’s Security Force Assistance BrigadesNetwork Modernization and other initiatives under the delivery orders announced in October 2018 and shipments of ourUniversal Vehicle Installed Power Enhanced Riflemen Appliqué (“VIPER”). Adaptors under an indefinite-delivery/indefinite-quantity contract with the Naval Air Warfare Center Aircraft Division announced in June 2019.
Cost of Products Sold / Gross Profit.Profit. Cost of products sold totaled $46,390$34,330 for the nine-monthsix-month period ended SeptemberJune 30, 2018,2019, an increase of $2,734$2,229 or 6.3%6.9%, from the $43,656$32,101 reported for the same nine-monthsix-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 69.3%69.9% for the nine-monthsix-month period ended OctoberJuly 1, 20172018 to 70.0%71.1% for the nine-monthsix-month period ended SeptemberJune 30, 2018.2019. Correspondingly, consolidated gross margin was 30.0%28.9% for the nine-monthsix-month period ended SeptemberJune 30, 2018,2019, compared with 30.7%30.1% for the nine-monthsix-month period ended OctoberJuly 1, 2017,2018, due primarily to product mix. The gross margin for the 2019 period includes an adjustment to increase the opening inventory of SWE to fair market value in accordance with purchase accounting which resulted in a 40-basis point reduction in reported gross margin for the first half of 2019 upon sell through of the product during the second quarter of 2019.
For our Battery & Energy Products segment, the cost of products sold decreased $439increased $1,140 or 1.2%4.5%, from $38,119$25,093 during the nine-monthsix-month period ended OctoberJuly 1, 20172018 to $37,680$26,233 during the nine-monthsix-month period ended SeptemberJune 30, 2018 due to lower sales in the 2018 period.2019. Battery & Energy Products’ gross profit for the 2018 nine-month2019 six-month period was $14,664$10,065 or 28.0%27.7% of revenues, a decreasean increase of $194$103 or 1.3%1.0% from gross profit of $14,858,$9,962, or 28.0%28.4% of revenues, for the 2017 nine-month2018 six-month period. Battery & Energy Products’ gross margin decreased for the six-month period ended June 30, 2019 by 70 basis points, primarily due to the purchase accounting adjustment described above which accounted for 60 basis points of the reduction.
For our Communications Systems segment, the cost of products sold increased by $3,173$1,089 or 57.3%15.5% from $5,537$7,008 during the nine-monthsix-month period ended OctoberJuly 1, 20172018 to $8,710$8,097 during the nine-monthsix-month period ended SeptemberJune 30, 2018.2019. Communications Systems’ gross profit for the first ninesix months of 20182019 was $5,209$3,884 or 37.4%32.4% of revenues, an increase of $701$14 or 15.6%0.4% from gross profit of $4,508$3,870 or 44.9%35.6% of revenues, for the third quarter of 2017.six-month period ended July 1, 2018. The decrease in gross margin during 2018 iswas primarily due to product mix reflectingcosts incurred to commence production of large program awards during the higher sales for competitively bid U.S. Departmentfirst quarter of Defense contracts in the current nine-month period.2019.
Operating Expenses. Total operating expenses for the nine-monthsix-month period ended SeptemberJune 30, 20182019 totaled $14,385, a decrease$10,359, an increase of $555$515 or 3.7%5.2% from the $14,940$9,844 recorded during the nine-monthsix-month period ended OctoberJuly 1, 2017.2018. The increase is fully attributable to the acquisition of SWE on May 1, 2019, which contributed operating expenses of $1,156, including $165 of one-time direct acquisition costs and $41 of intangible asset amortization. Excluding SWE results, operating expenses decreased $641 or 6.5% due to lower corporate expenses. Both periods reflected continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 21.7%21.5% for the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to 23.7%21.4% for the comparable 20172018 period. Amortization expense associated with intangible assets related to our acquisitions was $300$224, including $41 for SWE, for the first ninesix months of 20182019 ($189158 in selling, general and administrative expenses and $111$66 in research and development costs), compared with $315$203 for the first ninesix months of 20172018 ($192128 in selling, general, and administrative expenses and $123$75 in research and development costs). Research and development costs were $3,417$2,623 for the nine-monthsix-month period ended SeptemberJune 30, 2018, a decrease2019, an increase of $261$305 or 7.1% from the $3,67813.2% over $2,318 for the nine-monthssix-months ended OctoberJuly 1, 2017.2018. The decrease primarily reflects the timingincrease is fully attributable to $383 of research and development and testing costs associated with new products.incurred by SWE. Selling, general, and administrative expenses decreased $294increased $210 or 2.6%2.8%, from $11,262$7,526 during the first ninesix months of 20172018 to $10,968$7,736 during the first ninesix months of 2018 in line with our tight control over discretionary2019. The increase is fully attributable to the inclusion of SWE results which contributed $773, including one-time acquisition costs of $165 and intangible asset amortization of $41, partially offset by lower corporate spending.
Other Expense. Other expense totaled $27$141 for the nine-monthsix-month period ended SeptemberJune 30, 20182019 compared to $200$48 for the nine-monthsix-month period ended OctoberJuly 1, 2017.2018. Interest and financing expense, net of interest income, decreased $80increased $65 to $67$119 for the 20182019 period from $147$54 for the comparable period in 2017,2018, as a result of the more favorable terms of our Revolving Credit Agreement which was executed on May 31, 2017, as well as higher interest income due to our increased cash balance.financing for the SWE acquisition. Miscellaneous incomeexpense amounted to $40$22 for the first ninesix months of 20182019 compared with expenseincome of $53$6 for the first ninesix months of 2017,2018, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.
Income Taxes. We recognized a tax provision of $219$717 for the first threetwo quarters of 20182019 compared with a tax provision of $370$133 for the first threetwo quarters of 2017. The decrease2018. As a result of $151 or 40.8%reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of 20.8% was dueused to the geographic mix of earningsrecord our tax provision for the periods and the favorable impact resulting from the lower U.S. Federalfirst six months of 2019 compared to an effective tax rates and eliminationrate of the alternative minimum taxes in conjunction with the Tax Cuts & Jobs Act. The effective consolidated tax rates3.4% for the nine-month periods ended September 30, 2018year-earlier period. We expect that our deferred taxes will offset U.S. taxes for the foreseeable future, and October 1, 2017 were 4.0% and 8.8%, respectively.that a cash-based effective tax rate for the 2019 first half would be approximately 2.3%. See Note 98 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.
Net Income Attributable to Ultralife. Net income attributable to Ultralife and Net income attributable to Ultralife common shareholders per diluted share was $5,185$2,681 and $0.32,$0.17, respectively, for the ninesix months ended SeptemberJune 30, 2018,2019, compared to $3,848$3,777 and $0.24,$0.23, respectively, for the ninesix months ended OctoberJuly 1, 2017.2018. Average common shares outstanding used to compute diluted earnings per share increaseddecreased from 15,817,961 in the 2017 period to 16,407,12116,353,705 in the 2018 period to 16,179,897 in the 2019 period, mainly due to share repurchases under the exercise ofCompany’s Share Repurchase Program which commenced on November 1, 2018, partially offset by stock optionsoption exercises under our Long-Term Incentive Plans and the increased stock price.Plans.
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense.expense, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ understandinguse of operating performance comparisons from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the book amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes)expense), the age and book value of facilities and equipment (affecting relative depreciation expense) and one-time charges/benefits relating to income taxes.other significant non-operating expenses or income. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Net income (loss) attributable to Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles (“U.S. GAAP”).
We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as operating income.income (loss) from operations. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by presentingproviding Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.
The term Adjusted EBITDA is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:
● | Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business; |
● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements; |
● | while stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and |
● | other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to Netnet income attributable to Ultralife.
Adjusted EBITDA is calculated as follows for the periods presented:
Three-Month Periods Ended | Nine-Month Periods Ended | |||||||||||||||
September 30, | October 1, | September 30, | October 1, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net Income Attributable to Ultralife | $ | 1,408 | $ | 1,098 | $ | 5,185 | $ | 3,848 | ||||||||
Add: | ||||||||||||||||
Interest and Financing Expense, Net | 13 | 38 | 67 | 147 | ||||||||||||
Income Tax Provision | 86 | 104 | 219 | 370 | ||||||||||||
Depreciation expense | 496 | 497 | 1,476 | 1,507 | ||||||||||||
Amortization of Intangible Assets and Financing Fees | 106 | 115 | 327 | 357 | ||||||||||||
Stock-Based Compensation Expense | 363 | 133 | 707 | 529 | ||||||||||||
Adjusted EBITDA | $ | 2,472 | $ | 1,985 | $ | 7,981 | $ | 6,758 |
Three-Month Period Ended | Six-Month Period Ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income attributable to Ultralife | $ | 2,256 | $ | 1,627 | $ | 2,681 | $ | 3,777 | ||||||||
Add: | ||||||||||||||||
Interest and financing expense, net | 114 | 21 | 119 | 54 | ||||||||||||
Income tax provision | 676 | 78 | 717 | 133 | ||||||||||||
Depreciation expense | 515 | 496 | 962 | 980 | ||||||||||||
Amortization of intangible assets and financing fees | 143 | 110 | 244 | 221 | ||||||||||||
Stock-based compensation expense | 175 | 205 | 360 | 344 | ||||||||||||
Non-cash purchase accounting adjustments | 205 | - | 205 | - | ||||||||||||
Adjusted EBITDA | $ | 4,084 | $ | 2,537 | $ | 5,288 | $ | 5,509 |
Adjusted EPS
In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance. We define Adjusted EPS as net income attributable to Ultralife Corporation excluding the provision for deferred taxes divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our tax provision that will be offset by our U.S. net operating loss carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under U.S. GAAP. Neither current nor potential investors in our securities should rely on Adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EPS to EPS and net income attributable to Ultralife.
Adjusted EPS is calculated as follows for the periods presented:
ULTRALIFE CORPORATION AND SUBSIDIARIES |
CALCULATION OF ADJUSTED EPS |
(In Thousands Except Per Share Amounts) |
(Unaudited) |
Three-Month Period Ended | ||||||||||||||||||
June 30, 2019 | July 1, 2018 | |||||||||||||||||
Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | |||||||||||||
Net income attributable to Ultralife Corporation | $2,256 | $.14 | $.14 | $1,627 | $.10 | $.10 | ||||||||||||
Deferred tax provision | 641 | .04 | .04 | 17 | - | - | ||||||||||||
Adjusted net income attributable to Ultralife Corporation | $2,897 | $.18 | $.18 | $1,644 | $.10 | $.10 | ||||||||||||
Weighted average shares outstanding | 15,742 | 16,193 | 15,922 | 16,520 |
Six-Month Period Ended | ||||||||||||||||||
June 30, 2019 | July 1, 2018 | |||||||||||||||||
Amount | Per Basic Share | Per Diluted Share | Amount | Per Basic Share | Per Diluted Share | |||||||||||||
Net income attributable to Ultralife Corporate | $2,681 | $.17 | $.17 | $3,777 | $.24 | $.23 | ||||||||||||
Deferred tax provision | 636 | .04 | .04 | 36 | - | - | ||||||||||||
Adjusted net income attributable to Ultralife Corporation | $3,317 | $.21 | $.21 | $3,813 | $.24 | $.23 | ||||||||||||
Weighted average shares outstanding | 15,741 | 16,180 | 15,813 | 16,354 |
Liquidity and Capital Resources
As of SeptemberJune 30, 2018,2019, cash totaled $25,454, an increase of $7,124 from the beginning of the year. During the nine-month period ended September 30, 2018, we generated $7,531 of cash from our operating activities. Cash generated from operations in 2018 consisted of net income of $5,242, non-cash expenses (depreciation, amortization and stock-based compensation) totaling $2,510,$6,816, a decrease of $2,947$19,118 as compared to $25,934 of cash held at December 31, 2018, primarily driven by the acquisition of SWE on May 1, 2019, the procurement of inventory to fulfill the higher backlog level entering 2019, an increase in inventory primarily due to the fulfillment of orders, partially offset by a net decrease in working capital of $3,168 primarilyaccounts receivable due to the timing of inventory procurementsshipments, strategic capital investments for our Battery & Energy Products business, and compensation and benefit-related expenditures.repurchases of our common stock under our Share Repurchase Program.
During the nine-monthsix-month period ended June 30, 2019, net cash of $4,246 was used in operations, driven by a $6,779 increase in inventory and a $5,466 increase in accounts receivable primarily attributable to the large program awards announced in October 1, 2017, cash increased2018 for our Communications Systems business. Cash used in operations was largely offset by $3,978. Cash of $3,657 generated from operations for the nine-month period ended October 1, 2017 consisted of net income of $3,856,$2,732, non-cash expenses (depreciation, amortization, stock-based compensation and stock-based compensation)deferred taxes) totaling $2,393,$2,202, and a netan increase of $3,065 in accounts payable and other working capital items of $1,041 largelyprimarily attributable to the timingprocurement of payroll. This was partially offset by an increase in accounts receivable of $2,412 primarily due to the timing of shipments and an increase in inventory of $1,221 largely due to service 2017 backlog.inventories.
Cash used in investing activities for the nine-month periodssix months ended SeptemberJune 30, 20182019 was $29,041, consisting of the purchase price for SWE of $25,248, net of cash acquired, and October 1, 2017 amounted to $1,994 and $971, respectively, representing capital expenditures of $3,793 primarily due to investment in the respective periods.automation equipment pertaining to our Battery & Energy Products business, including 3-Volt cell production.
CashNet cash provided by financing activities for the nine-month periodssix months ended SeptemberJune 30, 2018 totaled $1,754,2019 was $14,326, consisting of cash proceeds$15,970 of $1,357 from stock option exercises and $397 for a government grant awarded in the People’s Republic of Chinanet borrowings drawn against our Credit Facilities primarily to fund specified future technological researchthe acquisition of SWE and development expenditures. Cash provided by financing activities for the nine-month period ended October 1, 2017 consisted of $1,120 in stock option exercise proceeds.
In July 2017, the Company made a strategic decision to invest up to $4,300 inproceeds of $478, partially offset by repurchases of our Newark, New York facility to modernize our manufacturing capability for production of premium 3-volt primary batteries for various applications in the rapidly growing, wireless Internet of Things (“IoT”) market. This investment, in line with our strategy to diversify revenues outside of the core U.S. government/defense markets and focus on transformational commercial opportunities, will enable us to produce a premium product with performance differentiation and incorporate the manufacturing technology expertise required to deliver a clear competitive advantage in terms of product performance, volume, safety, value proposition and strategic supply chain access to the end market and OEM’s. In addition to the IoT market, the product will also expand customer options in the legacy smoke detector market by providing our customers the choice between our industry leading next generation 9-volt battery, or a new premium 3-volt product. Low volume equipment production to support product qualification builds in partnership with customers is expected to start in late 2018 and continue into 2019, with customer-driven, higher volume US production expected to ramp up over the course of 2019.
On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Under theunder our Share Repurchase Program shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1totaling $1,957 and debt issuance costs of the Securities Exchange Act$157.
As of 1934. The timing, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may be suspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligateJune 30, 2019, the Company has significant U.S. net operating loss carryforwards available to utilize as an offset to future taxable income. See Note 8 in the Notes to Consolidated Financial Statements for additional information.
As of June 30, 2019, we had made commitments to purchase any specific numberapproximately $1,418 of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18,production machinery and equipment, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.we expect to fund through operating cash flows or debt borrowings.
Debt Commitments
We haveOn May 1, 2019, in connection with financing through ourthe SWE acquisition (see Note 3 to the Notes to Consolidated Financial Statements), the Company drew down $8,000 million on its Term Loan Facility and $6,782 million under its Revolving Credit Facility. As of June 30, 2019, we had $7,788 outstanding principal on the Term Loan Facility, of which $1,291 is due to be paid over the next twelve months, and $8,182 outstanding principal on the Revolving Credit Facility. As of June 30, 2019, the Company is in full compliance with KeyBank, which provides a $30,000 secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacility. There have been no borrowingsits debt covenants under the Credit Facility. See Note 7 in the Notes to the Consolidated Financial Statements for additional information regarding our Credit Facility.
The Company currentlyFacilities. Management believes that the cash flow generated from future operations and when necessary, available borrowing fromremaining availability under our Revolving Credit Facility will be sufficient to meet its current and long-termour general funding requirements for the foreseeable future.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with U.S. GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Operations and Significant Accounting Policies”) to our Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for the year ended December 31, 2017 should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the ninefirst six months of 2018,2019, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed. Refer to Note 21 in the notes to consolidated financial statements for updated accounting policies to reflect the Company’s adoption of Topic 606 “Revenue from Contracts with Customers”842 - Leases as of January 1, 2018.2019.
ITEMItem 4. Controls and Procedures
Evaluation ofof Disclosure Controls andand Procedures
Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.
Changes inin Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Dreamliner LitigationITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operatedPurchases of Equity Securities by Ethiopian Airlines was damaged by fire while parked at London Heathrow Airport. Following an investigationthe Issuer
Refer to Note 4 of the Notes to Consolidated Financial Statements (Part I, Item 1 of this incident conducted by U.K.Form 10-Q) for further discussion regarding share repurchases.
On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018 and U.S. regulatory authorities as well as byunder which the manufacturerCompany was authorized to repurchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.
Share repurchases under this program were made in accordance with SEC Rule 10b-18 using a variety of methods, which included open market purchases and block trades in compliance with applicable insider trading and other securities laws and regulations. With the aircraft, a final report was issued byexception of repurchases made during stock trading black-out periods under 10b5-1 Plans, the Air Accidents Investigative Branch – UK Civil Aviation regulatory authority, with findings indicating thattiming, manner, price and amount of any repurchases were determined at the fire was primarily caused by circumstancesCompany’s discretion.
The following table sets forth information regarding our repurchases of common stock for the first six months of 2019 under this program:
Total Number of Shares Purchased | Weighted Average Price Paid Per Share | Total Number of Shares Purchased As Part of Publicly Announced Program | Maximum Number of Shares That May Yet Be Purchased Under the Program | |||||||||||||
January 2019 | 267,100 | $ | 7.29 | 372,774 | 2,127,226 | |||||||||||
February 2019 | 200 | 7.49 | 372,974 | 2,127,026 | ||||||||||||
March 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
April 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
May 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
June 2019 | - | - | 372,974 | 2,127,026 | ||||||||||||
Total | 267,300 | 372,974 |
All repurchases were made using cash resources. The above table excludes shares repurchased to settle employee tax withholding related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company. A componentvesting of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell, which Ultralife has produced since 2001, with wide-use in global defense and commercial applications.
On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire, which was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. We immediately referred this matter to our insurers.
This lawsuit has now been resolved (February 2018), the claimant has terminated the action against the Company, and the Court has acknowledged and consented to this termination. The matter was terminated without financial consequences to the Company.
ITEM 1A. RISK FACTORS
There have been no material changes to the Company’s risk factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2017. We encourage current and potential investors of our securities to review the risk factors as set forth therein.stock awards.
ITEMItem 6. EXHIBITS
Exhibit Index | Exhibit Description | Incorporated by Reference from | |||
| Exhibit 2.1 of |
| |||
10.1 | Exhibit 10.1 of Form 8-K filed May 2, 2019 | ||||
10.2 | Exhibit 10.2 of Form 8-K filed May 2, 2019 | ||||
10.3 | Exhibit 10.3 of Form 8-K filed May 2, 2019 | ||||
10.4 | Exhibit 10.4 of Form 8-K filed May 2, 2019 | ||||
10.5 | Exhibit 10.5 of Form 8-K filed May 2, 2019 | ||||
10.6 | Exhibit 10.6 of Form 8-K filed May 2, 2019 | ||||
31.1 | Filed herewith | ||||
31.2 | Filed herewith | ||||
32 | Filed herewith | ||||
101.INS | XBRL Instance Document | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | ||||
101.LAB | XBRL Taxonomy Label Linkbase Document | ||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | ||||
101.DEF | XBRL Taxonomy Definition Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ULTRALIFE CORPORATION | |||
(Registrant) | |||
Date: | By: /s/ Michael D. Popielec | ||
Michael D. Popielec | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | By: /s/ Philip A. Fain | ||
Philip A. Fain | |||
Chief Financial Officer and Treasurer | |||
(Principal Financial Officer and | |||
Principal Accounting Officer) |
Index to Exhibits
Exhibit Index | Exhibit Description | Incorporated by Reference from | ||
2.1 | Stock Purchase Agreement, dated May 1, 2019, by and among Ultralife Corporation, Southwest Electronic Energy Corporation, Southwest Electronic Energy Medical Research Institute, and Claude Leonard Benckenstein | Exhibit 2.1 of Form 8-K filed May 2, 2019 | ||
10.1 | First Amendment Agreement, dated May 1, 2019, by and among Ultralife Corporation, Southwest Electronic Energy Corporation, CLB, INC., and KeyBank National Association | Exhibit 10.1 of Form 8-K filed May 2, 2019 | ||
10.2 | Intellectual Property Security Agreement, dated May 1, 2019, by and among Southwest Electronic Energy Corporation, and KeyBank National Association | Exhibit 10.2 of Form 8-K filed May 2, 2019 | ||
10.3 | Intellectual Property Security Agreement, dated May 1, 2019, by and among CLB, INC., and KeyBank National Association | Exhibit 10.3 of Form 8-K filed May 2, 2019 | ||
10.4 | Pledge Agreement, dated May 1, 2019, by and among Southwest Electronic Energy Corporation, and KeyBank National Association | Exhibit 10.4 of Form 8-K filed May 2, 2019 | ||
10.5 | Assumption and Joinder Agreement, dated May 1, 2019, by and among Ultralife Corporation, Southwest Electronic Energy Corporation, CLB, INC., and KeyBank National Association | Exhibit 10.5 of Form 8-K filed May 2, 2019 | ||
10.6 | Term Loan, dated May 1, 2019, by and among Ultralife Corporation, Southwest Electronic Energy Corporation, CLB, INC., and KeyBank National Association | Exhibit 10.6 of Form 8-K filed May 2, 2019 | ||
31.1 |
| Filed herewith |
31.2 |
| Filed herewith |
32 |
|
| ||
101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Label Linkbase Document |
101.PRE | XBRL Taxonomy Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Definition Document |
3132