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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

(Mark One)

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

 

For the Quarter Ended September 30, 2018

 

OR

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

For the transition period from                     to                     

 

Commission File Number 0-27460

 

ULTRALIFE CORPORATION

 

 

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation)	16-1387013 (I.R.S. Employer Identification No.)
2000 Technology Parkway Newark, New York (Address of principal executive offices)	14513 (Zip Code)

 

 

   Registrant’s telephone number, including area code: (315) 332-7100

 

 

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, smaller reporting company, or an emerging growth company. See 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		[  ] (Do not check if a smaller reporting company)	Smaller reporting company		[ X ]
			Emerging growth company		[  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [    ] No [ X ]

 

The number of shares outstanding of the registrant’s common stock was 15,956,677, net of 4,019,711 treasury shares, as of October 31, 2018.

 

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ULTRALIFE CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

		Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	3
	Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Three and Nine Month Periods Ended September 30, 2018 and October 1, 2017	4
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Month Periods Ended September 30, 2018 and October 1, 2017	5
	Notes to Consolidated Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	28
ITEM 1A.	Risk Factors	28
ITEM 6.	Exhibits	29
	Signatures	30
	Index to Exhibits	31

 

 

PART I.    FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)   (Unaudited)

 

 

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

 

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(Unaudited)

 

 

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

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)

(Unaudited)

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 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; 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 disruptions in our supply of raw materials and components; variability in our quarterly and annual results and the price of our common stock; 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; our exposure to foreign currency fluctuations; our customers’ demand falling short of volume expectations in our supply agreements; 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; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to utilize our net operating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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, 2017 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.

 

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 strive to increase the size and profitability of our business through 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. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTI™, ABLE™, ACCUTRONICS™, ACCUPRO™, 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.

 

 

Overview

 

Consolidated revenues of $20,330 for the three-month period ended September 30, 2018, decreased by $717 or 3.4%, from $21,047 during the three-month period ended October 1, 2017, due to lower non-U.S. government/defense and 9-Volt battery sales.

 

Gross profit for the three-month period ended September 30, 2018 was $6,041 or 29.7% of revenues, compared to $6,255 or 29.7% of revenues, for the same quarter a year ago. The decline in gross profit resulted from lower sales.

 

Operating expenses decreased to $4,541 during the three-month period ended September 30, 2018, compared to $4,992 during the three-month period ended October 1, 2017. The $451 or 9.0% decrease reflects continued tight control over discretionary spending.

 

Operating income for the three-month period ended September 30, 2018 was $1,500 or 7.4% of revenues, compared to $1,263 or 6.0% for the year-earlier period. The 18.7% increase in operating income resulted from lower operating expenses.

 

Net income attributable to Ultralife was $1,408 or $0.09 per share – basic and diluted, for the three-month period ended September 30, 2018, compared to $1,098, or $0.07 per share – basic and diluted, for the three-month period ended October 1, 2017.

 

Adjusted EBITDA, defined as net income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, amounted to $2,472 in the third quarter of 2018 compared to $1,985 for the third quarter of 2017. See the section “Adjusted EBITDA” beginning on page 25 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

We are delighted about the two recently announced Communications Systems delivery contracts totaling $19.2 million to supply our Vehicle Amplifier-Adaptors and Mounted Power Amplifiers for the U.S. Army, as 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.

 

 

Results of Operations

 

Three-Month Periods Ended September 30, 2018 and October 1, 2017

 

Revenues. Consolidated revenues for the three-month period ended September 30, 2018 amounted to $20,330, a decrease of $717, or 3.4%, from the $21,047 reported for the three-month period ended October 1, 2017.

 

Battery & Energy Products revenues decreased $1,327, or 7.1%, from $18,616 for the three-month period ended October 1, 2017 to $17,289 for the three-month period ended September 30, 2018, reflecting lower 9-Volt battery sales to our Europe-based customers, timing 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.    

 

Communications Systems revenues increased $610, or 25.1%, from $2,431 during the three-month period ended October 1, 2017 to $3,041 for the three-month period ended September 30, 2018. This increase is attributable to higher shipments of core products such as our 20-watt amplifiers, universal vehicle adaptors and other radio accessories.

 

Cost of Products Sold / Gross Profit. Cost of products sold totaled $14,289 for the quarter ended September 30, 2018, a decrease of $503, or 3.4%, from the $14,792 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% for the 2018 and 2017 three-month periods. Correspondingly, consolidated gross margin was 29.7% for both periods.

 

For our Battery & Energy Products segment, gross profit for the third quarter of 2018 was $4,702 or 27.2% of revenues, a decrease of $484 or 9.3% from gross profit of $5,186, or 27.9% of revenues, for the third quarter of 2017. Battery & Energy Products’ gross margin decreased for the three-month period ended September 30, 2018 by 70 basis points, reflecting product mix.

 

For our Communications Systems segment, gross profit for the third quarter of 2018 was $1,339 or 44.0% of revenues, an increase of $270 or 25.2%, from gross profit of $1,069, or 44.0% of revenues, for the third quarter of 2017. Both three-month periods reflect the product mix of our high-value proposition core products such as our 20-watt amplifiers, universal vehicle adaptors and other radio accessories.

 

Operating Expenses. Total operating expenses for the three-month period ended September 30, 2018 totaled $4,541, a decrease of $451 or 9.0% from the $4,992 reported during the three-month period ended October 1, 2017. The reduction for the 2018 third quarter reflects the continued tight control over discretionary spending.

 

Overall, operating expenses as a percentage of revenues were 22.3% for the quarter ended September 30, 2018 compared to 23.7% for the quarter ended October 1, 2017. Amortization expense associated with intangible assets related to our acquisitions was $97 for the third quarter of 2018 ($61 in selling, general and administrative expenses and $36 in research and development costs), compared with $106 for the third quarter of 2017 ($64 in selling, general, and administrative expenses and $42 in research and development costs). Research and development costs were $1,099 for the three-month period ended September 30, 2018, a decrease of $256 or 18.9%, from $1,355 for the three-months ended October 1, 2017. The decrease primarily reflects the timing of development and testing costs associated with new products. Selling, general, and administrative expenses decreased $195 or 5.4%, to $3,442 for the third quarter of 2018 from $3,637 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 third quarter of 2018.

 

 

Other Expense (Income). Other income totaled $21 for the three-month period ended September 30, 2018 compared to other expense of $58 for the three-month period ended October 1, 2017. Interest and financing expense, net of interest income, decreased $25 from $38 for the third quarter of 2017 to $13 for the comparable period in 2018. The decrease is due to higher interest income resulting from our increased cash balance in 2018 as compared to 2017. Miscellaneous income amounted to $34 for the third quarter of 2018 compared with miscellaneous expense of $20 for the third quarter of 2017, 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 from the end of the second quarter to the end of the third quarter in 2018.

 

Income Taxes. The tax provision for the 2018 third quarter was $86 compared to $104 for the third quarter of 2017. See Note 9 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.

 

Net Income Attributable to Ultralife. Net income attributable to Ultralife was $1,408, or $0.09 per share – basic and diluted, for the three-month period ended September 30, 2018, compared to $1,098, or $0.07 per share – basic and diluted, for the three-month period ended October 1, 2017. Average weighted common shares outstanding used to compute diluted earnings per share increased from 15,971,243 in the third quarter of 2017 to 16,523,433 in the third quarter of 2018. The increase in 2018 is attributable to stock option exercises since the third quarter of 2017 and an increase in the weighted average stock price to compute diluted shares from $6.86 for the third quarter of 2017 to $9.29 for the third quarter of 2018.

 

 

Nine-Month Periods Ended September 30, 2018 and October 1, 2017

 

Revenues.  Consolidated revenues for the nine-month period ended September 30, 2018 amounted to $66,263, an increase of $3,241 or 5.1%, from the $63,022 reported for the nine-month period ended October 1, 2017.

  

Battery & Energy Products revenues decreased $633, or 1.2%, from $52,977 for the nine-month period ended October 1, 2017 to $52,344 for the nine-month period ended September 30, 2018.  Government and defense sales of this segment increased 1.6% from the 2017 nine-month period, reflecting a 21.5% increase in U.S. government 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. 

 

Communications Systems revenues increased $3,874, or 38.6%, from $10,045 during the nine-month period ended October 1, 2017 to $13,919 for the nine-month period ended September 30, 2018.  This increase is primarily attributable to the fulfillment of a Vehicle Amplifier Adaptors award received in December 2017 from a large global defense prime contractor for the U.S. Army’s Security Force Assistance Brigades and shipments of our Vehicle Installed Power Enhanced Riflemen Appliqué (“VIPER”). 

 

 

Cost of Products Sold / Gross Profit. Cost of products sold totaled $46,390 for the nine-month period ended September 30, 2018, an increase of $2,734 or 6.3%, from the $43,656 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 69.3% for the nine-month period ended October 1, 2017 to 70.0% for the nine-month period ended September 30, 2018. Correspondingly, consolidated gross margin was 30.0% for the nine-month period ended September 30, 2018, compared with 30.7% for the nine-month period ended October 1, 2017, due to product mix.

 

For our Battery & Energy Products segment, the cost of products sold decreased $439 or 1.2%, from $38,119 during the nine-month period ended October 1, 2017 to $37,680 during the nine-month period ended September 30, 2018 due to lower sales in the 2018 period. Battery & Energy Products’ gross profit for the 2018 nine-month period was $14,664 or 28.0% of revenues, a decrease of $194 or 1.3% from gross profit of $14,858, or 28.0% of revenues, for the 2017 nine-month period.

 

For our Communications Systems segment, the cost of products sold increased by $3,173 or 57.3% from $5,537 during the nine-month period ended October 1, 2017 to $8,710 during the nine-month period ended September 30, 2018. Communications Systems’ gross profit for the first nine months of 2018 was $5,209 or 37.4% of revenues, an increase of $701 or 15.6% from gross profit of $4,508 or 44.9% of revenues, for the third quarter of 2017. The decrease in gross margin during 2018 is due to product mix reflecting the higher sales for competitively bid U.S. Department of Defense contracts in the current nine-month period.

 

Operating Expenses. Total operating expenses for the nine-month period ended September 30, 2018 totaled $14,385, a decrease of $555 or 3.7% from the $14,940 recorded during the nine-month period ended October 1, 2017. Both periods reflected continued tight control over discretionary spending.

 

Overall, operating expenses as a percentage of revenues were 21.7% for the nine-month period ended September 30, 2018 compared to 23.7% for the comparable 2017 period. Amortization expense associated with intangible assets related to our acquisitions was $300 for the first nine months of 2018 ($189 in selling, general and administrative expenses and $111 in research and development costs), compared with $315 for the first nine months of 2017 ($192 in selling, general, and administrative expenses and $123 in research and development costs). Research and development costs were $3,417 for the nine-month period ended September 30, 2018, a decrease of $261 or 7.1% from the $3,678 for the nine-months ended October 1, 2017. The decrease primarily reflects the timing of development and testing costs associated with new products. Selling, general, and administrative expenses decreased $294 or 2.6%, from $11,262 during the first nine months of 2017 to $10,968 during the first nine months of 2018 in line with our tight control over discretionary spending.

 

Other Expense. Other expense totaled $27 for the nine-month period ended September 30, 2018 compared to $200 for the nine-month period ended October 1, 2017. Interest and financing expense, net of interest income, decreased $80 to $67 for the 2018 period from $147 for the comparable period in 2017, 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. Miscellaneous income amounted to $40 for the first nine months of 2018 compared with expense of $53 for the first nine months of 2017, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.

 

Income Taxes. We recognized a tax provision of $219 for the first three quarters of 2018 compared with a tax provision of $370 for the first three quarters of 2017. The decrease of $151 or 40.8% was due to the geographic mix of earnings for the periods and the favorable impact resulting from the lower U.S. Federal tax rates and elimination of the alternative minimum taxes in conjunction with the Tax Cuts & Jobs Act. The effective consolidated tax rates for the nine-month periods ended September 30, 2018 and October 1, 2017 were 4.0% and 8.8%, respectively. See Note 9 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.

 

Net Income Attributable to Ultralife. Net income attributable to Ultralife and Net income attributable to Ultralife common shareholders per diluted share was $5,185 and $0.32, respectively, for the nine months ended September 30, 2018, compared to $3,848 and $0.24, respectively, for the nine months ended October 1, 2017. Average common shares outstanding used to compute diluted earnings per share increased from 15,817,961 in the 2017 period to 16,407,121 in the 2018 period, mainly due to the exercise of stock options under our Long-Term Incentive Plans and the increased stock price.

 

 

Adjusted EBITDA

 

In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also believe the use of Adjusted EBITDA facilitates investors’ understanding of operating performance from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and one-time charges/benefits relating to income taxes. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to Net income (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. 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 presenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.

 

The term Adjusted EBITDA is not defined under 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 Net income attributable to Ultralife.

 

 

		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

 

 

 

 

Liquidity and Capital Resources

 

As of September 30, 2018, 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, a decrease of $2,947 in inventory primarily due to the fulfillment of orders, partially offset by a net decrease in working capital of $3,168 primarily due to the timing of inventory procurements and compensation and benefit-related expenditures.

 

During the nine-month period ended October 1, 2017, cash increased 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, non-cash expenses (depreciation, amortization and stock-based compensation) totaling $2,393, and a net increase in accounts payable and other working capital items of $1,041 largely attributable to the timing of payroll. This was partially offset by an increase in accounts receivable of $2,412 primarily due to the timing of shipments and an increase in inventory of $1,221 largely due to service 2017 backlog.

 

Cash used in investing activities for the nine-month periods ended September 30, 2018 and October 1, 2017 amounted to $1,994 and $971, respectively, representing capital expenditures in the respective periods.

 

 

Cash provided by financing activities for the nine-month periods ended September 30, 2018 totaled $1,754, consisting of cash proceeds of $1,357 from stock option exercises and $397 for a government grant awarded in the People’s Republic of China to fund specified future technological research 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 in our Newark, New York facility to modernize our manufacturing capability for production of premium 3-volt primary batteries for various applications in the rapidly growing, wireless Internet of Things (“IoT”) market.  This investment, in line with our strategy to diversify revenues outside of the core U.S. government/defense markets and focus on transformational commercial opportunities, will enable us to produce a premium product with performance differentiation and incorporate the manufacturing technology expertise required to deliver a clear competitive advantage in terms of product performance, volume, safety, value proposition and strategic supply chain access to the end market and OEM’s.  In addition to the IoT market, the product will also expand customer options in the legacy smoke detector market by providing our customers the choice between our industry leading next generation 9-volt battery, or a new premium 3-volt product.  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 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.

 

Debt Commitments

 

We have financing through our Credit Facility with KeyBank, which provides a $30,000 secured, cash flow-based, revolving credit facility that includes a $1,500 letter of credit subfacility. There have been no borrowings under the Credit Facility. See Note 7 in the Notes to the Consolidated Financial Statements for additional information regarding our Credit Facility.

 

The Company currently believes that the cash flow generated from operations and, when necessary, available borrowing from our Credit Facility, will be sufficient to meet its current and long-term 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 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 nine months of 2018, 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 2 for updated accounting policies to reflect the Company’s adoption of Topic 606 “Revenue from Contracts with Customers” as of January 1, 2018.

 

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.     OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

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.

 

 

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.

 

 

ITEM 6.     EXHIBITS

 

Exhibit Index	Description of Document	Incorporated By Reference from:
31.1	Rule 13a-14(a) / 15d-14(a) CEO Certifications	Filed herewith
31.2	Rule 13a-14(a) / 15d-14(a) CFO Certifications	Filed herewith
32	Section 1350 Certifications	Filed herewith
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
101.DEF	XBRL Taxonomy Definition Document

 

 

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: November 1, 2018	By: /s/ Michael D. Popielec
		Michael D. Popielec
		President and Chief Executive Officer
		(Principal Executive Officer)
	Date: November 1, 2018	By: /s/ Philip A. Fain
		Philip A. Fain
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and
		Principal Accounting Officer)

 

 

Index to Exhibits

 

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32

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

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Presentation Linkbase Document

101.DEF

XBRL Taxonomy Definition Document

 

31

Exhibit 31.1

 

I, Michael D. Popielec, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Ultralife Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

	Date: November 1, 2018	By: /s/ Michael D. Popielec
		Michael D. Popielec
		President and Chief Executive Officer

 

Exhibit 31.2

 

I, Philip A. Fain, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of Ultralife Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.	The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

	Date: November 1, 2018	By: /s/ Philip A. Fain
		Philip A. Fain
		Chief Financial Officer and Treasurer

 

Exhibit 32

 

 

Section 1350 Certification

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), Michael D. Popielec and Philip A. Fain, the President and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of Ultralife Corporation, certify that (i) the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Ultralife Corporation.

 

A signed original of this written statement required by Section 906 has been provided to Ultralife Corporation and will be retained by Ultralife Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 

	Date: November 1, 2018	By: /s/ Michael D. Popielec
		Michael D. Popielec
		President and Chief Executive Officer
	Date: November 1, 2018	By: /s/ Philip A. Fain
		Philip A. Fain
		Chief Financial Officer and Treasurer