ulbi20190630_10q.htm
 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)                     

 

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 0-20852

 

ULTRALIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation of organization)

 

2000 Technology Parkway Newark, New York 14513

(Address of principal executive offices) (Zip Code)

16-1387013

(I.R.S. Employer Identification No.)

 

(315) 332-7100 

(Registrant's telephone number, including area code:)

 

None

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.10 par value per share

ULBI

NASDAQ

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer

 

Non-accelerated filer ☐

Smaller reporting company

 

 

Emerging Growth Company ☐

 

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

 

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

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☐   No ☐   Not applicable

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of July 30, 2019, the registrant had 15,762,574 shares of common stock outstanding.

 



 

1

 

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

 

INDEX

 

   

Page

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Consolidated Financial Statements (unaudited):

 
     
 

Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 

3

     
 

Consolidated Statements of Income and Comprehensive Income for the Three and Six-Month Periods Ended June 30, 2019 and July 1, 2018 

4

     
 

Consolidated Statements of Cash Flows for the Six-Month Periods Ended June 30, 2019 and July 1, 2018

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

7

     

Item 2.

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

20

     

Item 4.

Controls and Procedures

29

     

PART II.

OTHER INFORMATION

 
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

     

Item 6.

Exhibits

30

     
 

Signatures

31

 

2

 

 

PART I.    FINANCIAL INFORMATION

 

Item 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.

 

3

 

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(Unaudited)

 

   

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.

 

4

 

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

   

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.

 

5

 

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in Thousands)

(Unaudited)

 

                   

Capital

   

Accumulated

                                 
   

Common Stock

   

in Excess

   

Other

                   

Non-

         
   

Number of

           

of Par

   

Comprehensive

   

Accumulated

   

Treasury

   

Controlling

         
   

Shares

   

Amount

   

Value

   

Income (Loss)

   

Deficit

   

Stock

   

Interest

   

Total

 
                                                                 

Balance – December 31, 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.

 

6

 

 

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 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included. Results for interim periods should not be considered indicative of results to be expected for a full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2018.

 

The December 31, 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.

 

7

 

 

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.

 

8

 

 

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

 

9

 

 

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  

 

 

 

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.

 

10

 

 

Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.

 

 

 

4.    SHARE REPURCHASE PROGRAM

 

On October 31, 2018, the Company’s Board of Directors approved a share repurchase program (the “Share Repurchase Program”) which became effective on November 1, 2018, under which the Company is authorized to purchase up to 2.5 million shares of its outstanding common stock over a period not to exceed twelve months.

 

Under the Share Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing, manner, price and amount of any repurchase will be determined at the Company’s discretion and the Share Repurchase Program may be suspended, terminated or modified by the Company’s Board of Directors at any time for any reason and does not obligate the Company to purchase any specific number of shares. Under the Program, all purchases will be made in accordance with Securities Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.

 

For the six-month period ended June 30, 2019, we repurchased a total of 267,300 shares of our common stock for an aggregate consideration (including fees and commissions) of $1,957. There were no shares repurchased during the three-month period ended June 30, 2019.

 

From the inception of the Share Repurchase Program on November 1, 2018, we repurchased a total of 372,974 shares of our common stock for an aggregate consideration (including fees and commissions) of $2,699.

 

 

 

5.    EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method. For the three-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 composition 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  

 

11

 

 

As of June 30, 2019 and December 31, 2018, restricted cash included $205 and $266, respectively, relating to a government grant awarded in the People’s Republic of China to fund specified technological research and development initiatives. The grant proceeds are realized to income as a direct offset to expense as the related expenditures are incurred. For the six-month period ended June 30, 2019, grant proceeds of $61 were realized to income. As of June 30, 2019 and December 31, 2018, restricted cash included euro-denominated deposits of $83 and $85, respectively, withheld by the Dutch tax authorities and third-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.

 

Inventories

 

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

 

   

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:

   

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 period ended

   

Six-month period ended

 
   

June 30,

   

July 1,

   

June 30,

   

July 1,

 
   

2019

   

2018

   

2019

   

2018

 

Depreciation expense

  $ 515     $ 496     $ 962     $ 980  

 

12

 

 

Goodwill

 

The following table summarizes the goodwill activity by segment for the six-month periods ended June 30, 2019 and July 1, 2018:

 

   

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  

 

 

Other Intangible Assets, Net

 

The composition of other intangible assets was:

 

   

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, 2018

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,405     $ -     $ 3,405  

Customer relationships

    6,471       4,392       2,079  

Patents and technology

    5,486       4,725       761  

Distributor relationships

    377       377       -  

Trade name

    370       111       259  

Total

  $ 16,109     $ 9,605     $ 6,504  

 

 

The increase in the carrying value of other intangible assets from December 31, 2018 to June 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 to June 30, 2019 is the result of the effect of foreign currency translations.

 

13

 

 

Amortization expense for other intangible assets was as 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

  $ 33     $ 37     $ 66     $ 75  

Selling, general and administrative

    99       64       158       128  

Total amortization expense

  $ 132     $ 101     $ 224     $ 203  

 

 

 

 

7.    STOCK-BASED COMPENSATION

 

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

 

   

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 June 30, 2019, there was $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 six-month period ended June 30, 2019:

 

   

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  

 

Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended June 30, 2019 and July 1, 2018 was $122 and $354, respectively. Cash received from stock option exercises under our stock-based compensation plans for the six-month periods ended June 30, 2019 and July 1, 2018 was $478 and $1,293, respectively.

 

In April 2019, 20,000 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $11.12 per share. In January 2018, 17,500 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $7.16 per share. All outstanding restricted shares vest in equal annual installments over three years. Unrecognized compensation cost related to these restricted shares was $230 at June 30, 2019.

 

14

 

 

 

8.    INCOME TAXES

 

Our effective tax rate for the six-month periods ended June 30, 2019 and July 1, 2018 was 20.8% and 3.4%, respectively. The increase in our effective tax rate for the current period compared to the prior period was primarily due to the reversal of the valuation allowance on our U.S. deferred tax assets as of December 31, 2018.

 

Our effective tax rate for the six months ended June 30, 2019 was lower than the U.S. federal statutory rate primarily due to tax benefits relating to the exercise of stock options during the period.

 

As of December 31, 2018, we have domestic net operating loss (“NOL”) carryforwards of $63,388, which expire 2019 thru 2035, and 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 continue to report a valuation allowance for NOL carryforwards of approximately $10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating losses may be limited due to the change in the past U.K. operation and cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd.

 

As of June 30, 2019, we have not recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.

 

As of June 30, 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 June 30, 2019 and December 31, 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 2000 through 2018 remain subject to examination by the Internal Revenue Service (“IRS”) due to our net operating loss carryforwards. Our U.S. tax matters for the years 2000 through 2018 remain subject to examination by various state and local tax jurisdictions due to our net operating loss carryforwards. Our tax matters for the years 2010 through 2018 remain subject to examination by the respective foreign tax jurisdiction authorities.

 

 

 

9.    OPERATING LEASES

 

The 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 approximately 3 years. Renewal options to extend our leases have been exercised. Termination options are not reasonably certain of exercise by the Company. There is no transfer of title or option to purchase the leased assets upon expiration. There are no residual value guarantees or material restrictive covenants.

 

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

 

   

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  

 

15

 

 

Supplemental cash flow information related to leases was as 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.

 

16

 

 

 

10.  COMMITMENTS AND CONTINGENCIES

 

a. Purchase Commitments

 

As of June 30, 2019, we have made commitments to purchase approximately $1,418 of production machinery and equipment.

 

b. Product Warranties

 

We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in our product warranty liability during the first six months of 2019 and 2018 were as follows:

 

   

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 the 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.

 

 

 

11.  BUSINESS SEGMENT INFORMATION

 

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

 

17

 

 

The components of segment performance were as follows:

 

Three-Month Period Ended June 30, 2019:

 

   

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 July 1, 2018:

 

   

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  

 

18

 

 

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

 

Commercial and Government/Defense Revenue Information: 

 

Three-Month Period Ended June 30, 2019:

 

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 20,300     $ 15,049     $ 5,251  

Communications Systems

    9,097       -       9,097  

Total

  $ 29,397     $ 15,049     $ 14,348  
              51 %     49 %

 

Three-Month Period Ended July 1, 2018:

 

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 17,831     $ 10,254     $ 7,577  

Communications Systems

    5,033       -       5,033  

Total

  $ 22,864     $ 10,254     $ 12,610  
              45 %     55 %

 

Six-Month Period Ended June 30, 2019:

 

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 36,298     $ 25,059     $ 11,239  

Communications Systems

    11,981       -       11,981  

Total

  $ 48,279     $ 25,059     $ 23,220  
              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 July 1, 2018:

 

Total

Revenue

   

United

States

   

Non-United

States

 

Battery & Energy Products

  $ 17,831     $ 10,647     $ 7,184  

Communications Systems

    5,033       5,033       -  

Total

  $ 22,864     $ 15,680     $ 7,184  
              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 %

 

Six-Month Period Ended July 1, 2018:

 

Total

Revenue

   

United

States

   

Non-United

States

 

Battery & Energy Products

  $ 35,055     $ 20,062     $ 14,993  

Communications Systems

    10,878       10,606       272  

Total

  $ 45,933     $ 30,668     $ 15,265  
              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

 

19

 

 

 

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; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our inability to comply with changes to the regulations for the shipment of our products; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; possible impairments of our goodwill and other intangible assets; our customers’ demand falling short of volume expectations in our supply agreements; 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 comply with government regulations regarding the use of “conflict minerals;” possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “estimate,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 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, 2018 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 Form 10-K for the year ended December 31, 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.

 

20

 

 

General

 

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

 

We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, 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 $29,397 for the three-month period ended June 30, 2019, increased by $6,533 or 28.6%, from $22,864 during the three-month period ended July 1, 2018, due to higher revenues from our Battery & Energy Products business reflecting the May 1, 2019 acquisition of SWE and 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 June 30, 2019 was $8,865 or 30.2% of revenues, compared to $6,550 or 28.6% of revenues, for the same quarter a year ago. The 160-basis point increase in gross margin for both businesses resulted from 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 increased to $5,823 during the three-month period ended June 30, 2019, compared to $4,918 during the three-month period ended July 1, 2018. The increase of $905 or 18.4% 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.

 

21

 

 

Operating income for the three-month period ended June 30, 2019 was $3,042 or 10.3% of revenues, compared to $1,632 or 7.1% for the year-earlier period. The increase in operating income resulted from revenue growth and operating 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 $2,256, or $0.14 per share – basic and diluted, for the three-month period ended June 30, 2019, compared to $1,627, or $0.10 per share – basic and diluted, for the three-month period ended July 1, 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 $4,084 in the second quarter of 2019 compared to $2,537 for the second quarter of 2018. See the section “Adjusted EBITDA” beginning on page 25 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

We enter the second half of 2019 prepared to fulfill remaining amplifier orders and to capture opportunities available to us from several new products serving commercial end markets. As a result, we remain well positioned to deliver profitable growth in 2019 now boosted by our acquisition of SWE.

 

 

Three-Month Periods Ended June 30, 2019 and July 1, 2018

 

Revenues. Consolidated revenues for the three-month period ended June 30, 2019 were $29,397, an increase of $6,533, or 28.6%, from the $22,864 reported for the three-month period ended July 1, 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 increased $2,469, or 13.9%, from $17,831 for the three-month period ended July 1, 2018 to $20,300 for the three-month period ended June 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 and lower 9-Volt sales in the second quarter of 2019.

 

Communications Systems revenues increased $4,064, or 80.7%, from $5,033 during the three-month period ended July 1, 2018 to $9,097 for the three-month period ended June 30, 2019. This increase is primarily attributable to shipments of mounted power amplifiers to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018 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. Cost of products sold totaled $20,532 for the quarter ended June 30, 2019, an increase of $4,218, or 25.9%, from the $16,314 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 71.4% for the three-month period ended July 1, 2018 to 69.8% for the three-month period ended June 30, 2019. Correspondingly, consolidated gross margin was 30.2% for 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.

 

22

 

 

For our Battery & Energy Products segment, gross profit for the second quarter of 2019 was $5,655, an increase of $729 or 14.8% from gross profit of $4,926 for the second quarter of 2018. Battery & Energy Products’ gross margin of 27.9% increased by 30 basis points over the 27.6% gross margin for the year-earlier period, reflecting favorable product 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 second quarter of 2019 was $3,210 or 35.3% of revenues, an increase of $1,586 or 97.7%, from gross profit of $1,624, or 32.3% of revenues, for the second quarter of 2018. The 300-basis point increase in gross margin during 2019 is driven by the favorable sales mix.

 

Operating Expenses. Total operating expenses for the three-month period ended June 30, 2019 were $5,823, an increase of $905 or 18.4% over the $4,918 reported during the three-month period ended July 1, 2018. The increase is fully attributable to the acquisition of SWE, which contributed operating expenses of $1,156 in the second quarter, including $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 19.8% for the quarter ended June 30, 2019 compared to 21.5% for the quarter ended July 1, 2018. Amortization expense associated with intangible assets related to our acquisitions was $132, including $41 for SWE, for the second quarter of 2019 ($99 in selling, general and administrative expenses and $33 in research and development costs), compared with $101 for the second quarter of 2018 ($64 in selling, general, and administrative expenses and $37 in research and development costs). Research and development costs were $1,587 for the three-month period ended June 30, 2019, an increase of $369 or 30.3%, from $1,218 for the three-months ended July 1, 2018. The increase is fully attributable to $383 of research and development costs incurred by SWE.  Selling, general, and administrative expenses increased $536 or 14.5%, to $4,236 for the second quarter of 2019 from $3,700 for the second 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 expense totaled $83 for the three-month period ended June 30, 2019 compared to other income of $86 for the three-month period ended July 1, 2018. Interest and financing expense, net of interest income, increased $93, from $21 for the second quarter of 2018 to $114 for the comparable period in 2019. The increase is due to the financing for the SWE acquisition, which were $110 for the second quarter of 2019. Miscellaneous income amounted to $31 for the second quarter of 2019 compared with miscellaneous expense of $107 for the second quarter of 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 second quarter in 2018.

 

Income Taxes. The tax provision for the 2019 second quarter was $676 compared to $78 for the second quarter of 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 8 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 $2,256, or $0.14 per share – basic and diluted, for the three-month period ended June 30, 2019, compared to $1,627, or $0.10 per share – basic and diluted, for the three-month period ended July 1, 2018. Average weighted common shares outstanding used to compute diluted earnings per share decreased from 16,519,593 in the second quarter of 2018 to 16,192,692 in the second quarter of 2019. The decrease in 2019 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 second quarter of 2018 and an increase in the weighted average stock price to compute diluted shares from $9.64 for the second quarter of 2018 to $9.15 for the second quarter of 2019.

 

23

 

 

Six-Month Periods Ended June 30, 2019 and July 1, 2018

 

Revenues. Consolidated revenues for the six-month period ended June 30, 2019 amounted to $48,279, an increase of $2,346 or 5.1%, from the $45,933 reported for the six-month period ended July 1, 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 increased $1,243, or 3.5%, from $35,055 for the six-month period ended Ju1y 1, 2018 to $36,298 for the six-month period ended June 30, 2019. The increase was attributable to the $4,750 revenue contribution from the operations of SWE and a 4.0% increase in battery 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 lower 9-Volt sales in the first half of 2019.

 

Communications Systems revenues increased $1,103, or 10.1%, from $10,878 during the six-month period ended July 1, 2018 to $11,981 for the six-month period ended June 30, 2019.  This increase is primarily attributable to shipments of mounted power amplifiers to support the U.S. Army’s Network Modernization and other initiatives under the delivery orders announced in October 2018 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.

 

Cost of Products Sold / Gross Profit. Cost of products sold totaled $34,330 for the six-month period ended June 30, 2019, an increase of $2,229 or 6.9%, from the $32,101 reported for the same six-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 69.9% for the six-month period ended July 1, 2018 to 71.1% for the six-month period ended June 30, 2019. Correspondingly, consolidated gross margin was 28.9% for the six-month period ended June 30, 2019, compared with 30.1% for the six-month period ended July 1, 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 increased $1,140 or 4.5%, from $25,093 during the six-month period ended July 1, 2018 to $26,233 during the six-month period ended June 30, 2019. Battery & Energy Products’ gross profit for the 2019 six-month period was $10,065 or 27.7% of revenues, an increase of $103 or 1.0% from gross profit of $9,962, or 28.4% of revenues, for the 2018 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 $1,089 or 15.5% from $7,008 during the six-month period ended July 1, 2018 to $8,097 during the six-month period ended June 30, 2019. Communications Systems’ gross profit for the first six months of 2019 was $3,884 or 32.4% of revenues, an increase of $14 or 0.4% from gross profit of $3,870 or 35.6% of revenues, for the six-month period ended July 1, 2018. The decrease in gross margin was primarily due to costs incurred to commence production of large program awards during the first quarter of 2019.

 

Operating Expenses.  Total operating expenses for the six-month period ended June 30, 2019 totaled $10,359, an increase of $515 or 5.2% from the $9,844 recorded during the six-month period ended July 1, 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 21.5% for the six-month period ended June 30, 2019 compared to 21.4% for the comparable 2018 period. Amortization expense associated with intangible assets related to our acquisitions was $224, including $41 for SWE, for the first six months of 2019 ($158 in selling, general and administrative expenses and $66 in research and development costs), compared with $203 for the first six months of 2018 ($128 in selling, general, and administrative expenses and $75 in research and development costs). Research and development costs were $2,623 for the six-month period ended June 30, 2019, an increase of $305 or 13.2% over $2,318 for the six-months ended July 1, 2018. The increase is fully attributable to $383 of research and development costs incurred by SWE. Selling, general, and administrative expenses increased $210 or 2.8%, from $7,526 during the first six months of 2018 to $7,736 during the first six months of 2019. 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.

 

24

 

 

Other Expense. Other expense totaled $141 for the six-month period ended June 30, 2019 compared to $48 for the six-month period ended July 1, 2018. Interest and financing expense, net of interest income, increased $65 to $119 for the 2019 period from $54 for the comparable period in 2018, as a result of the financing for the SWE acquisition. Miscellaneous expense amounted to $22 for the first six months of 2019 compared with income of $6 for the first six months of 2018, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.

 

Income Taxes. We recognized a tax provision of $717 for the first two quarters of 2019 compared with a tax provision of $133 for the first two quarters of 2018. As a result of reversing the allowance on deferred tax assets at year-end 2018, a statutory-based tax rate of 20.8% was used to record our tax provision for the first six months of 2019 compared to an effective tax rate of 3.4% for the year-earlier period. 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 first half would be approximately 2.3%. See Note 8 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 $2,681 and $0.17, respectively, for the six months ended June 30, 2019, compared to $3,777 and $0.23, respectively, for the six months ended July 1, 2018. Average common shares outstanding used to compute diluted earnings per share decreased from 16,353,705 in the 2018 period to 16,179,897 in the 2019 period, mainly due to share repurchases under the Company’s Share Repurchase Program which commenced on November 1, 2018, partially offset by stock option exercises under our Long-Term Incentive 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, 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’ use 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 (affecting relative amortization expense), the age and book value of facilities and equipment (affecting relative depreciation expense) and 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 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 providing 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.

 

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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.

 

Adjusted EBITDA is calculated as follows for the periods presented:

 

   

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.

 

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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