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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)                     

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

 

For the quarterly period ended September 30, 2020

OR

 

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

 

For the transition period from ____________ to ____________

 

Commission file number: 0-20852

 

ULTRALIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation of organization)

 

2000 Technology Parkway Newark, New York 14513

(Address of principal executive offices) (Zip Code)

16-1387013

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

 

(315) 332-7100 

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

 

None

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

 

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

 

Common Stock, $0.10 par value per share

ULBI

NASDAQ

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)

 

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

 

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

 

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

 

Large accelerated filer ☐

Accelerated filer

 

Non-accelerated filer ☐

Smaller reporting company

  
 

Emerging Growth Company

 

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

 

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

 

As of October 26, 2020, the registrant had 15,928,055 shares of common stock outstanding.

 



 

1

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

 

INDEX

 

   

Page

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Consolidated Financial Statements (unaudited):

 
     
 

Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 

3

     
 

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

4

     
 

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

5

     
 

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

6

     
 

Notes to Consolidated Financial Statements

7

     

Item 2.

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

20

     

Item 4.

Controls and Procedures

30

     

PART II.

OTHER INFORMATION

 
     

Item 1A.

Risk Factors

31

     

Item 6.

Exhibits

32

     
 

Signatures

33

 

2

 

PART I. FINANCIAL INFORMATION

 

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands except share amounts)

(Unaudited)

 

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
ASSETS 

Current assets:

        

Cash

 $13,777  $7,405 

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

  15,012   30,106 

Inventories, net

  29,746   29,759 

Prepaid expenses and other current assets

  3,661   3,103 

Total current assets

  62,196   70,373 

Property, plant and equipment, net

  22,605   22,525 

Goodwill

  26,705   26,753 

Other intangible assets, net

  9,212   9,721 

Deferred income taxes, net

  12,425   13,222 

Other noncurrent assets

  2,411   1,963 

Total Assets

 $135,554  $144,557 
         

LIABILITIES AND SHAREHOLDERS' EQUITY

 

Current Liabilities:

        

Accounts payable

 $8,875  $9,388 

Current portion of long-term debt

  1,537   1,372 

Accrued compensation and related benefits

  1,258   1,655 

Accrued expenses and other current liabilities

  5,702   4,775 

Total current liabilities

  17,372   17,190 

Long-term debt

  2,190   15,780 

Deferred income taxes

  480   559 

Other noncurrent liabilities

  1,675   1,278 

Total liabilities

  21,717   34,807 
         

Commitments and contingencies (Note 9)

          
         

Shareholders' equity:

        

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

  -   - 

Common stock – par value $.10 per share; authorized 40,000,000 shares; issued – 20,331,348 shares at September 30, 2020 and 20,268,050 shares at December 31, 2019; outstanding – 15,928,055 shares at September 30, 2020 and 15,866,868 shares at December 31, 2019

  2,033   2,026 

Capital in excess of par value

  185,261   184,292 

Accumulated deficit

  (49,706)  (52,830)

Accumulated other comprehensive loss

  (2,619)  (2,531)

Treasury stock - at cost; 4,403,293 shares at September 30, 2020 and 4,401,182 shares at December 31, 2019

  (21,246)  (21,231)

Total Ultralife Corporation equity

  113,723   109,726 

Non-controlling interest

  114   24 

Total shareholders’ equity

  113,837   109,750 
         

Total liabilities and shareholders' equity

 $135,554  $144,557 

 

 

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

 

3

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(Unaudited)

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

2020

   

September 29,

2019

   

September 30,

2020

   

September 29,

2019

 
                                 

Revenues

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

Cost of products sold

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

Gross profit

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

Operating expenses:

                               

Research and development

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

Selling, general and administrative

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

Total operating expenses

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

Operating income

    707       1,306       4,486       4,896  
                                 

Other expense (income):

                               

Interest and financing expense

    92       220       372       339  

Miscellaneous income

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

Total other expense

    53       160       262       301  
                                 

Income before income tax provision

    654       1,146       4,224       4,595  

Income tax provision

    192       225       1,010       942  
                                 

Net income

    462       921       3,214       3,653  
                                 

Net income attributable to non-controlling interest

    55       23       90       74  
                                 

Net income attributable to Ultralife Corporation

    407       898       3,124       3,579  
                                 

Other comprehensive gain (loss):

                               

Foreign currency translation adjustments

    677       (668 )     (88 )     (685 )
                                 

Comprehensive income attributable to Ultralife Corporation

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

Net income per share attributable to Ultralife common shareholders – basic

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

Net income per share attributable to Ultralife common shareholders – diluted

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

Weighted average shares outstanding – basic

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

Potential common shares

    181       377       214       382  

Weighted average shares outstanding - diluted

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

 

 

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

 

4

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars In Thousands)

(Unaudited)

 

  

Nine-month period ended

 
  

September 30,

2020

  

September 29,

2019

 

OPERATING ACTIVITIES:

        

Net income

 $3,214  $3,653 

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

        

Depreciation

  1,743   1,548 

Amortization of intangible assets

  444   372 

Amortization of financing fees

  36   32 

Stock-based compensation

  756   519 

Deferred income taxes

  821   801 

Changes in operating assets and liabilities:

        

Accounts receivable

  15,094   (7,022)

Inventories

  13   (5,021)

Prepaid expenses and other assets

  (84)  (1,547)

Accounts payable and other liabilities

  (546)  1,818 

Net cash provided by (used in) operating activities

  21,491   (4,847)
         

INVESTING ACTIVITIES:

        

Purchases of property, plant and equipment

  (1,902)  (4,846)

Proceeds from sale of equipment

  120   - 

Purchase of SWE, net of cash acquired

  -   (25,248)

Net cash used in investing activities

  (1,782)  (30,094)
         

FINANCING ACTIVITIES:

        

Proceeds from Paycheck Protection Program loan

  3,459   - 

Repayment of Paycheck Protection Program loan

  (3,459)  - 

Payment of revolving credit facility

  (10,182)    

Payment of term loan facility

  (3,279)  (423)

Proceeds from exercise of stock options

  218   866 

Tax withholdings on stock-based awards

  (15)  (8)

Proceeds from revolving credit facility

  ---   10,182 

Proceeds from term loan facility

  -   8,000 

Repurchase of common stock

  -   (1,957)

Payment of debt issuance costs

  -   (157)

Net cash (used in) provided by financing activities

  (13,258)  16,503 
         

Effect of exchange rate changes on cash

  (79)  (407)
         

INCREASE (DECREASE) IN CASH

  6,372   (18,845)
         

Cash, Beginning of period

  7,405   25,934 

Cash, End of period

 $13,777  $7,089 

 

 

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

 

5

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

(In Thousands except share amounts)

(Unaudited)

 

 

                   

Capital

   

Accumulated

                                 
   

Common Stock

   

in Excess

   

Other

                   

Non-

         
   

Number of

           

of Par

   

Comprehensive

   

Accumulated

   

Treasury

   

Controlling

         
   

Shares

   

Amount

   

Value

   

Income (Loss)

   

Deficit

   

Stock

   

Interest

   

Total

 
                                                                 

Balance – December 31, 2018

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

Net income

                                    3,579               74       3,653  

Share repurchases

                                            (1,957 )             (1,957 )

Stock option exercises

    194,720       20       846                                       866  

Stock-based compensation – stock options

                    433                                       433  

Stock-based compensation - restricted stock

                    86                                       86  

Vesting of restricted stock

    5,834                                       (8 )             (8 )

Foreign currency translation adjustments

                            (685 )                             (685 )

Balance – September 29, 2019

    20,253,889     $ 2,025     $ 183,995     $ (3,471 )   $ (54,456 )   $ (21,231 )   $ (11 )   $ 106,851  
                                                                 

Balance – December 31, 2019

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

Net income

                                    3,124               90       3,214  

Stock option exercises

    50,797       5       213                                       218  

Stock-based compensation – stock options

                    674                                       674  

Stock-based compensation - restricted stock

                    82                                       82  

Vesting of restricted stock

    12,501       2                               (15 )             (13 )

Foreign currency translation adjustments

                            (88 )                             (88 )

Balance – September 30, 2020

    20,331,348     $ 2,033     $ 185,261     $ (2,619 )   $ (49,706 )   $ (21,246 )   $ 114     $ 113,837  
                                                                 

Balance – June 30, 2019

    20,163,756     $ 2,016     $ 183,457     $ (2,803 )   $ (55,354 )   $ (21,231 )   $ (34 )   $ 106,051  

Net income

                                    898               23       921  

Stock option exercises

    90,133       9       379                                       388  

Stock-based compensation -stock options

                    117                                       117  

Stock-based compensation -restricted stock

                    42                                       42  

Foreign currency translation adjustments

                            (668 )                             (668 )

Balance – September 29, 2019

    20,253,889     $ 2,025     $ 183,995     $ (3,471 )   $ (54,456 )   $ (21,231 )   $ (11 )   $ 106,851  
                                                                 

Balance – June 30, 2020

    20,297,182     $ 2,030     $ 184,900     $ (3,296 )   $ (50,113 )   $ (21,246 )   $ 59     $ 112,334  

Net income

                                    407               55       462  

Stock option exercises

    34,166       3       139                                       142  

Stock-based compensation – stock options

                    204                                       204  

Stock-based compensation - restricted stock

                    18                                       18  

Foreign currency translation adjustments

                            677                               677  

Balance – September 30, 2020

    20,331,348     $ 2,033     $ 185,261     $ (2,619 )   $ (49,706 )   $ (21,246 )   $ 114     $ 113,837  

 

 

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

 

6

 

ULTRALIFE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands except share and per share amounts)

(Unaudited)

 

 

1.     BASIS OF PRESENTATION

 

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

 

The December 31, 2019 consolidated balance sheet information referenced herein was derived from audited financial statements but does not include all disclosures required by GAAP.

 

Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.

 

Effective January 1, 2020, the Company’s interim fiscal periods are reported on a calendar month-basis to better align with fiscal period changes of our customer base. Prior to 2020, the Company’s monthly closing schedule was a 4/4/5 week-based cycle for each fiscal quarter. We do not believe this change materially impacts quarterly comparisons.

 

Recently Adopted Accounting Guidance

 

Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2017-04, “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment”. The new standard eliminates the two-step process that required the identification of potential impairment and a separate measure of the actual impairment. Adoption of the new standard will not materially impact the Company’s consolidated financial statements.

 

Recent Accounting Guidance Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements.

 

 

 

2.     ACQUISITION

 

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

 

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

 

7

 

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

 

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

 

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

 

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

 

Cash

  $ 942  

Accounts receivable

    3,621  

Inventories

    4,685  

Other current assets

    431  

Property, plant and equipment

    9,177  

Goodwill

    6,534  

Customer relationships

    2,522  

Trade name

    1,127  

Accounts payable

    (1,060 )

Other current liabilities

    (778 )

Deferred tax liability, net

    (1,011 )

Net assets acquired

  $ 26,190  

 

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

 

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

 

For the nine months ended September 30, 2020, SWE contributed revenue of $13,382 and net income of $858, inclusive of interest expense of $273 directly related to the financing of the SWE acquisition and amortization expense of $182 on identifiable intangible assets acquired from SWE.

 

For the nine months ended September 29, 2019, from the May 1, 2019 acquisition date, SWE contributed revenue of $11,993 and net income of $740, inclusive of a $264 increase in cost of products sold for the fair value step-up of acquired inventory sold during the period, non-recurring expenses of $165 directly related to the acquisition, interest expense of $289 directly related to the financing of the SWE acquisition, amortization expense of $101 on acquired identifiable intangible assets, a $55 reduction of depreciation expense as a result of fair value adjustments and useful life changes, and stock-based compensation charges of $49 for stock options and restricted stock awarded to certain SWE employees.

 

8

 

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

 

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

 

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

 

   

Nine months ended

   

September 30,

2020

 

September 29,

2019

Revenue

  $ 78,736       $ 84,567    

Operating income

  $ 4,486         5,536    

Net income attributable to Ultralife Corporation

  $ 3,124         3,900    

Net income per share attributable to Ultralife Corporation:

                   

Basic

  $ .20       $ .25    

Diluted

  $ .19       $ .24    

 

 

 

3.     DEBT

 

Credit Facilities

 

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

 

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

 

Upon closing of the SWE acquisition on May 1, 2019, the Company drew down the full amount of the Term Loan Facility and $6,782 under the Revolving Credit Facility. As of September 30, 2020, the Company had $3,855 outstanding principal on the Term Loan Facility, of which $1,537 is included in current portion of long-term debt on the balance sheet, and no amounts outstanding on the Revolving Credit Facility. As of September 30, 2020, total unamortized debt issuance costs of $128 associated with the Amended Credit Agreement are classified as a reduction of long-term debt on the balance sheet.

 

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

 

In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated fixed charge coverage ratio of equal to or greater than 1.15 to 1.0, and a consolidated senior leverage ratio of equal to or less than 2.5 to 1.0, each as defined in the Amended Credit Agreement. The Company was in full compliance with its covenants as of September 30, 2020.

 

Borrowings under the Credit Facilities are secured by substantially all the assets of the Company. Availability under the Revolving Credit Facility is subject to certain borrowing base limits based on receivables and inventories.

 

9

 

Interest will accrue on outstanding indebtedness under the Credit Facilities at the Base Rate or the Overnight LIBOR Rate, as selected by the Company, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus 50 basis points, and (c) the Overnight LIBOR Rate plus one hundred basis points. The applicable margin ranges from zero to negative 50 basis points for the Base Rate and from 185 to 215 basis points for the Overnight LIBOR Rate and are determined based on the Company’s senior leverage ratio.

 

The Company must pay a fee of 0.1% to 0.2% based on the average daily unused availability under the Revolving Credit Facility.

 

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

 

 

 

4.     EARNINGS PER SHARE

 

Basic earnings per share (“EPS”) is computed by dividing earnings attributable to the Company’s common shareholders by the weighted-average shares outstanding during the period.  Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method.  For the three-month period ended September 30, 2020, 831,244 stock options and 19,165 restricted stock awards were included in the calculation of diluted EPS as such securities are dilutive.  Inclusion of these securities resulted in 181,270 additional shares in the calculation of fully diluted earnings per share.  For the comparable three-month period ended September 29, 2019, 914,535 stock options and 31,666 restricted stock awards were included in the calculation of diluted EPS resulting in 377,200 additional shares in the calculation of fully diluted earnings per share. For the nine-month periods ended September 30, 2020 and September 29, 2019, 831,244   and 914,535 stock options and 19,165 and 31,666 restricted stock awards, respectively, were included in the calculation of diluted EPS as such securities are dilutive.  Inclusion of these securities resulted in 213,574 and 382,711 additional shares, respectively, in the calculation of fully diluted earnings per share. 

 

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

 

 

 

5.     SUPPLEMENTAL BALANCE SHEET INFORMATION

 

Fair Value Measurements and Disclosures

 

The fair value of financial instruments approximated their carrying values at September 30, 2020 and December 31, 2019. The fair value of cash, trade accounts receivable, trade accounts payable, accrued liabilities, and the current portion of long-term debt approximates carrying value due to the short-term nature of these instruments. The carrying value of long-term debt approximates fair value, as the variable interest rates approximate current market rates.

 

Cash

 

The composition of the Company’s cash was as follows:

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Cash

  $ 13,690     $ 7,135  

Restricted cash

    87       270  

Total

  $ 13,777     $ 7,405  

 

As of September 30, 2020 and December 31, 2019, restricted cash included $87 and $82, respectively, of euro-denominated deposits withheld by the Dutch tax authorities and third-party VAT representatives in connection with a previously utilized logistics arrangement in the Netherlands. As of December 31, 2019, restricted cash included $188 for a government grant awarded in the People’s Republic of China to fund specified technological research and development initiatives. The grant proceeds are realized as a direct offset to qualifying expenditures as incurred. For the nine-month period ended September 30, 2020, grant proceeds of $188 were used to fund qualifying capital expenditures and material and labor costs incurred. Restricted cash is included as a component of the cash balance for purposes of the consolidated statements of cash flows.

 

10

 

Inventories

 

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

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Raw materials

  $ 17,600     $ 18,485  

Work in process

    3,861       2,548  

Finished goods

    8,285       8,726  

Total

  $ 29,746     $ 29,759  

 

Property, Plant and Equipment, Net

 

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

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Land

  $ 1,273     $ 1,273  

Buildings and leasehold improvements

    15,365       15,386  

Machinery and equipment

    55,869       55,058  

Furniture and fixtures

    2,219       2,194  

Computer hardware and software

    6,812       6,712  

Construction in process

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

Less: Accumulated depreciation

    (64,555 )     (62,828 )

Property, plant and equipment, net

  $ 22,605     $ 22,525  

 

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

 

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

   

September 29,

   

September 30,

   

September 29,

 
   

2020

   

2019

   

2020

   

2019

 

Depreciation expense

  $ 582     $ 586     $ 1,743     $ 1,548  

 

 

Goodwill

 

The following table summarizes the goodwill activity by segment for the nine-month period ended September 30, 2020.

 

   

Battery &

Energy

   

Communications

         
   

Products

   

Systems

   

Total

 

Balance – December 31, 2019

    15,260       11,493       26,753  

Effect of foreign currency translation

    (48 )     -       (48 )

Balance – September 30, 2020

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

 

11

 

Other Intangible Assets, Net

 

The composition of other intangible assets was:

   

September 30, 2020

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,406     $ -     $ 3,406  

Customer relationships

    9,020       4,975       4,045  

Patents and technology

    5,496       4,952       544  

Distributor relationships

    377       377       -  

Trade name

    1,501       284       1,217  

Total

  $ 19,800     $ 10,588     $ 9,212  

 

   

December 31, 2019

 
           

Accumulated

         
   

Cost

   

Amortization

   

Net

 

Trademarks

  $ 3,403     $ -     $ 3,403  

Customer relationships

    9,080       4,721       4,359  

Patents and technology

    5,521       4,869       652  

Distributor relationships

    377       377       -  

Trade name

    1,511       204       1,307  

Total

  $ 19,892     $ 10,171     $ 9,721  

 

 

The change in the cost of total intangible assets from December 31, 2019 to September 30, 2020 is a result of the effect of foreign currency translations.

 

Amortization expense for other intangible assets was as follows:

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

   

September 29,

   

September 30,

   

September 29,

 
   

2020

   

2019

   

2020

   

2019

 

Amortization included in:

                               

Research and development

  $ 31     $ 32     $ 92     $ 98  

Selling, general and administrative

    118       116       352       274  

Total amortization expense

  $ 149     $ 148     $ 444     $ 372  

 

12

 
 

6.     STOCK-BASED COMPENSATION

 

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

 

   

Three-month period ended

   

Nine-month period ended

 
   

September 30,

   

September 29,

   

September 30,

   

September 29,

 
   

2020

   

2019

   

2020

   

2019

 

Stock options

  $ 204     $ 117     $ 674     $ 433  

Restricted stock grants

    18       42       82       86  

Total

  $ 222     $ 159     $ 756     $ 519  

 

We have stock options outstanding from various stock-based employee compensation plans for which we record compensation cost relating to share-based payment transactions in our financial statements. As of September 30, 2020, there was $720 of total unrecognized compensation cost related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.4 years.

 

The following table summarizes stock option activity for the nine-month period ended September 30, 2020:

 

   

Number of Shares

   

Weighted Average Exercise Price

   

Weighted Average Remaining Contractual Term (years)

   

Aggregate Intrinsic Value

 

Outstanding at January 1, 2020

    1,541,792     $ 6.88                  

Granted

    256,000       6.51                  

Exercised

    (50,797 )     4.29                  

Forfeited or expired

    (17,584 )     7.72                  

Outstanding at September 30, 2020

    1,729,411     $ 6.89       3.06     $ 745  

Vested and expected to vest at September 30, 2020

    1,626,494     $ 6.84       2.88     $ 745  

Exercisable at September 30, 2020

    1,244,119     $ 6.63       1.92     $ 745  

 

The following assumptions were used to value stock options granted during the nine months ended September 30, 2020:

 

Risk-Free Interest Rate

    0.4 %

Volatility Factor

    49 %

Weighted Average Expected Life (Years)

    5.3  

Dividends

    0.0 %

 

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

 

Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended September 30, 2020 and September 29, 2019 was $142 and $388, respectively. Cash received from stock option exercises under our stock-based compensation plans for the nine-month periods ended September 30, 2020 and September 29, 2019 was $218 and $866, respectively.

 

In April 2019, 20,000 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $11.12 per share. In January 2018, 17,500 shares of restricted stock were awarded to certain of our employees at a weighted-average grant date fair value of $7.16 per share. All outstanding restricted shares vest in equal annual installments over three years. Unrecognized compensation cost related to these restricted shares was $63 at September 30, 2020, which is expected to be recognized over a weighted average period of 1.5 years.

 

13

 
 

7.     INCOME TAXES

 

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

 

As of December 31, 2019, we have domestic net operating loss (“NOL”) carryforwards of $58,400, which expire 2020 thru 2035, and domestic tax credits of $1,907, which expire 2028 thru 2039, available to reduce future taxable income. As of September 30, 2020, management has concluded it is more likely than not that these domestic NOL and credit carryforwards will be fully utilized.

 

As of September 30, 2020, for certain past operations in the U.K., we continue to report a valuation allowance for NOL carryforwards of approximately $10,000, nearly all of which can be carried forward indefinitely. Utilization of the net operating losses may be limited due to the change in the past U.K. operation and cannot currently be used to reduce taxable income at our other U.K. subsidiary, Accutronics Ltd.

 

As of September 30, 2020, we have not recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.

 

As of September 30, 2020, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations.

 

There were no unrecognized tax benefits related to uncertain tax positions at September 30, 2020 and December 31, 2019.

 

As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions.  We are routinely subject to examination by taxing authorities in these various jurisdictions.  In August 2020, the Internal Revenue Service (“IRS”) completed its examination of the Company’s federal tax returns for 2016-2018 with no material adjustments identified.  Our U.S. tax matters for 2019 remain subject to IRS examination.  Our U.S. tax matters for 2001, 2002, 2005-2007 and 2011-2015 also remain subject to IRS examination due to the remaining availability of net operating loss carryforwards generated in those years. Our U.S. tax matters for 2001, 2002, 2005-2007 and 2011-2019 remain subject to examination by various state and local tax jurisdictions. Our tax matters for the years 2010 through 2019 remain subject to examination by the respective foreign tax jurisdiction authorities.

 

 

 

8.     OPERATING LEASES

 

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

 

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

 

  

Three months ended

  

Nine months ended

 
  

September 30, 2020

  

September 29, 2019

  

September 30, 2020

  

September 29, 2019

 

Operating lease cost

 $172  $168  $508  $459 

Variable lease cost

  18   21   54   63 

Total lease cost

 $190  $189  $562  $522 

 

14

 

Supplemental cash flow information related to leases was as follows:

 

  

Nine months ended

 
  

September 30,

2020

  

September 29,

2019

 

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

        

Operating cash flows from operating leases

 $506  $447 

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

 $875  $1,586 

 

Supplemental balance sheet information related to leases was as follows:

 

 

Balance sheet classification

 

September 30,

2020

  

December 31,

2019

 

Assets:

         

Operating lease right-of-use asset

Other noncurrent assets

 $2,303  $1,866 
          

Liabilities:

         

Current operating lease liability

Accrued expenses and other current liabilities

 $669  $620 

Operating lease liability, net of current portion

Other noncurrent liabilities

  1,643   1,247 

Total operating lease liability

 $2,312  $1,867 
          

Weighted-average remaining lease term (years)

  3.6   3.7 
          

Weighted-average discount rate

  4.5%  4.5%

 

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

 

Maturity of Operating Lease Liabilities

    

2020

  177 

2021

  709 

2022

  680 

2023

  700 

2024

  269 

Total lease payments

  2,535 

Less: Imputed interest

  (223)

Present value of remaining lease payments

 $2,312 

 

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

 

15

 
 

9.     COMMITMENTS AND CONTINGENCIES

 

a. Purchase Commitments

 

As of September 30, 2020, we have made commitments to purchase approximately $783 of production machinery and equipment.

 

b. Product Warranties

 

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

 

   

Nine-month period ended

 
   

September 30,

2020

   

September 29,

2019

 

Accrued warranty obligations – beginning

  $ 195     $ 95  

Assumed warranty obligations – SWE

    -       145  

Accruals for warranties issued

    75       152  

Settlements made

    (103 )     (167 )

Accrued warranty obligations – ending

  $ 167     $ 225  

 

 

c. Contingencies and Legal Matters

 

We are subject to legal proceedings and claims that arise from time to time in the normal course of business. We believe that the final disposition of any such matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, recognizing that legal matters are subject to inherent uncertainties, there exists the possibility that ultimate resolution of these matters could have a material adverse impact on the Company’s financial position, results of operations or cash flows. We are not aware of any such situations that are reasonably possible at this time.

 

 

 

10.     REVENUE RECOGNITION

 

Revenues are generated from the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer, which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on the date of delivery. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and other taxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return. For products shipped under vendor managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which point control has transferred and there are no further obligations by the Company.

 

Revenues recognized from prior period performance obligations for the nine-month periods ended September 30, 2020 and September 29, 2019 were not material. Deferred revenue, unbilled revenue and deferred contract costs recorded on our consolidated balance sheets as of September 30, 2020 and December 31, 2019 were not material. As of September 30, 2020 and December 31, 2019, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to ASC Topic 606, we have applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations.

 

16

 
 

11.     BUSINESS SEGMENT INFORMATION

 

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

 

The components of segment performance were as follows:

 

Three-month period ended September 30, 2020:

 

   

Battery &
Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

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

Segment contribution

    5,677       834       (5,804 )     707  

Other expense

                    (53 )     (53 )

Tax provision

                    (192 )     (192 )

Non-controlling interest

                    (55 )     (55 )

Net income attributable to Ultralife

                          $ 407  

 

Three-month period ended September 29, 2019:

 

   

Battery &
Energy Products

   

Communications

Systems

   

Corporate

   

Total

 

Revenues

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

Segment contribution

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

Other expense

                (160 )     (160 )

Tax provision

                    (225 )     (225 )

Non-controlling interest

                    (23 )     (23 )

Net income attributable to Ultralife

                          $ 898  

 

Nine-month period ended September 30, 2020:

 

   

Battery &
Energy Products

   

Communications Systems

   

Corporate

   

Total

 

Revenues

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

Segment contribution

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

Other expense

                    (262 )     (262 )

Tax provision

                    (1,010 )     (1,010 )

Non-controlling interest

                    (90 )     (90 )

Net income attributable to Ultralife

                          $ 3,124  

 

17

 

Nine-month period ended September 29, 2019:

 

   

Battery &
Energy Products

   

Communications Systems

   

Corporate

   

Total

 

Revenues

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

Segment contribution

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

Other expense

                    (301 )     (301 )

Tax provision

                    (942 )     (942 )

Non-controlling interest

                    (74 )     (74 )

Net income attributable to Ultralife

                          $ 3,579  

 

 

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

 

Commercial and Government/Defense Revenue Information: 

 

Three-month period ended September 30, 2020:

   

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 21,819     $ 15,772     $ 6,047  

Communications Systems

    2,543       -       2,543  

Total

  $ 24,362     $ 15,772     $ 8,590  
              65 %     35 %

 

Three-month period ended September 29, 2019:

   

Total

Revenue

   

Commercial

   

Government/

Defense

 

Battery & Energy Products

  $ 22,578     $