Ultralife(ULBI) - 2018 Q4 - Annual Report

Part I Item 1. Business Ultralife Corporation designs, manufactures, and sells power solutions and communication systems to global government, defense, and commercial sectors General Overview Ultralife Corporation provides power solutions and communication systems globally through its Battery & Energy Products and Communications Systems segments - The company operates through two primary segments: Battery & Energy Products and Communications Systems[22] - Products are sold globally to government, defense, and commercial sectors through OEMs, distributors, and direct sales channels[20][21] Segment Performance In 2018, Battery & Energy Products generated $70.5 million in revenue, while Communications Systems contributed $16.7 million Segment Financial Performance (Year Ended Dec 31, 2018) | Segment | Revenue (in thousands) | Gross Profit (in thousands) | | :--- | :--- | :--- | | Battery & Energy Products | $70,497 | $19,574 | | Communications Systems | $16,693 | $6,009 | | Corporate Operating Expenses | N/A | ($19,028) | Company History and Acquisitions Ultralife, incorporated in 1990, grew through strategic acquisitions expanding its battery and military communications businesses globally - Formed in 1990, went public in 1992, and grew through key acquisitions[32] - Acquired ABLE New Energy (2006) to expand battery products and enter new consumer markets in China[33] - Expanded into military communications with the acquisitions of McDowell Research (2006) and AMTI (2009)[34][36] - Acquired Accutronics (2016) to diversify commercial revenue, expand into the European medical device market, and achieve sales synergies[37] Products, Services and Technology Ultralife's portfolio includes non-rechargeable and rechargeable Lithium batteries, and ruggedized military communication equipment like RF amplifiers and integrated systems - Battery & Energy Products include non-rechargeable Lithium batteries (9-volt, cylindrical, ThinCell) and rechargeable Lithium-ion batteries and charging systems[38][46] - Communications Systems products include RF amplifiers, integrated vehicle-mounted and man-portable systems, and various power supplies for tactical communications[52][53] Sales and Marketing The company employs a global sales force, with a significant portion of revenue from government contracts, and saw a 168% increase in Communications Systems backlog in 2018 - A single large defense prime contractor represented 16% of total revenues in 2018[60] Sales by Region (in thousands) | Year | U.S. Customers | Non-U.S. Customers | | :--- | :--- | :--- | | 2018 | $53,054 | $34,136 | | 2017 | $47,614 | $37,917 | Order Backlog by Segment (as of Dec 31, in thousands) | Segment | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Battery & Energy Products | $29,300 | $31,000 | -5% | | Communications Systems | $21,700 | $8,100 | +168% | - The 168% increase in Communications Systems backlog was driven by two major contract awards in October 2018 totaling $19.2 million to support U.S. Army network modernization[68] Manufacturing and Raw Materials Ultralife operates ISO-certified manufacturing facilities globally, faces supply chain risks from single-source materials, and reduced inventory levels in 2018 - The company operates ISO 9001 and/or ISO 13485 certified manufacturing facilities in the U.S., China, and the U.K[73] - The company acknowledges a risk related to its reliance on single or limited-source suppliers for certain materials used in its products[76][80] Inventory Levels by Segment (as of Dec 31, in thousands) | Segment | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Battery & Energy Products | $14,007 | $16,650 | -16% | | Communications Systems | $8,836 | $9,676 | -9% | Research and Development The company invests in R&D across its global facilities, with expenditures of $4.9 million in 2018, and anticipates future increases to support new product development R&D Expenditures (in thousands) | Year | Total R&D Expense | Customer Sponsored R&D (in Cost of Goods Sold) | | :--- | :--- | :--- | | 2018 | $4,905 | $397 | | 2017 | $5,142 | $405 | - Future R&D expenditures are expected to increase by 20% or more over 2018 levels to support new product development, a key driver of growth[83] Safety, Regulatory, and Environmental Matters Ultralife's products are subject to extensive safety, transportation, environmental, and export control regulations, with management believing it is in material compliance - The transportation of Lithium batteries is highly regulated by U.S. (PHMSA) and international (ICAO, IATA, IMDG) bodies[88] - The company complies with environmental regulations such as the EU RoHS Directive, EU Battery Directive, and China RoHS 2[89][90][93] - Products are subject to U.S. and international trade and export laws, including ITAR and EAR[96] - The company complies with the Dodd-Frank Act regarding the disclosure of 'conflict minerals' in its supply chain[106] Item 1A. Risk Factors The company faces multiple risks including customer concentration, military spending dependence, supply chain vulnerabilities, and geopolitical and cybersecurity threats - A single major customer, a large defense contractor, accounted for 16% of revenues in 2018, creating significant customer concentration risk[112] - The company is highly dependent on military spending, with approximately 53% of 2018 revenues derived from sales to U.S. and foreign militaries[121] - Operations in China are subject to unique risks, including regulatory changes, labor issues, currency fluctuations, and the potential impact of U.S. tariffs[115] - The company faces supply chain risk as certain materials and components are available only from a single or limited number of suppliers[118] - Cybersecurity threats to the company's IT infrastructure pose a risk of operational disruption and compromise of proprietary information[126] Item 2. Properties Ultralife owns its corporate headquarters in New York and leases manufacturing, sales, and R&D facilities across the U.S., China, and the U.K. - Owns two buildings in Newark, NY (approx. 250,000 sq. ft.) serving as corporate headquarters and Battery & Energy Products operations[155] - Leases facilities in Shenzhen, China (approx. 97,000 sq. ft.) and Newcastle-under-Lyme, UK (approx. 25,000 sq. ft.) for the Battery & Energy Products segment[155] - Leases a facility in Virginia Beach, VA (approx. 32,500 sq. ft.) for the Communications Systems segment[155] Item 3. Legal Proceedings A lawsuit related to a 2013 aircraft fire involving the company's battery was resolved in February 2018 without financial consequences - The 'Dreamliner Litigation' related to a 2013 aircraft fire was resolved in February 2018[160] - The matter was terminated without any financial consequences to the company[160] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ultralife's common stock trades on NASDAQ, and the company initiated a share repurchase program in 2018 but does not pay cash dividends - The company's common stock is listed on the NASDAQ Global Market under the symbol 'ULBI'[163] - A share repurchase program was approved in October 2018, authorizing the repurchase of up to 2.5 million shares[164] 2018 Share Repurchases | Period | Total Shares Purchased | Weighted Average Price Paid Per Share | Total Cost (in thousands) | | :--- | :--- | :--- | :--- | | November 2018 | 29,691 | $7.26 | ~$216 | | December 2018 | 75,983 | $6.89 | ~$523 | | Total for 2018 | 105,674 | $6.99 | $739 | - The company has never declared or paid cash dividends and is precluded from doing so under its current credit facility[168] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, Ultralife's revenues grew to $87.2 million, net income surged to $24.9 million due to a tax benefit, and liquidity strengthened with no debt Results of Operations (2018 vs. 2017) In 2018, total revenues increased 1.9% to $87.2 million, gross margin declined, and net income surged to $24.9 million due to a non-cash tax benefit Consolidated Financial Results (in thousands, except EPS) | Metric | 2018 | 2017 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $87,190 | $85,531 | +1.9% | | Gross Profit | $25,583 | $26,232 | -2.5% | | Gross Margin | 29.3% | 30.7% | -140 bps | | Operating Income | $6,555 | $6,476 | +1.2% | | Net Income Attributable to Ultralife | $24,930 | $7,648 | +226% | | Diluted EPS | $1.53 | $0.48 | +219% | - 2018 net income includes a non-cash tax benefit of $18,652 thousand from the release of the valuation allowance on U.S. deferred tax assets[181][182] - The order backlog at year-end 2018 was $51.0 million, a 30.3% increase from 2017, driven by a 168.7% increase in the Communications Systems backlog[191] Liquidity and Capital Resources The company's liquidity strengthened in 2018, with cash increasing 41.5% to $25.9 million from operating activities, and ended the year with no debt - Cash balance increased by 41.5% to $25,934 thousand as of December 31, 2018[208] - Generated $10,886 thousand in cash from operating activities, a 49.7% increase from 2017, aided by strong earnings and a $3,186 thousand reduction in inventory[208] - The company had no debt outstanding as of December 31, 2018, and had approximately $30,000 thousand available under its credit facility[214][219] Critical Accounting Policies and Estimates Management identifies critical accounting policies including revenue recognition, inventory valuation, asset impairment, and income taxes, notably the 2018 release of deferred tax asset valuation allowance - Adopted new revenue recognition standard (Topic 606) on January 1, 2018, which did not materially impact the timing of revenue recognition[224] - Annual impairment testing for goodwill and other indefinite-lived intangible assets as of October 1, 2018, identified no impairments[233] - A critical judgment in 2018 was the release of the valuation allowance on U.S. deferred tax assets, based on sustained profitability and positive future outlook[236][237] Item 8. Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2018 and 2017, including balance sheets, income statements, cash flows, and notes Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Total Current Assets | $67,221 | $61,916 | | Total Assets | $120,104 | $97,186 | | Total Current Liabilities | $14,947 | $14,239 | | Total Liabilities | $15,570 | $18,137 | | Total Shareholders' Equity | $104,534 | $79,049 | Consolidated Statement of Income Highlights (in thousands) | Account | 2018 | 2017 | | :--- | :--- | :--- | | Revenues | $87,190 | $85,531 | | Gross Profit | $25,583 | $26,232 | | Operating Income | $6,555 | $6,476 | | Net Income Attributable to Ultralife | $24,930 | $7,648 | Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Management concluded that disclosure controls and procedures were effective as of December 31, 2018[375] - Management assessed internal control over financial reporting as effective as of December 31, 2018, based on the COSO framework[378] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the company's definitive proxy statement[382][383] Item 11. Executive Compensation Information on executive and director compensation is incorporated by reference from the 2019 proxy statement - Information is incorporated by reference from the company's definitive proxy statement[382][384] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership and equity compensation plans is incorporated by reference from the company's proxy statement Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by security holders | 1,576,087 | $6.58 | 726,858 | | Not approved by security holders | - | - | - | | Total | 1,576,087 | $6.58 | 726,858 | Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the financial statements and all exhibits filed with the annual report, including corporate governance documents and certifications - This section contains the list of financial statements and all exhibits filed with the annual report[391]