Ultralife Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Financial figures below are in millions of dollars unless stated otherwise. Ultralife designs and manufactures battery, power, communications, and electronics products for commercial, government, and defense customers.
Financial performance
- Revenue: $31.916 million, up 5.1%. Government/defense sales increased 24.7%, while commercial sales declined 1.7%.
- Gross profit and margin: $7.436 million and 23.3%, versus $6.958 million and 22.9% a year earlier.
- Operating results: Operating income was $26,000, compared with an operating loss of $295,000. Operating expenses rose 2.2% to $7.410 million; expenses were 23.2% of revenue versus 23.9%.
- Net results: Net loss attributable to Ultralife was $346,000, or $0.02 per diluted share, compared with a $168,000 loss, or $0.01 per share. Higher interest expense was a significant factor.
- Adjusted EBITDA: $1.155 million, or 3.6% of revenue, versus $1.103 million, also 3.6%. This is a non-GAAP measure; the company cautions it should not be viewed as a substitute for GAAP results.
- Cash flow: Operating activities used $1.365 million, compared with $3.222 million used in Q1 2022. Capital expenditures were $497,000; financing activities provided $1.800 million, principally from revolving-credit borrowings, partly offset by $500,000 of term-loan payments. Cash decreased $108,000 to $5.605 million, including $81,000 of restricted cash.
- Liquidity and debt: Current assets were $81.352 million and current liabilities $29.199 million. At quarter-end, principal outstanding was $7.667 million on the term loan and $15.630 million on the revolver. The company reported compliance with credit-facility covenants.
- Working capital: Inventory increased $6.119 million from year-end to $47.311 million; management attributed the build to the cyberattack and precautionary purchasing to manage supply-chain risks and customer demand.
Material changes and operating developments
- Cybersecurity incident: A ransomware attack disrupted order processing, shipments, customer service, and planning for several weeks at the Newark facility and longer at Virginia Beach. The company reported that production and shipping resumed, no ransom was paid, and recovery and security work took substantial Q1 resources. A $100,000 insurance deductible was included in results; management was pursuing an insurance claim for external cybersecurity costs and business interruption.
- Segments: Battery & Energy Products revenue declined 2.3% to $28.470 million; segment gross profit fell 3.1% to $6.512 million and margin was 22.9% versus 23.1%. Communications Systems revenue rose 181.8% to $3.446 million, primarily on shipments under a vehicle-amplifier adaptor order; the segment’s gross margin improved to 26.8% from 19.4%. The attack reduced Communications Systems’ Q1 sales by approximately $2 million, according to management.
- Backlog: $108.1 million at March 31, down 2.6% from the record $111.0 million at December 31, 2022. The company expected $96.1 million to ship during the rest of 2023, 30.2% above the comparable prior-year amount.
- Interest costs: Interest and financing expense increased to $424,000 from $134,000, primarily due to acquisition financing and rising interest rates.
Outlook, risks, and contingencies
- Management said its 2023 goal remains profitable growth through operational improvements and incremental cash flow to pay down acquisition debt. It is focused on completing orders delayed by the cyberattack and serving increased medical and government/defense demand, as well as commercial markets including oil and gas.
- The company expects positive operating cash flow and revolver availability to meet general funding needs for the foreseeable future. This is management’s expectation, not a quantified earnings forecast; the filing provides no specific revenue or profit guidance.
- Key risks identified include inflation and supply-chain disruptions, customer concentration, changes in government and military spending, China-related exposure, cybersecurity and IT disruption, raw-material availability, variable-rate borrowing costs, battery safety, foreign exchange, and the ability to realize expected customer volumes.
- Outstanding commitments included approximately $873,000 for production machinery and equipment. The company described routine legal claims and proceedings; it was not aware of matters expected to have a material adverse effect, while noting that legal outcomes carry uncertainty.
Important facts for investors to verify
- Subsequent filings or disclosures on the cyber-insurance claim, recovery of business interruption costs, and any continuing operational or security effects.
- Whether the elevated inventory converts into shipments and cash, and whether the stated 2023 backlog is delivered on schedule.
- Cash generation, borrowing needs, variable-rate interest expense, and compliance with the tighter senior-leverage covenant that applies from Q2 2023.
- Progress in restoring Battery & Energy Products margins amid supply-chain, material-cost, and new-product production pressures.
- The assumptions supporting management’s expectation of positive operating cash flow and sufficient liquidity.