Ultralife Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Ultralife sells battery and energy products and communications systems to commercial, government, and defense customers. Amounts are in millions of dollars except per-share data, unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $26.770 | $28.560 | $52.743 | $54.374 |
| Gross profit / margin | $7.267 / 27.1% | $7.963 / 27.9% | $14.245 / 27.0% | $15.297 / 28.1% |
| Operating income / margin | $1.091 / 4.1% | $2.294 / 8.0% | $2.043 / 3.9% | $3.779 / 7.0% |
| Net income attributable to Ultralife | $0.811 | $1.658 | $1.482 | $2.717 |
| Diluted EPS | $0.05 | $0.10 | $0.09 | $0.17 |
| Adjusted EBITDA (non-GAAP) | $2.186 | $3.307 | $4.198 | $5.829 |
- Q2 revenue declined 6.3%; first-half revenue declined 3.0%. Q2 Battery & Energy Products revenue fell 4.8% to $22.875 million, and Communications Systems revenue fell 13.9% to $3.895 million.
- Q2 gross margin contracted 80 basis points. Management attributed the decline primarily to product mix, particularly comparison with 2020 U.S. Army vehicle amplifier-adaptor shipments. First-half margin fell 110 basis points for similar reasons.
- Operating expenses rose 9.0% in Q2 to $6.176 million, largely reflecting investment in engineering and new product development. Q2 R&D expense increased 45.3% to $1.853 million.
- Six-month operating cash flow was $6.955 million, versus $8.882 million. Investing used $1.225 million, principally for capital investment; financing used $0.542 million. Cash increased $5.175 million to $15.828 million, including $0.088 million of restricted cash.
- At June 30, current assets were $64.305 million and current liabilities $15.531 million. Total liabilities were $17.283 million and stockholders’ equity $119.237 million.
- Term-loan principal outstanding was $0.685 million; the balance sheet reports $0.624 million current debt net of $0.061 million unamortized issuance costs. No revolving-facility borrowings were outstanding. The $30 million revolver runs through May 31, 2022; the term loan matures April 30, 2024. The company reported compliance with debt covenants.
Material changes and management commentary
- Q2 earnings were affected by lower medical battery sales after elevated 2020 pandemic-related demand, and by lower Communications Systems shipments following completion of U.S. Army delivery orders. Higher oil-and-gas and 9-volt battery sales partly offset those declines.
- Management estimated that supplier lead-time increases and COVID-19-related logistics delays shifted shipments out of Q2, reducing quarterly revenue by approximately $1.5 million, operating income by $0.5 million, and EPS by $0.03.
- Battery & Energy Products Q2 gross profit was nearly unchanged at $6.016 million, with margin improving to 26.3%. Communications Systems gross profit declined 35.4% to $1.251 million; margin fell to 32.1%.
- Management expects positive operating cash flow and available revolver capacity to meet general funding needs for the foreseeable future. The filing provides no specific revenue or earnings guidance. Management intends to pursue near- and long-term growth initiatives, including product development and potential acquisitions.
- The company announced a Conformal Wear Battery IDIQ contract on May 17, 2021, and reported dedicating development resources to it; the filing does not provide a contract value. It also had approximately $1.001 million of production machinery and equipment purchase commitments.
- A shelf registration effective April 2, 2021 permits offerings of up to $100 million in aggregate, subject to required prospectus filings. Potential uses include acquisitions, capital expenditures, and product development.
- Key disclosed risks include COVID-19 and supply disruptions, customer and defense-budget concentration, demand uncertainty, China operations, foreign exchange, product safety and warranties, technology and competition, and possible goodwill or intangible-asset impairment. Management said known legal matters were not expected to have a material adverse effect, while acknowledging the inherent uncertainty of legal proceedings.
Most important facts for investors to verify
- Whether delayed shipments were recovered in subsequent periods and whether component lead times continued to constrain deliveries.
- Whether medical battery demand normalized and whether oil-and-gas, 9-volt, and defense demand sustained the reported offsets.
- Whether Communications Systems sales and margins stabilized after completion of the cited U.S. Army orders.
- Whether increased R&D and the Conformal Wear Battery IDIQ work generated follow-on orders and returns consistent with management’s growth plans.
- Current revolver availability, debt repayment and covenant compliance, and the company’s funding plans if it uses the shelf registration.
- The utilization and limitations of tax attributes, including approximately $11 million of U.K. NOL carryforwards subject to a valuation allowance and potential usage limits.