Ultralife Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results; financial amounts below are in millions of dollars unless stated otherwise. Ultralife designs and manufactures battery and energy products and communications systems. The December 2021 Excell acquisition is included in 2022 results, but not in the comparable 2021 periods.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $33.2 | $21.8 | $95.7 | $74.5 |
| Gross profit / margin | $6.7 / 20.2% | $5.1 / 23.5% | $21.3 / 22.3% | $19.4 / 26.0% |
| Operating income (loss) | $(0.6) | $(0.8) | $(0.1) | $1.3 |
| Net income (loss) attributable to Ultralife | $(0.2) | $(0.6) | $0.1 | $0.9 |
| EPS, basic and diluted | $(0.01) | $(0.04) | $0.01 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $1.3 | $0.3 | $4.5 | $4.5 |
- Q3 revenue grew 52.7% year over year, including $6.9 million from Excell. Government/defense revenue rose 99.8%; commercial revenue rose 38.0% including Excell. Excluding Excell, commercial revenue declined 3.5%.
- For the first nine months, revenue increased 28.5%, while net income attributable to Ultralife declined from $0.9 million to $0.1 million. Operating results moved from $1.3 million of income to a $0.1 million loss.
- Battery & Energy Products revenue was $28.6 million in Q3 and $87.9 million year to date. Communications Systems revenue was $4.7 million in Q3 and $7.9 million year to date; its year-to-date revenue and gross profit were below 2021.
Cash, debt and liquidity
- At September 30, cash was $5.1 million, down from $8.4 million at December 31, 2021. Current assets were $78.9 million and current liabilities $28.1 million.
- Operating activities used $3.8 million of cash in the first nine months, versus $8.5 million generated in 2021. Inventory investment used $8.7 million of cash; capital expenditures were $1.4 million.
- Financing activities provided $2.1 million, including $3.4 million of revolving-credit borrowings, partly offset by $1.3 million of term-loan repayments.
- Outstanding debt comprised $14.3 million under the revolving facility and $8.7 million under the term loan. The $30 million revolving facility runs through May 2025; remaining availability is subject to borrowing-base limits. The company reported covenant compliance at quarter-end.
- Management said it expects positive operating cash flow and revolving-credit availability to meet general funding needs for the foreseeable future.
Changes, outlook and risks
- Gross margin fell year over year in both Q3 and the nine-month period. Management attributed pressure primarily to component inflation, supply-chain delays, manufacturing inefficiencies, logistics costs and new-product production transitions. It said customer price increases did not fully offset component cost inflation.
- Management reported a firm-order backlog of $106.2 million at September 30, up 34.1% from June 30 and 154% from September 30, 2021, and described it as supporting near-term revenue increases. No specific revenue or earnings guidance was provided.
- Excell contributed $6.9 million of Q3 revenue and $19.9 million for the nine-month period. Nine-month Excell net income was $1.1 million, including $0.5 million of acquired-intangible amortization and $0.1 million of inventory purchase-accounting cost.
- The nine-month effective tax rate was 259.1%, which management linked to geographic mix and the larger effect of permanent and discrete adjustments in a low-income period. Q3 included $0.5 million of miscellaneous income; the filing does not clearly identify its specific Q3 source. Year-to-date miscellaneous income was primarily foreign-exchange gains on U.S.-denominated transactions and balances of non-U.S. businesses.
- Other notable exposures include ongoing supply-chain disruption and inflation, rising variable borrowing costs, COVID-related uncertainty (including China shutdowns that affected the Shenzhen facility in Q1), foreign-exchange movements, customer and government-defense demand, and potential battery safety and goodwill impairment risks.
- The company disclosed $0.6 million of production-equipment purchase commitments. It said ordinary-course legal matters were not expected to have a material adverse effect, while noting the inherent uncertainty of legal proceedings. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $106.2 million backlog converts to shipments and cash as expected, given component constraints and customer order timing.
- Whether gross margins recover as supply costs, pricing, factory efficiency and new-product volumes change.
- Working-capital requirements, especially elevated inventory and receivables, and the resulting effect on operating cash flow and borrowing needs.
- Revolver availability under the borrowing base, variable interest expense and compliance with leverage covenants.
- The sustainability of reported earnings and the tax benefit, including the effect of foreign-exchange gains and discrete tax items.
- Excell integration and performance, and the assumptions supporting acquired goodwill and intangible assets.