Ultralife Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Ultralife sells battery and energy products and communications systems to commercial, government and defense markets. Dollar amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $42.692 | $32.126 | $74.608 | $62.499 |
| Gross profit / margin | $10.588 / 24.8% | $7.646 / 23.8% | $18.024 / 24.2% | $14.604 / 23.4% |
| Operating income | $3.665 | $0.793 | $3.691 | $0.498 |
| Net income attributable to Ultralife | $3.340 | $0.512 | $2.994 | $0.344 |
| Diluted EPS | $0.21 | $0.03 | $0.19 | $0.02 |
- Q2 revenue rose 32.9%. Battery & Energy Products sales increased 12.3% to $33.861 million; Communications Systems sales increased 344.6% to $8.831 million, reflecting defense program shipments.
- Six-month revenue rose 19.4%. Government/defense sales increased 67.1%; commercial sales increased 4.0%.
- Q2 operating margin rose to 8.6% from 2.5%; operating expenses were 16.2% of revenue versus 21.3%. For the six-month period, operating expenses were 19.2% of revenue versus 22.6%.
- Q2 adjusted EBITDA, a non-GAAP measure, was $6.296 million versus $2.185 million; six-month adjusted EBITDA was $7.451 million versus $3.288 million. Q2 adjusted EPS was $0.29 and six-month adjusted EPS was $0.24; both measures exclude deferred tax provision effects.
Cash flow, liquidity and debt
- Cash was $8.283 million at June 30, including $0.081 million restricted, up from $5.713 million at year-end. Six-month operating cash flow was $0.386 million, compared with $3.400 million used in the prior-year period. Inventory and other working-capital needs absorbed cash; inventory increased to $46.063 million from $41.192 million.
- Capital expenditures were $1.013 million. Financing provided $3.362 million, principally from revolving-credit draws, partly offset by term-loan repayments.
- Principal outstanding was $17.630 million on the revolving facility and $7.167 million on the term loan. The company reported full covenant compliance at June 30. Revolver availability is subject to borrowing-base limits; the filing does not provide a clear amount of remaining availability.
- Current assets were $87.826 million and current liabilities $29.203 million. Management said expected positive operating cash flow and revolver availability should meet general funding needs for the foreseeable future.
Material changes, outlook and risks
- Q2 other income includes a $1.544 million Employee Retention Credit (ERC) benefit. The company filed amended payroll tax forms during the quarter; the claimed refund is recorded as a receivable. This benefit materially increased reported earnings and should not be assumed to recur.
- A ransomware cyberattack on January 25, 2023 disrupted order processing, shipments, services and planning for several weeks at Newark and longer at Virginia Beach. No ransom was paid. Management reported lingering operational inefficiencies and said it was pursuing an insurance claim for response costs and business interruption.
- Management cited backlog of $110.875 million at June 30, up 40.1% year over year; $76.400 million was scheduled to ship in the second half of 2023. It identified margin recovery through price realization, alternate-supplier qualification and lean manufacturing as priorities, with a goal of profitable growth, debt reduction and reinvestment. No formal numeric revenue or EPS guidance is provided.
- Battery & Energy Products gross margin declined year over year, reflecting cyberattack-related inefficiencies, non-conforming materials, supply-chain issues and new-product ramp costs. Communications Systems margins improved with higher volumes and favorable mix. Interest expense increased, attributed to acquisition financing, working-capital borrowing and higher rates.
- Risks discussed include customer dependence, demand and government spending uncertainty, supply-chain and component availability, cyber and IT disruption, variable interest rates, product safety and warranty costs, foreign exchange, and regulatory and legal matters. The company reported no known legal matter expected to have a material adverse effect, while noting the inherent uncertainty of proceedings.
Important facts for investors to verify
- ERC claim eligibility, collection timing and any subsequent IRS developments.
- Backlog shipment conversion, especially the $76.400 million scheduled for the second half, and whether defense-program demand is sustained.
- Cyberattack recovery, insurance reimbursement and continuing effects on production, margins and cash flow.
- Inventory and working-capital trends, operating cash generation, actual revolver availability and debt reduction progress.
- Whether gross-margin improvement persists without the ERC benefit, and the assumptions behind non-GAAP adjusted EBITDA and adjusted EPS.