Ultralife Corporation (ULBI) — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; year-to-date results cover nine months ended September 30, 2020. Comparative periods ended September 29, 2019. Financial amounts below are USD millions, except per-share data.
Business context
Ultralife designs and manufactures battery and energy products and communications systems for commercial, government, and defense customers. It reports two segments: Battery & Energy Products and Communications Systems. SWE, acquired in May 2019, is included in Battery & Energy Products. The company changed to calendar-month interim reporting in 2020; management said this did not materially affect comparisons.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $24.362 | $27.493 | $78.736 | $75.772 |
| Gross profit / margin | $6.511 / 26.7% | $7.861 / 28.6% | $21.808 / 27.7% | $21.810 / 28.8% |
| Operating income | $0.707 | $1.306 | $4.486 | $4.896 |
| Net income attributable to Ultralife | $0.407 | $0.898 | $3.124 | $3.579 |
| Diluted EPS | $0.03 | $0.06 | $0.19 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $1.656 | $2.307 | $7.485 | $7.595 |
- Cash flow: Nine-month operating cash flow was $21.491, versus cash used of $4.847 in 2019. The principal driver was a $15.094 reduction in accounts receivable, primarily from collections. Investing used $1.782, including $1.902 of capital expenditures; financing used $13.258, mainly debt repayment.
- Cash and debt: Cash was $13.777 at September 30, up from $7.405 at December 31, 2019. Debt carrying amounts totaled $3.727 ($1.537 current and $2.190 long-term), versus $17.152 at year-end 2019. No revolving-credit borrowings were outstanding; the company reported compliance with debt covenants.
- Liquidity: Current assets were $62.196 and current liabilities $17.372. Management expected operating cash flow and remaining revolver availability to meet general funding and investment needs for the foreseeable future, subject to economic conditions.
Material changes and management commentary
- Q3 revenue fell 11.4%; commercial sales declined 10.8% and government/defense sales 12.5%. Battery & Energy Products revenue decreased 3.4%, while Communications Systems revenue decreased 48.3%.
- Medical battery demand rose sharply, but was more than offset in Q3 by weaker oil and gas and international industrial sales, plus shipment delays. Battery & Energy revenue excluding oil and gas increased 27.5%; oil and gas battery sales fell 68.7% year over year.
- Communications Systems revenue was lower partly because higher U.S. Army-related amplifier orders from 2019 had been completed by Q2 2020. Nine-month segment revenue declined 28.3%.
- Q3 gross margin decreased 190 basis points, reflecting product mix and costs of transitioning new products to higher-volume production. Nine-month margin fell 110 basis points, with COVID-related China shutdown, supply-chain and logistics costs contributing; Communications Systems margin improved year to date due to production efficiencies.
- Operating expenses fell 11.5% in Q3, reflecting headcount reductions, lower travel and discretionary-spending controls. Nine-month operating expenses rose 2.4%, mainly because 2020 included a full nine months of SWE versus five months in 2019.
- Management estimated COVID-19 reduced Q3 revenue by about $2.9 and net income by about $1.0; its estimated adverse net-income impact for the first nine months was about $1.5. It cited supply-chain/logistics disruption and weakness in oil and gas and international industrial markets, partly offset by medical battery demand.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management described the balance sheet and business model as resilient and stated that liquidity should be sufficient under current conditions.
- COVID-19 remains a material uncertainty, with potential effects including component shortages or higher costs, weaker demand or pricing, customer credit stress, workforce constraints, cyber threats, and impairment of long-lived assets or goodwill.
- Other identified risks include reliance on key customers, changes in defense spending, China tariffs and trade disputes, oil-price-driven demand, product safety and warranty exposure, foreign exchange, and technology and regulatory risks.
- Debt facilities require a fixed-charge coverage ratio of at least 1.15:1 and senior leverage ratio no greater than 2.5:1. The company reported compliance at quarter-end. Production-equipment purchase commitments were approximately $0.783.
- Legal matters arise in the ordinary course; management did not believe their disposition would materially adversely affect the company, while noting the inherent uncertainty. The filing identifies no specific matter considered reasonably possible to have such an effect.
- Reported tax expense includes substantial deferred tax charges: $0.188 in Q3 and $0.821 year to date, which management said would be offset by U.S. NOL carryforwards and credits for the foreseeable future. Adjusted EPS excludes deferred tax provisions and is non-GAAP.
Most important facts for investors to verify
- Whether the large operating-cash-flow contribution from receivables collection is repeatable, and the current status and aging of receivables.
- Whether medical battery demand can persist and offset continuing weakness in oil and gas, industrial markets, and Communications Systems orders.
- The actual duration and financial effects of COVID-related logistics, supply-chain, customer-demand and operating disruptions versus management’s estimates.
- Remaining revolver availability under borrowing-base limits, scheduled term-loan amortization, covenant headroom, and the effect of future cash needs.
- The assumptions behind non-GAAP Adjusted EBITDA and Adjusted EPS, including excluded deferred taxes and the stated COVID impact estimates.
- Whether customer and defense order timing, product-transition costs, or potential asset impairment could materially change margins and reported results.