Ultralife Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless otherwise noted. Dollar amounts are in thousands, except per-share data. The company reports Battery & Energy Products and Communications Systems segments. SWE, acquired May 1, 2019, is included in Battery & Energy Products. Beginning in 2020, interim periods use calendar months rather than the prior 4/4/5-week cycle; management said this did not materially affect quarterly comparisons.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $25.814 million | $18.882 million |
| Gross profit / margin | $7.334 million / 28.4% | $5.084 million / 26.9% |
| Operating expenses | $5.849 million | $4.536 million |
| Operating income / margin | $1.485 million / 5.7% | $548,000 / 2.9% |
| Net income attributable to Ultralife | $1.059 million | $425,000 |
| Basic and diluted EPS | $0.07 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $2.522 million | $1.204 million |
| Operating cash flow | $(365,000) | $(545,000) |
| Capital expenditures | $565,000 | $2.581 million |
Revenue grew 36.7%. Battery & Energy Products revenue rose 29.8% to $20.761 million, including $5.437 million from SWE; Communications Systems revenue rose 75.2% to $5.053 million, primarily on higher U.S. Army vehicle amplifier-adaptor shipments. Commercial sales increased 47.9% and government/defense sales increased 24.1%. Gross margin improved 150 basis points, mainly from higher-volume production and favorable Communications Systems mix. Segment gross margin was 25.6% for Battery & Energy Products (down from 27.6%) and 39.9% for Communications Systems (up from 23.4%).
Operating expenses increased 28.9%, including SWE expenses and greater core engineering and product-development spending, but declined as a share of revenue to 22.7% from 24.0%. Interest and financing expense increased to $174,000, primarily due to acquisition financing. The effective tax rate was 22.9%, compared with 8.4%; the prior-year rate benefited from discrete tax benefits related to employee stock-option dispositions. Management reported adjusted diluted EPS of $0.08 versus $0.03, excluding deferred tax provision; adjusted EPS and Adjusted EBITDA are non-GAAP measures.
Financial position, cash flow and debt
At March 31, 2020, cash was $6.109 million, including $247,000 of restricted cash, versus $7.405 million at December 31, 2019. Current assets were $73.568 million and current liabilities $18.928 million. Accounts receivable increased to $35.750 million from $30.106 million, while inventory declined to $28.979 million from $29.759 million. The company attributed the cash decrease and negative operating cash flow principally to the timing of receivable collections; operating cash use was partly offset by net income and increased accounts payable.
Net cash used in investing was $445,000; financing used $322,000, including $343,000 of term-loan principal payments. Cash decreased by $1.296 million during the quarter. At quarter-end, principal outstanding was $6.791 million on the term loan and $10.182 million on the revolving facility. The facilities are secured by substantially all company assets; the revolver has a $30 million commitment, subject to borrowing-base limits. The company reported compliance with its financial covenants. Balance-sheet current and long-term debt totaled $16.821 million, net of debt issuance costs.
Changes, outlook, risks and unusual items
- Growth reflects SWE, acquired in May 2019, and increased Communications Systems deliveries; it is not solely organic growth. SWE contributed $5.437 million of Q1 revenue and $271,000 of net income.
- COVID-19 adversely affected Q1 operations through the approximately one-month mandated closure of the China facility and supply-chain disruption. Management estimated an approximately $500,000 adverse effect on net income. Battery & Energy Products core sales declined, and its gross margin was pressured.
- Management said backlog had increased approximately 20% from year-end 2019 to more than $50 million. It cited liquidity, end-market diversity and spending controls, and expected operating cash generation, collection of government/defense receivables and remaining revolver availability to fund foreseeable needs. This expectation is subject to pandemic uncertainty.
- The company planned approximately $1 million of Q2 2020 test-equipment investment to support demand for power supplies used in ventilators, respirators and infusion pumps. It also had approximately $1.253 million of production-machinery and equipment purchase commitments at March 31.
- Subsequent event: the company received a $3.459 million CARES Act PPP loan in April 2020, then agreed to repay the proceeds, which it said had not been used, following revised government guidance.
- Other disclosed risks include customer concentration and demand variability, raw-material and supply-chain availability, foreign-currency movements, oil-market exposure, military spending and contract timing, product warranty and battery safety matters, and potential impairment of goodwill or intangible assets. Management said known legal matters were not expected to have a material adverse effect, while acknowledging inherent uncertainty.
Key facts for investors to verify
- How much of revenue and earnings growth persists excluding SWE and the U.S. Army delivery program, and whether segment margins hold as production and product mix change.
- Receivable collection timing and conversion of the reported backlog into shipments and cash, particularly given negative Q1 operating cash flow.
- COVID-19 effects on China operations, suppliers, customer demand, staffing and the estimated earnings impact in subsequent periods.
- Revolver borrowing-base availability, debt service and covenant headroom; the filing reports covenant compliance but does not state a clear unused borrowing-availability amount.
- Execution, timing and returns from planned equipment investments and purchase commitments, including the ventilator-related test-equipment spending.
- The treatment and completion of the PPP loan repayment, and the extent to which domestic tax attributes continue to offset future cash taxes.