Ultralife Corporation (ULBI) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed October 26, 2023. Amounts below are USD millions unless noted. Ultralife designs and manufactures battery and energy products and communications systems for commercial, government, and defense customers.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $39.488 | $33.234 | $114.096 | $95.733 |
| Gross profit / margin | $9.774 / 24.8% | $6.715 / 20.2% | $27.798 / 24.4% | $21.319 / 22.3% |
| Operating income (loss) | $2.135 | $(0.586) | $5.826 | $(0.088) |
| Net income (loss) attributable to Ultralife | $1.330 | $(0.239) | $4.324 | $0.105 |
| GAAP diluted EPS | $0.08 | $(0.01) | $0.27 | $0.01 |
| Adjusted EBITDA (non-GAAP) | $3.480 | $1.255 | $10.931 | $4.543 |
Q3 operating expenses were $7.639 million, or 19.3% of revenue, versus $7.301 million, or 22.0%, a year earlier. Nine-month operating expenses were $21.972 million, or 19.3% of revenue, compared with $21.407 million, or 22.4%. Adjusted diluted EPS, a non-GAAP measure that excludes deferred tax expense or benefit, was $0.10 for Q3 and $0.34 for the nine-month period; the comparable 2022 figures were $(0.03) and $(0.04).
Cash flow, debt, and liquidity
- Cash, including restricted cash of $0.078 million, was $9.301 million at September 30, up from $5.713 million at December 31, 2022.
- Nine-month operating cash flow was negative $0.503 million, improved from negative $3.827 million in 2022. Inventory increased $5.626 million; management said working-capital investment reflected advance procurement of materials and the cyberattack’s effects.
- Investing cash outflow was $1.547 million, principally capital expenditures. Financing provided $5.791 million, including $6.250 million of revolving-facility borrowings, offset in part by $1.500 million of term-loan repayments.
- Outstanding principal was $26.247 million: $19.580 million on the revolver and $6.667 million on the term loan. The company reported compliance with its credit covenants. The revolving facility matures May 30, 2025; the term loan matures January 1, 2027.
- Management expects positive operating cash flow and revolving-credit availability to meet general funding needs for the foreseeable future. The filing does not quantify remaining borrowing availability, which is subject to borrowing-base limits.
Material changes and operating trends
- Q3 revenue increased 18.8% year over year. Battery & Energy Products revenue rose 11.7% to $31.919 million; Communications Systems rose 62.7% to $7.569 million. Nine-month increases were 7.3% and 152.5%, respectively.
- Q3 government/defense sales increased 48.1% and commercial sales increased 5.6%. For the nine-month period, government/defense sales rose 59.4% and commercial sales rose 4.5%.
- Q3 gross margin improved 460 basis points, primarily from higher volume and cost absorption, improved production leveling, and price realization. Communications Systems’ Q3 margin declined to 27.0% from 29.5%, reflecting component-delivery delays and product mix. Nine-month consolidated margin also benefited from higher volume and Communications Systems mix, partly offset by cyberattack-related inefficiencies.
- Interest and financing expense increased to $0.586 million in Q3 and $1.450 million for nine months, which management attributed to acquisition financing, cyberattack-related working-capital funding, and higher interest rates.
- Backlog was $101.087 million at September 30, 2023, down 4.8% from $106.153 million a year earlier, primarily due to timing of expected orders. Approximately $35.1 million was due to ship during the remainder of 2023.
Outlook, unusual items, and risks
- Management described the year-end backlog as strong and said it is positioned for continued profitable growth, cash generation, debt reduction, and investment in product development, capital expenditures, and potential acquisitions. The filing provides no specific revenue or earnings guidance.
- A January 25, 2023 ransomware attack disrupted order processing, shipments, services, and planning for several weeks or longer at affected locations. The company reported restoring data and augmenting security without paying a ransom; it was pursuing a cybersecurity insurance claim for expert costs and business interruption.
- The nine-month results include a $1.544 million Employee Retention Credit recognized as other income. The receivable remained in current assets at September 30.
- Q3 income tax included $0.357 million of deferred tax expense; nine-month deferred tax expense was $1.245 million. Management expects these U.S. deferred charges to be offset by tax-loss carryforwards and credits for the foreseeable future. The nine-month effective tax rate was 28.1%, versus 259.1% in 2022.
- Management cites risks including supply-chain and component availability, inflation, customer concentration, government spending and contract timing, variable interest rates, foreign exchange, cybersecurity, product safety and warranty costs, and the ability to realize forecast demand. The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective.
- Commitments included approximately $0.925 million for production machinery and equipment. The company stated that routine legal matters were not expected to have a material adverse effect, while acknowledging inherent uncertainty.
Important facts for investors to verify
- Whether backlog converts to shipments and cash as expected, especially the approximately $35.1 million scheduled for shipment in Q4 2023.
- Remaining revolver availability and covenant headroom, given $26.247 million of outstanding principal, borrowing-base limits, and the 2025 revolver maturity.
- Cash conversion and inventory levels: nine-month operating cash flow remained negative despite higher earnings, while inventory rose to $46.634 million from $41.192 million at year-end.
- Progress and recoveries under the cybersecurity insurance claim, and any continuing operational or security effects of the January attack.
- Repeatability of margin improvement and segment trends, including Communications Systems’ Q3 margin decline and the timing of expected commercial battery demand.
- Collection of the $1.544 million Employee Retention Credit receivable and the assumptions supporting deferred-tax-asset utilization.