Ultralife Corporation (ULBI) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial statement amounts below are in millions of dollars unless stated otherwise. The company designs and manufactures battery and energy products and communications systems for commercial, government and defense customers.
Financial performance and liquidity
- Q2 revenue: $28.560, down 2.8% from $29.397 a year earlier. Gross profit was $7.963, with a 27.9% margin versus $8.865 and 30.2%. Operating income was $2.294 versus $3.042; net income attributable to Ultralife was $1.658 versus $2.256. Diluted EPS was $0.10 versus $0.14.
- First-half revenue: $54.374, up 12.6% from $48.279. Gross profit was $15.297, with a 28.1% margin versus $13.949 and 28.9%. Operating income was $3.779 versus $3.590; attributable net income was $2.717 versus $2.681. Diluted EPS was $0.17 in both periods.
- Cash flow: First-half operating cash flow was $8.882, compared with cash used of $4.246 in 2019. Investing activities used $1.413, mainly capital expenditures; financing activities used $6.349, primarily debt repayments. Cash increased $0.984 to $8.389 from December 31, 2019.
- Debt and liquidity: Balance-sheet debt was $10.766, including $1.482 current and $9.284 long-term, versus $17.152 at year-end 2019. Outstanding principal was $6.424 on the term loan and $4.482 on the revolver. Current assets were $65.002 and current liabilities $14.470. The company reported compliance with credit-facility covenants.
- Non-GAAP measures: Q2 Adjusted EBITDA was $3.307 (11.6% of revenue), down from $4.084 (13.9%). First-half Adjusted EBITDA was $5.829 versus $5.288. Adjusted diluted EPS was $0.13 versus $0.18 in Q2 and $0.21 in both first-half periods. These are company-defined non-GAAP measures.
Material changes versus comparable periods
- In Q2, Battery & Energy Products revenue grew 18.4% to $24.036, while Communications Systems revenue fell 50.3% to $4.524. The latter decline reflected higher prior-year shipments for U.S. Army vehicle systems and Naval Air Warfare Center orders; the Army delivery orders were completed in Q2 2020.
- Q2 commercial sales increased 7.5%, while government/defense sales declined 13.7%. Medical battery demand and government/defense battery sales rose, partly offset by lower oil and gas, 9-volt battery and communications shipments.
- Q2 gross margin declined 230 basis points. Management attributed the decrease mainly to new-product production ramp costs and COVID-related supply-chain disruption in Battery & Energy Products; improved Communications Systems production efficiencies partly offset the decline.
- First-half reported revenue growth included SWE, acquired May 1, 2019, and therefore compares six months of SWE results in 2020 with two months in 2019. On a pro forma basis assuming SWE was owned for both periods, first-half revenue was $54.374 versus $57.074, and attributable net income was $2.717 versus $2.955.
Outlook, risks and unusual items
- COVID-19 caused an approximately one-month China facility closure and supply-chain disruption. Management estimated an approximately $0.5 adverse net-income impact in Q1; the Q2 net impact was estimated to be immaterial. Higher Q2 demand for batteries used in ventilators, respirators and infusion pumps was offset by delayed elective-surgery-related orders and broader disruption.
- Management said cash generated from future operations and remaining revolver availability should meet general funding needs and capital investments for the foreseeable future under current economic conditions. No quantified revenue or earnings guidance was provided.
- Risks identified include continuing COVID-19 effects on demand, supply, workforce and customer solvency; dependence on key customers and government budgets; oil and gas market exposure; foreign currency movements; product safety and warranty risks; and potential impairment of goodwill or intangibles.
- The company had $1.322 of production-equipment purchase commitments. Management said normal-course legal matters were not expected to have a material adverse effect, while acknowledging the inherent uncertainty of legal proceedings.
- The company received a $3.459 Paycheck Protection Program loan in April and returned the full proceeds on April 23, 2020. It reported no remaining loan proceeds. The first-half tax provision included $0.633 of deferred tax expense, which management described as primarily non-cash and expected to be offset by U.S. tax attributes for the foreseeable future.
Important facts for investors to verify
- Whether medical battery demand and supply-chain conditions persist, and whether delayed elective-procedure orders return.
- How the completed Army delivery orders and lower Communications Systems shipments affect subsequent-period revenue and margins.
- Whether first-half operating cash generation is sustainable, given its contribution from receivable and inventory reductions, and whether planned capital spending proceeds as expected.
- Revolver availability under borrowing-base limits, debt repayment requirements, and continued compliance with lending covenants.
- The assumptions behind management’s COVID-19 assessment, non-GAAP adjustments, and expectation that deferred tax assets and carryforwards will be usable.