Ultralife Corporation (ULBI) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unless otherwise stated, financial amounts are in thousands of dollars. The filing was signed July 28, 2022.
Business context and results
Ultralife designs and manufactures batteries, power solutions, and communications systems, reported in Battery & Energy Products and Communications Systems. Results include Excell, acquired in December 2021; its contribution makes year-over-year comparisons less like-for-like.
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $32,126 | $26,770 | $62,499 | $52,743 |
| Gross profit / margin | $7,646 / 23.8% | $7,267 / 27.1% | $14,604 / 23.4% | $14,245 / 27.0% |
| Operating income | $793 | $1,091 | $498 | $2,043 |
| Net income attributable to Ultralife | $512 | $811 | $344 | $1,482 |
| Diluted EPS | $0.03 | $0.05 | $0.02 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $2,185 | $2,186 | $3,288 | $4,198 |
Financial position and cash flow
- Cash was $5,114 at June 30, 2022, down $3,299 from year-end 2021. Cash used in operations during the first half was $3,400, versus $6,955 provided in the prior-year period; inventory procurement used $6,606 of cash.
- Capital expenditures were $585 in the first half. Financing activities provided $794, including $1,550 of revolving-facility borrowings and $833 of term-loan repayments.
- Inventories rose to $39,201 from $33,189 at year-end 2021; receivables were $22,349. Current assets were $71,825 and current liabilities $22,176.
- Debt outstanding at June 30 was $9,167 on the term loan and $12,530 on the revolving facility. The balance sheet reports $2,000 current and $19,566 long-term debt, net of unamortized issuance costs. The company said it was in compliance with credit covenants.
- First-half effective tax rate was (30.5%), compared with 23.7% in 2021; the 2022 period recorded an $81 income tax benefit.
Material changes versus comparable periods
- Q2 revenue increased 20.0% year over year; first-half revenue increased 18.5%. Excell contributed $6,591 of Q2 revenue and $13,027 for the first half.
- Commercial revenue grew, while government/defense revenue fell 30.8% in Q2 and 32.0% in the first half, with supply-chain constraints pushing orders into future periods.
- Communications Systems revenue fell 49.0% in Q2 and 58.6% in the first half. Management cited delayed orders, component lead times, and a prior-year international defense order that was not expected to recur until the second half of 2022.
- Gross margin declined in both periods. Management attributed pressure to lower Communications Systems factory volume, supply-chain and logistics costs, component price increases ahead of customer price realization, product mix, and costs of ramping new products.
- Operating income and net income declined despite revenue growth. Higher acquisition-related expenses and amortization, increased interest expense associated with Excell financing, and reduced Communications Systems contribution were factors.
- Foreign currency translation reduced first-half comprehensive results by $1,498.
Outlook, risks, and unusual items
- Management expects positive operating cash flow and says cash and revolving-credit availability should meet general funding needs for the foreseeable future. It also aims to generate profitable growth for the year, while anticipating continued inflationary cost pressure and manufacturing inefficiencies in the second half. No specific revenue or earnings guidance was provided.
- COVID-related disruptions, including China shutdowns affecting the Shenzhen facility in Q1, and extended component lead times affected schedules and shipments. Management cautioned that future effects remain uncertain.
- Other disclosed risks include raw-material availability and cost, customer concentration and demand, government and defense spending, oil-and-gas demand, foreign-exchange movements, cybersecurity, product safety and warranties, and possible goodwill or intangible-asset impairment.
- The company had approximately $697 of production-equipment purchase commitments. It reported routine legal matters, stating it was not aware of matters expected to have a material adverse effect, while noting the inherent uncertainty of legal proceedings.
- The credit facilities are secured by substantially all company and subsidiary assets. The revolving facility matures May 30, 2025; the term loan’s unpaid principal is due January 1, 2027. The company is subject to senior leverage-ratio covenants.
- Adjusted EBITDA is a non-GAAP measure; the filing cautions that it is not a substitute for GAAP results or cash-flow measures.
Important facts for investors to verify
- Whether delayed defense and Communications Systems orders shipped as expected, and whether customer demand recovered.
- Whether inventory growth converts to sales and cash, and whether operating cash flow turns positive as management expects.
- Whether pricing catches up with component, logistics, and other inflationary costs and gross margins recover.
- Excell’s ongoing contribution, integration costs, and the effect of acquisition debt and interest expense.
- Revolving-credit availability under borrowing-base limits and continued compliance with leverage covenants.