ULBI 10-Q
Ultralife Corp (ULBI)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number:
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation of organization) | (I.R.S. Employer Identification No.) |
| ( | |
| (Address of principal executive offices) (Zip Code) | (Registrant's telephone number, including area code:) |
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | |
| (Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company |
| Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of October 26, 2021, the registrant had
ULTRALIFE CORPORATION AND SUBSIDIARIES
INDEX
| Page |
||
| PART I. |
FINANCIAL INFORMATION |
|
| Item 1. |
Consolidated Financial Statements (unaudited): |
|
| Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 |
1 |
|
| Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the Three and Nine-Month Periods Ended September 30, 2021 and September 30, 2020 |
2 |
|
| Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2021 and September 30, 2020 |
3 |
|
| Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine-Month Periods Ended September 30, 2021 and September 30, 2020 |
4 |
|
| Notes to Consolidated Financial Statements |
5 |
|
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
16 |
| Item 4. |
Controls and Procedures |
26 |
| PART II. |
OTHER INFORMATION |
|
| Item 6. |
Exhibits |
27 |
| Signatures |
28 |
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
| ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) (Unaudited) |
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of and , respectively | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Goodwill | ||||||||
| Other intangible assets, net | ||||||||
| Deferred income taxes, net | ||||||||
| Other noncurrent assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Current portion of long-term debt | ||||||||
| Accrued compensation and related benefits | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred income taxes | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock – par value per share; authorized shares; issued | ||||||||
| Common stock – par value per share; authorized shares; issued – shares at September 30, 2021 and shares at December 31, 2020; outstanding – shares at September 30, 2021 and shares at December 31, 2020 | ||||||||
| Capital in excess of par value | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock - at cost; shares at September 30, 2021 and shares at December 31, 2020 | ( | ) | ( | ) | ||||
| Total Ultralife Corporation equity | ||||||||
| Non-controlling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| ULTRALIFE CORPORATION AND SUBSIDIARIES |
|||||||
| CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME |
|||||||
| (In thousands except per share amounts) |
|||||||
| (Unaudited) |
| Three-month period ended | Nine-month period ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of products sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating (loss) income | ( | ) | ||||||||||||||
| Other (income) expense: | ||||||||||||||||
| Interest and financing expense | ||||||||||||||||
| Miscellaneous | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other (income) expense | ( | ) | ||||||||||||||
| (Loss) income before income tax (benefit) provision | ( | ) | ||||||||||||||
| Income tax (benefit) provision | ( | ) | ||||||||||||||
| Net (loss) income | ( | ) | ||||||||||||||
| Net (loss) income attributable to non-controlling interest | ( | ) | ||||||||||||||
| Net (loss) income attributable to Ultralife Corporation | ( | ) | ||||||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive (loss) income attributable to Ultralife Corporation | $ | ( | ) | $ | $ | $ | ||||||||||
| Net (loss) income per share attributable to Ultralife common stockholders – basic | $ | (. | ) | $ | . | $ | . | $ | . | |||||||
| Net (loss) income per share attributable to Ultralife common stockholders – diluted | $ | (. | ) | $ | . | $ | . | $ | . | |||||||
| Weighted average shares outstanding – basic | ||||||||||||||||
| Potential common shares | ||||||||||||||||
| Weighted average shares outstanding - diluted | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| ULTRALIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) |
| Nine-month period ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of financing fees | ||||||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable and other liabilities | ) | ( | ) | |||||
| Net cash provided by operating activities | ||||||||
| INVESTING ACTIVITIES: | ||||||||
| Purchases of property, plant and equipment | ) | ( | ) | |||||
| Proceeds from sale of equipment | ||||||||
| Net cash used in investing activities | ) | ( | ) | |||||
| FINANCING ACTIVITIES: | ||||||||
| Payment of credit facilities | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Tax withholdings on stock-based awards | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ) | ( | ) | |||||
| INCREASE IN CASH | ||||||||
| Cash, Beginning of period | ||||||||
| Cash, End of period | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| ULTRALIFE CORPORATION AND SUBSIDIARIES |
|||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY |
|||||||||||||||
| (In thousands except share amounts) (Unaudited) |
| Capital | Accumulated | |||||||||||||||||||||||||||||||
| Common Stock | in Excess | Other | Non- | |||||||||||||||||||||||||||||
| Number of | of Par | Comprehensive | Accumulated | Treasury | Controlling | |||||||||||||||||||||||||||
| Shares | Amount | Value | Income (Loss) | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||
| Balance – December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||||||||||
| Stock-based compensation – stock options | ||||||||||||||||||||||||||||||||
| Stock-based compensation - restricted stock | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Stock option exercises | ( | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation – stock options | ||||||||||||||||||||||||||||||||
| Stock-based compensation - restricted stock | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Balance – June 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||
| Stock option exercises | ||||||||||||||||||||||||||||||||
| Stock-based compensation – stock options | ||||||||||||||||||||||||||||||||
| Stock-based compensation - restricted stock | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ||||||||||||||||||||||||||||||||
| Balance – September 30, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Balance – June 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Stock option exercises | (81 | ) | ||||||||||||||||||||||||||||||
| Stock-based compensation – stock options | ||||||||||||||||||||||||||||||||
| Stock-based compensation - restricted stock | ||||||||||||||||||||||||||||||||
| Vesting of restricted stock | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance – September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
ULTRALIFE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share amounts)
(Unaudited)
| 1. | BASIS OF PRESENTATION |
The accompanying unaudited Consolidated Financial Statements of Ultralife Corporation and its subsidiaries (the “Company”, “Ultralife”, “we” or “our”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation of the Consolidated Financial Statements have been included. Results for interim periods should not be considered indicative of results to be expected for any subsequent interim period or the full year. Reference should be made to the Consolidated Financial Statements and related notes thereto contained in our Form 10-K for the year ended December 31, 2020.
The December 31, 2020 consolidated balance sheet information referenced herein was derived from audited Consolidated Financial Statements but does not include all disclosures required by GAAP.
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.
Recently Adopted Accounting Guidance
Effective January 1, 2021, the Company adopted Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes (Topic 740)”. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. Adoption of the new standard did not materially impact the Company’s Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments”, which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently assessing the impact that adopting this new accounting standard will have on our Consolidated Financial Statements.
| 2. | DEBT |
On May 1, 2019, Ultralife, Southwest Electronic Energy Corporation, a Texas corporation (“SWE”), and CLB, INC., a Texas corporation and wholly owned subsidiary of SWE (“CLB”), as borrowers, entered into the First Amendment Agreement (the “First Amendment Agreement”) with KeyBank National Association (“KeyBank” or the “Bank”), as lender and administrative agent, to amend the Credit and Security Agreement by and among Ultralife and KeyBank dated May 31, 2017 (the “Credit Agreement”, and together with the First Amendment Agreement, the “Amended Credit Agreement”).
The Amended Credit Agreement, among other things, provides for a -year, $
As of September 30, 2021, the Company had $
The Company is required to repay the borrowings under the Term Loan Facility in (60) equal consecutive monthly payments which commenced on May 31, 2019, in arrears, together with applicable interest. All unpaid principal and accrued and unpaid interest with respect to the Term Loan Facility is due and payable in full on April 30, 2024. All unpaid principal and accrued and unpaid interest with respect to the Revolving Credit Facility is due and payable in full on May 31, 2022. The Company may voluntarily prepay principal amounts outstanding at any time subject to certain restrictions. The Company made voluntary prepayments of $
In addition to the customary affirmative and negative covenants, the Company must maintain a consolidated fixed charge coverage ratio equal to or greater than
Borrowings under the Credit Facilities are secured by substantially all the assets of the Company. Availability under the Revolving Credit Facility is subject to certain borrowing base limits based on receivables and inventories.
Interest will accrue on outstanding indebtedness under the Credit Facilities at the Base Rate or the Overnight LIBOR Rate, as selected by the Company, plus the applicable margin. The Base Rate is the higher of (a) the Prime Rate, (b) the Federal Funds Effective Rate plus
The Company must pay a quarterly fee of
Payments must be made by the Company to the extent borrowings exceed the maximum amount then permitted to be drawn on the Credit Facilities and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and the Bank will have other customary remedies including resort to the security interest the Company provided to the Bank.
| 3. | EARNINGS PER SHARE |
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Ultralife by the weighted-average shares outstanding during the period. Diluted EPS includes the dilutive effect of securities, if any, and is calculated using the treasury stock method.
For the three-month period ended September 30, 2021, there were no outstanding stock awards included in the calculation of diluted weighted average shares outstanding and
For the nine-month period ended September 30, 2021, there were
| 4. | SUPPLEMENTAL BALANCE SHEET INFORMATION |
Fair Value Measurements and Disclosures
The fair value of financial instruments approximated their carrying values at September 30, 2021 and December 31, 2020. The fair value of cash, accounts receivable, accounts payable, accrued liabilities, and the current portion of long-term debt approximates carrying value due to the short-term nature of these instruments.
Cash
The composition of the Company’s cash was as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total | $ | $ | ||||||
As of September 30, 2021 and December 31, 2020, restricted cash included $
Inventories
Inventories are stated at the lower of cost or net realizable value, net of obsolescence reserves, with cost determined under the first-in, first-out (FIFO) method. The composition of inventories, net was:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Total | $ | $ | ||||||
Property, Plant and Equipment, Net
Major classes of property, plant and equipment consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Land | $ | $ | ||||||
| Buildings and leasehold improvements | ||||||||
| Machinery and equipment | ||||||||
| Furniture and fixtures | ||||||||
| Computer hardware and software | ||||||||
| Construction in process | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Depreciation expense for property, plant and equipment was as follows:
| Three-month period ended | Nine-month period ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Depreciation expense | $ | $ | $ | $ | ||||||||||||
Goodwill
The following table summarizes the goodwill activity by segment for the nine-month period ended September 30, 2021.
| Battery & Energy | Communications | |||||||||||
| Products | Systems | Total | ||||||||||
| Balance – December 31, 2020 | $ | $ | $ | |||||||||
| Effect of foreign currency translation | ( | ) | ( | ) | ||||||||
| Balance – September 30, 2021 | $ | $ | $ | |||||||||
Other Intangible Assets, Net
The composition of other intangible assets was:
| September 30, 2021 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
| Trademarks | $ | $ | $ | |||||||||
| Customer relationships | ||||||||||||
| Patents and technology | ||||||||||||
| Distributor relationships | ||||||||||||
| Trade name | ||||||||||||
| Total | $ | $ | $ | |||||||||
| December 31, 2020 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
| Trademarks | $ | $ | $ | |||||||||
| Customer relationships | ||||||||||||
| Patents and technology | ||||||||||||
| Distributor relationships | ||||||||||||
| Trade name | ||||||||||||
| Total | $ | $ | $ | |||||||||
The change in the cost of total intangible assets from December 31, 2020 to September 30, 2021 is a result of the effect of foreign currency translations.
Amortization expense for other intangible assets was as follows:
| Three-month period ended | Nine-month period ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Amortization included in: | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Total amortization expense | $ | $ | $ | $ | ||||||||||||
| 5. | STOCK-BASED COMPENSATION |
We recorded non-cash stock compensation expense in each period as follows:
| Three-month period ended | Nine-month period ended | |||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Stock options | $ | $ | $ | $ | ||||||||||||
| Restricted stock grants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
We have stock options outstanding from various stock-based employee compensation plans for which we record compensation cost relating to share-based payment transactions in our financial statements. As of September 30, 2021, there was $
The following table summarizes stock option activity for the nine-month period ended September 30, 2021:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at January 1, 2021 | $ | |||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited or expired | ( | ) | ||||||||||||||
| Outstanding at September 30, 2021 | $ | $ | ||||||||||||||
| Vested and expected to vest at September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable at September 30, 2021 | $ | $ | ||||||||||||||
Cash received from stock option exercises under our stock-based compensation plans for the three-month periods ended September 30, 2021 and September 30, 2020 was $
In October 2020,
| 6. | INCOME TAXES |
Our effective income tax rate for the nine-month periods ended September 30, 2021 and September 30, 2020 was
As of December 31, 2020, we have domestic net operating loss (“NOL”) carryforwards of $
As of September 30, 2021, for certain past operations in the U.K., we continue to report a valuation allowance for NOL carryforwards of approximately $
As of September 30, 2021, we have recognized a valuation allowance against our other foreign deferred tax assets, as realization is considered to be more likely than not.
As of September 30, 2021, the Company maintains its assertion that all foreign earnings will be indefinitely reinvested in those operations, other than earnings generated in the U.K.
There were
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. In August 2020, the Internal Revenue Service (“IRS”) completed its examination of the Company’s federal tax returns for 2016-2018 with no material adjustments identified. Our U.S. tax matters for 2019 and 2020 remain subject to IRS examination. Our U.S. tax matters for 2002, 2005-2007 and 2011-2015 also remain subject to IRS examination due to the remaining availability of NOL carryforwards generated in those years. Our U.S. tax matters for 2002, 2005-2007 and 2011-2020 remain subject to examination by various state and local tax jurisdictions. Our tax matters for the years through 2020 remain subject to examination by the respective foreign tax jurisdiction authorities.
| 7. | OPERATING LEASES |
The Company has operating leases predominantly for operating facilities. As of September 30, 2021, the remaining lease terms on our operating leases range from less than one (
The components of lease expense for the current and prior-year comparative periods were as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Variable lease cost | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
Supplemental cash flow information related to leases was as follows:
| Nine months ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for lease liabilities: | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| Balance Sheet Classification | September 30, 2021 | December 31, 2020 | |||||||
| Assets: | |||||||||
| Operating lease right-of-use asset | Other noncurrent assets | $ | $ | ||||||
| Liabilities: | |||||||||
| Current operating lease liability | Accrued expenses and other current liabilities | $ | $ | ||||||
| Operating lease liability, net of current portion | Other noncurrent liabilities | ||||||||
| Total operating lease liability | $ | $ | |||||||
| Weighted-average remaining lease term (years) | |||||||||
| Weighted-average discount rate | % | % | |||||||
Future minimum lease payments as of September 30, 2021 are as follows:
| Maturity of Operating Lease Liabilities | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total lease payments | ||||
| Less: Imputed interest | ( | ) | ||
| Present value of remaining lease payments | $ |
| 8. | COMMITMENTS AND CONTINGENCIES |
a. Purchase Commitments
As of September 30, 2021, we have made commitments to purchase approximately $
b. Product Warranties
We estimate future warranty costs to be incurred for product failure rates, material usage and service costs in the development of our warranty obligations. Estimated future warranty costs are based on actual past experience and are generally estimated as a percentage of sales over the warranty period. Changes in our product warranty liability during the first nine months of 2021 and 2020 were as follows:
| Nine-month period ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Accrued warranty obligations – beginning | $ | $ | ||||||
| Accruals for warranties issued | ||||||||
| Settlements made | ( | ) | ( | ) | ||||
| Accrued warranty obligations – ending | $ | $ | ||||||
c. Contingencies and Legal Matters
We are subject to legal proceedings and claims that arise from time to time in the ordinary course of business. We believe that the final disposition of any such matters of which we are currently aware will not have a material adverse effect on the Company’s financial position, results of operations or cash flows. However, recognizing that legal matters are subject to inherent uncertainties, there exists the possibility that ultimate resolution of current or future legal matters could have a material adverse impact on the Company’s financial position, results of operations or cash flows. We are not aware of any such situations at this time.
| 9. | REVENUE RECOGNITION |
Revenues are generated from the sale of products. Performance obligations are met and revenue is recognized upon transfer of control to the customer, which is generally upon shipment. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on the date of delivery. For products shipped under vendor-managed inventory arrangements, revenue is recognized and billed when the product is consumed by the customer, at which point control has transferred and there are no further obligations by the Company. Revenue is measured as the amount of consideration we expect to receive in exchange for shipped product. Sales, value-added and other taxes billed and collected from customers are excluded from revenue. Customers, including distributors, do not have a general right of return.
Revenues recognized from prior period performance obligations for the nine-month periods ended September 30, 2021 and 2020 were not material.
Deferred revenue, unbilled revenue and deferred contract costs recorded on our Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 were not material. As of September 30, 2021 and December 31, 2020, the Company had no unsatisfied performance obligations for contracts with an original expected duration of greater than one year. Pursuant to Topic 606, we have applied the practical expedient with respect to disclosure of the deferral and future expected timing of revenue recognition for transaction price allocated to remaining performance obligations.
| 10. | BUSINESS SEGMENT INFORMATION |
We report our results in
The components of segment performance were as follows:
Three-month period ended September 30, 2021:
| Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Segment contribution | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| Income tax benefit | ||||||||||||||||
| Non-controlling interest | ||||||||||||||||
| Net loss attributable to Ultralife | $ | ( | ) | |||||||||||||
Three-month period ended September 30, 2020:
| Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Segment contribution | ( | ) | ||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Tax provision | ( | ) | ( | ) | ||||||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net income attributable to Ultralife | $ | |||||||||||||||
Nine-month period ended September 30, 2021:
| Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Segment contribution | ( | ) | ||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Income tax provision | ( | ) | ( | ) | ||||||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net income attributable to Ultralife | $ | |||||||||||||||
Nine-month period ended September 30, 2020:
| Battery & Energy Products | Communications Systems | Corporate | Total | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Segment contribution | ( | ) | ||||||||||||||
| Other expense | ( | ) | ( | ) | ||||||||||||
| Tax provision | ( | ) | ( | ) | ||||||||||||
| Non-controlling interest | ( | ) | ( | ) | ||||||||||||
| Net income attributable to Ultralife | $ | |||||||||||||||
The following tables disaggregate our business segment revenues by major source and geography.
Commercial and Government/Defense Revenue Information:
Three-month period ended September 30, 2021:
| Total Revenue | Commercial | Government/ Defense | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Three-month period ended September 30, 2020:
| Total Revenue | Commercial | Government/ Defense | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Nine-month period ended September 30, 2021:
| Total Revenue | Commercial | Government/ Defense | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Nine-month period ended September 30, 2020:
| Total Revenue | Commercial | Government/ Defense | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
U.S. and Non-U.S. Revenue Information1:
Three-month period ended September 30, 2021:
| Total Revenue | United States | Non-United States | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Three-month period ended September 30, 2020:
| Total Revenue | United States | Non-United States | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Nine-month period ended September 30, 2021:
| Total Revenue | United States | Non-United States | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
Nine-month period ended September 30, 2020:
| Total Revenue | United States | Non-United States | ||||||||||
| Battery & Energy Products | $ | $ | $ | |||||||||
| Communications Systems | ||||||||||||
| Total | $ | $ | $ | |||||||||
| % | % | |||||||||||
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains certain forward-looking statements and information that are based on the beliefs of management as well as assumptions made by and information currently available to management. The statements contained in this report relating to matters that are not historical facts are forward-looking statements that involve risks and uncertainties, including, but not limited to, the effects of the novel coronavirus disease of 2019 (“COVID-19”); our reliance on certain key customers; possible future declines in demand for the products that use our batteries or communications systems; the unique risks associated with our China operations; potential costs because of the warranties we supply with our products and services; potential disruptions in our supply of raw materials and components; our efforts to develop new commercial applications for our products; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; our entrance into new end-markets which could lead to additional financial exposure; fluctuations in the price of oil and the resulting impact on the level of downhole drilling; our ability to retain top management and key personnel; our resources being overwhelmed by our growth prospects; our inability to comply with changes to the regulations for the shipment of our products; our customers’ demand falling short of volume expectations in our supply agreements; possible impairments of our goodwill and other intangible assets; negative publicity concerning Lithium-ion batteries; our exposure to foreign currency fluctuations; the risk that we are unable to protect our proprietary and intellectual property; rules and procedures regarding contracting with the U.S. and foreign governments; our ability to utilize our net operating loss carryforwards; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those forward-looking statements described herein. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “seek,” “project,” “intend,” “plan,” “may,” “will,” “should,” or words of similar import, and in each case, their negatives, are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this quarterly report, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2020 to reflect new information or risks, future events or other developments.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto in Part I, Item 1 of this Form 10-Q, and the Consolidated Financial Statements and Notes thereto and Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020.
The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts, unless otherwise specified.
General
We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture power and communications systems including: rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, and custom engineered systems. We continually evaluate and implement growth opportunities, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as seeking opportunities to expand through acquisitions.
We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors, and directly to U.S. and international defense departments. We enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTI™, ABLE™, ACCUTRONICS™, ACCUPRO™, ENTELLION™, SWE Southwest Electronic Energy Group™, SWE DRILL-DATA™, and SWE SEASAFE™ brands. We have sales, operations and product development facilities in North America, Europe and Asia.
We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: Lithium 9-volt, cylindrical, thin cell and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such, we report segment performance at the gross profit level and operating expenses as Corporate charges. See Note 10 in the Notes to Consolidated Financial Statements of this Form 10-Q.
Our website address is www.ultralifecorporation.com. We make available free of charge via a hyperlink on our website (see Investor Relations link on the website) our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
COVID-19
The COVID-19 pandemic has created significant economic disruption and uncertainty around the world. The Company continues to closely monitor the developments surrounding COVID-19 and take actions to mitigate the business risks involved. During this challenging time, we remain focused on ensuring the health and safety of our employees by implementing the protocols established by public health officials and meeting the demand of our customers. As an essential supplier currently exempt from government-mandated shutdown directives, we are striving to ensure an uninterrupted flow of our mission critical products serving medical device, first responder, public safety, energy, and national security customers. We have maintained normal operations at all our facilities with the exception of an approximately one-month closure of our China facility as was mandated by the Chinese government through early March 2020.
For the quarter ended September 30, 2021, increased lead times on components from suppliers and other COVID-19 related logistics matters resulted in delays in our shipments to future periods. For the quarter ended September 30, 2021, we estimate that such delayed shipments adversely impacted revenues by approximately $4,100, operating income by approximately $1,300 and adjusted EPS by approximately $0.08.
Overview
Consolidated revenues of $21,761 for the three-month period ended September 30, 2021, decreased by $2,601 or 10.7%, from $24,362 for the three-month period ended September 30, 2020, as a 5.1% increase in commercial sales was offset by 39.7% decline in government/defense sales. The increase in commercial sales primarily resulted from an 89.5% increase in oil & gas battery sales and a 115.8% increase in our new ER and thin cell battery sales, partially offset by a 28.3% decrease in medical battery sales. The decrease in government/defense sales primarily resulted from the completion of an order for BA-5390 batteries to the U.S. Department of Defense in the third quarter of 2020 under a spot purchase announced in December 2019, and lower shipments for our Communications Systems business segment. During the third quarter of 2021, increased lead times on components from suppliers and other COVID-19 related logistics matters resulted in delays in our shipments to future periods. We estimate that the delayed shipments adversely impacted revenue for the 2021 third quarter by $4,100, with $1,700 and $2,400 impacting our commercial and government/defense businesses, respectively.
Gross profit was $5,108, or 23.5% of revenue, compared to $6,511, or 26.7% of revenue, for the same quarter a year ago. The 320-basis point decrease primarily resulted from unfavorable sales product mix and lower factory volumes resulting from the revenue decline.
Operating expenses slightly increased to $5,887 during the three-month period ended September 30, 2021, from $5,804 during the three-month period ended September 30, 2020. The increase of $83 or 1.4% was attributable to our continued investment in engineering resources for new product development, including resources dedicated to our Conformal Wear Battery IDIQ contract announced on May 17, 2021. Operating expenses as a percentage of sales increased 330 basis points from 23.8% for the third quarter of 2020 to 27.1% for the current quarter.
Operating loss for the three-month period ended September 30, 2021 was ($779) or (3.6%) of revenues compared to operating income of $707 or 2.9% of revenues for the year-earlier period. The decrease in operating income primarily resulted from lower sales, a reduction in gross margin and higher new product development costs to support our organic growth initiatives.
Net loss attributable to Ultralife was ($585), or ($0.04) per share – basic and diluted, for the three-month period ended September 30, 2021, compared to net income of $407, or $0.03 per share – basic and diluted, for the three-month period ended September 30, 2020. Adjusted EPS was ($0.05) on a diluted basis for the third quarter of 2021, compared to $0.04 for the 2020 period. Adjusted EPS excludes the (benefit) provision for deferred income taxes of ($218) and $188 for the 2021 and 2020 periods, respectively, which primarily represents non-cash (benefits) charges for U.S. income taxes which we expect will be fully offset by NOL carryforwards and other tax credits for the foreseeable future. See the section “Adjusted EPS” beginning on Page 23 for a reconciliation of Adjusted EPS to EPS.
Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $283 or 1.3% of revenues in the third quarter of 2021, compared to $1,656 or 6.8% of revenues for the third quarter of 2020. See the section “Adjusted EBITDA” beginning on Page 22 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.
As we look ahead, our strong balance sheet and liquidity position, new product initiatives, and durable customer relationships anchor our view that our long-term growth drivers and strategy are sound and achievable.
Results of Operations
Three-Month Periods Ended September 30, 2021 and September 30, 2020
Revenues. Consolidated revenues for the three-month period ended September 30, 2021 amounted to $21,761, a decrease of $2,601 or 10.7%, from $24,362 for the three-month period ended September 30, 2020. Overall, commercial sales increased $807 or 5.1% while government/defense sales decreased $3,408 or 39.7% from the 2020 period.
Battery & Energy Products revenues decreased $1,811, or 8.3%, from $21,819 for the three-month period ended September 30, 2020 to $20,008 for the three-month period ended September 30, 2021. The decrease primarily resulted from a $2,950 or 28.3% decrease in medical battery sales primarily due to the high volume of orders in 2020 for respirators, ventilators and infusion pumps to meet the sector’s initial response to COVID-19, and a $2,618 or 43.3% decrease in government/defense sales primarily due to the shipment of BA-5390 batteries to the U.S. Department of Defense under a spot purchase announced in December 2019 and completed in 2020, partially offset by a $2,031 or 89.5% increase in oil & gas market sales reflecting the recent rebound in the energy sector and a $1,135 or 115.8% increase in our new ER and thin cell battery cells. For the third quarter of 2021, we estimate that shipments delayed to future periods due to increased lead times on components from suppliers and other COVID-19 related logistics matters adversely impacted Battery & Energy Products revenue by $2,500.
Communications Systems revenues decreased $790, or 30.9%, from $2,543 during the three-month period ended September 30, 2020 to $1,753 for the three-month period ended September 30, 2021. For the third quarter of 2021, we estimate that shipments delayed to future periods due to increased lead times on components from suppliers and other COVID-19 related logistics matters adversely impacted Communications Systems revenue by $1,600.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $16,653 for the quarter ended September 30, 2021, a decrease of $1,198, or 6.7%, from the $17,851 reported for the same quarter a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 73.3% for the three-month period ended September 30, 2020 to 76.5% for the three-month period ended September 30, 2021. Correspondingly, consolidated gross margin decreased from 26.7% for the three-month period ended September 30, 2020, to 23.5% for the three-month period ended September 30, 2021, primarily reflecting unfavorable sales product mix and lower factory volume for both business segments.
For our Battery & Energy Products segment, gross profit for the third quarter of 2021 was $4,792, a decrease of $885 or 15.6% from gross profit of $5,677 for the third quarter of 2020. Battery & Energy Products’ gross margin of 24.0% decreased by 200 basis points from the 26.0% gross margin for the year-earlier period, primarily reflecting unfavorable sales product mix and lower factory volume.
For our Communications Systems segment, gross profit for the third quarter of 2021 was $316 or 18.0% of revenues, a decrease of $518 or 62.1%, from gross profit of $834, or 32.8% of revenues, for the third quarter of 2020. The decrease primarily reflects lower factory volume in the 2021 third quarter.
Operating Expenses. Operating expenses for the three-month period ended September 30, 2021 were $5,887, an increase of $83 or 1.4% from the $5,804 for the three-month period ended September 30, 2020. The increase in operating expenses reflects our continued investment in engineering resources for new product development, including resources dedicated to the Conformal Wear Battery IDIQ contract announced on May 17, 2021. Both periods reflected our continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 27.1% for the quarter ended September 30, 2021 and 23.8% for the quarter ended September 30, 2020. Amortization expense associated with intangible assets related to our acquisitions was $148 for the third quarter of 2021 ($121 in selling, general and administrative expenses and $27 in research and development costs), compared with $149 for the third quarter of 2020 ($118 in selling, general, and administrative expenses and $31 in research and development costs). Research and development costs were $1,723 for the three-month period ended September 30, 2021, an increase of $117 or 7.3%, from $1,606 for the three-months ended September 30, 2020. The increase is largely attributable to the hiring of engineering resources to support new product development in our Battery & Energy Products business segment. Selling, general and administrative expenses decreased $34 or 0.8%, to $4,164 for the third quarter of 2021 from $4,198 for the third quarter of 2020. The slight decrease resulted from our continued tight control over all discretionary spending.
Other (Income) Expense. Other income totaled ($1) for the three-month period ended September 30, 2021 compared to other expense of $53 for the three-month period ended September 30, 2020. Interest and financing expense, net of interest income, decreased $39, or 42.3%, from $92 for the third quarter of 2020 to $53 for the comparable period in 2021. The decrease is primarily due to the continued reduction of debt incurred in connection with the financing of the SWE acquisition. Miscellaneous income of $54 for the third quarter of 2021 compared to miscellaneous income of $39 for the third quarter of 2020 represents foreign currency exchange gains and losses particularly for certain transactions and balances of Accutronics (U.K.) denominated in U.S. dollars. The U.S. dollar strengthened against the Pound Sterling by approximately 3% during the third quarter of 2021 and the U.S. dollar weakened against the Pound Sterling by approximately 4% during the third quarter of 2020.
Income Taxes. The income tax benefit for the 2021 third quarter was ($175) compared to a provision of $192 for the third quarter of 2020. Our effective income tax rate was (22.4%) for the third quarter of 2021 as compared to 29.4% for the third quarter of 2020, primarily due to the geographic mix of earnings. The income tax benefit for the third quarter of 2021 is comprised of a $43 current provision for taxes expected to be paid on income from our foreign operations, representing a cash-based effective income tax rate of (5.5%), and a ($218) deferred income tax benefit. For the 2020 period, the income tax provision was comprised of a $4 current tax provision, representing a cash-based effective tax rate of 0.6%, and a $188 deferred income tax provision. See Note 6 in the Notes to Consolidated Financial Statements in Item 1 of Part I of this Form 10-Q for additional information regarding our income taxes.
Net (Loss) Income Attributable to Ultralife. Net (loss) attributable to Ultralife was ($585), or ($0.04) per share – basic and diluted, for the three-month period ended September 30, 2021, compared to net income of $407, or $0.03 per share – basic and diluted, for the three-month period ended September 30, 2020. Adjusted EPS was ($0.05) on a diluted basis for the third quarter of 2021, compared to $0.04 on a diluted basis for the third quarter of 2020. Adjusted EPS excludes the (benefit) provision for deferred income taxes of ($218) and $188 for the 2021 and 2020 periods, respectively, which primarily represents non-cash (benefits) charges for U.S. income taxes. See the section “Adjusted EPS” beginning on Page 23 for a reconciliation of Adjusted EPS to EPS. Weighted average common shares outstanding used to compute diluted earnings per share decreased from 16,089,170 for the third quarter of 2020 to 16,065,412 for the third quarter of 2021. The period over period decrease is attributable to the antidilutive effect of all outstanding stock awards for the current period partially offset by stock option exercises and vesting of restricted stock awards since the third quarter of 2020.
Nine-Month Periods Ended September 30, 2021 and September 30, 2020
Revenues. Consolidated revenues for the nine-month period ended September 30, 2021 amounted to $74,504, a decrease of $4,232 or 5.4%, from the $78,736 reported for the nine-month period ended September 30, 2020. Overall, commercial sales increased $189 or 0.4% and government/defense sales decreased $4,421 or 13.8% from the nine-month 2020 period.
Battery & Energy Products revenues decreased $1,622, or 2.4%, from $66,616 for the nine-month period ended September 30, 2020 to $64,994 for the nine-month period ended September 30, 2021. The decline was attributable to a $1,811 or 9.1% decrease in government/defense sales partially offset by a $189 or 0.4% increase in commercial sales. The decrease in government/defense sales primarily reflects $2,800 of shipments of 5390 batteries to the U.S. Department of Defense under a spot purchase announced in December 2019 and completed in 2020. The increase in commercial sales primarily resulted from a $1,933 or 17.8% increase in oil & gas market sales and a $1,932 or 74.2% increase in our new ER and thin cell battery sales, partially offset primarily by a $3,898 or 15.7% decrease in medical sales. During the first nine months of 2021, we estimate that the negative net impact caused by supply chain disruptions and other COVID-19 related logistics matters on Battery & Energy Products revenues was $4,600.
Communications Systems revenues decreased $2,610, or 21.5%, from $12,120 during the nine-month period ended September 30, 2020 to $9,510 for the nine-month period ended September 30, 2021. This decrease is attributable to 2020 shipments of vehicle amplifier-adaptor systems in the amount of $5,680 to support the U.S. Army’s Network Modernization initiatives completing the delivery orders announced in October 2018. During the first nine months of 2021, we estimate that the negative net impact from supply chain disruptions and other COVID-19 related logistics matters on Communications Systems revenues was $3,000.
Cost of Products Sold / Gross Profit. Cost of products sold totaled $55,151 for the nine-month period ended September 30, 2021, a decrease of $1,777 or 3.1%, from the $56,928 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 72.3% for the nine-month period ended September 30, 2020 to 74.0% for the nine-month period ended September 30, 2021. Correspondingly, consolidated gross margin was 26.0% for the nine-month period ended September 30, 2021, compared with 27.7% for the nine-month period ended September 30, 2020, due primarily to unfavorable sales product mix and lower factory volume.
For our Battery & Energy Products segment, the cost of products sold decreased $847 or 1.7%, from $49,597 during the nine-month period ended September 30, 2020 to $48,750 during the nine-month period ended September 30, 2021. Battery & Energy Products’ gross profit for the 2021 nine-month period was $16,244 or 25.0% of revenues, a decrease of $775 or 4.6% from gross profit of $17,019, or 25.5% of revenues, for the 2020 nine-month period. Battery & Energy Products’ gross margin decreased for the nine-month period ended September 30, 2021 by 50 basis points, primarily due to unfavorable sales product mix and lower factory volume.
For our Communications Systems segment, the cost of products sold decreased by $930 or 12.7% from $7,331 during the nine-month period ended September 30, 2020 to $6,401 during the nine-month period ended September 30, 2021. Communications Systems’ gross profit for the first nine months of 2021 was $3,109 or 32.7% of revenues, a decrease of $1,680 or 35.1% from gross profit of $4,789 or 39.5% of revenues, for the nine-month period ended September 30, 2020. The decrease in gross margin primarily reflects the favorable sales mix in 2020 of the vehicle amplifier-adaptor systems for the U.S. Army and lower factory volume in 2021.
Operating Expenses. Total operating expenses for the nine-month period ended September 30, 2021 totaled $18,089, an increase of $767 or 4.4% from the $17,322 for the nine-month period ended September 30, 2020. The increase in operating expenses reflects our continued investment in engineering resources for new product development, including resources dedicated to the Conformal Wear Battery IDIQ contract announced on May 17, 2021. Both periods reflected our continued tight control over discretionary spending.
Overall, operating expenses as a percentage of revenues were 24.3% for the nine-month period ended September 30, 2021 compared to 22.0% for the comparable 2020 period. Amortization expense associated with intangible assets related to our acquisitions was $458 for the first nine months of 2021 ($365 in selling, general and administrative expenses and $93 in research and development costs), compared with $444 for the first nine months of 2020 ($352 in selling, general and administrative expenses and $92 in research and development costs). Research and development costs were $5,223 for the nine-month period ended September 30, 2021 an increase of $794 or 17.9% over $4,429 for the nine months ended September 30, 2020. The increase is largely attributable to the hiring of engineering resources to support new product development in our Battery & Energy Products business segment. Selling, general and administrative expenses decreased $27 or 0.2% from $12,893 during the first nine months of 2020 to $12,866 during the first nine months of 2021, primarily reflecting a 3.6% increase in selling expenses for sales resources to support our new product market launches virtually, offset by a 1.5% decrease in general and administrative expenses.
Other (Income) Expense. Other expense totaled $76 for the nine-month period ended September 30, 2021 compared to $262 for the nine-month period ended September 30, 2020. Interest and financing expense, net of interest income, decreased $208, or 55.9%, to $164 for the 2021 period from $372 for the comparable period in 2020, as a result of the continued reduction of debt incurred with the financing for the SWE acquisition. Miscellaneous income amounted to ($88) for the first nine months of 2021 compared with miscellaneous income of ($110) for the first nine months of 2020, primarily due to fluctuations in the U.S. dollar relative to the Pound Sterling.
Income Taxes. We recognized an income tax provision of $290 for the first three quarters of 2021 compared with an income tax provision of $1,010 for the first three quarters of 2020. Our effective income tax rate increased to 24.4% for the first nine months of 2021 as compared to 23.9% for the first nine months of 2020, primarily due to the geographic mix of earnings. The income tax provision for the 2021 period is comprised of a $163 current provision for taxes expected to be paid on income from our foreign operations, representing a cash-based effective income tax rate of 13.7%, and a $127 deferred income tax provision which primarily represents non-cash charges for U.S. income taxes which we expect will be fully offset by NOL carryforwards and other tax credits for the foreseeable future. For the 2020 period, the income tax provision was comprised of a $189 current income tax provision, representing a cash-based effective income tax rate of 4.5%, and a non-cash $821 deferred provision for income taxes. See Note 6 in the Notes to Consolidated Financial Statements of this Form 10-Q for additional information regarding our income taxes.
Net Income Attributable to Ultralife. Net income attributable to Ultralife and net income attributable to Ultralife common stockholders per diluted share was $897 and $‐‐‐0.06, respectively, for the nine months ended September 30, 2021, compared to $3,124 and $0.19 for the nine months ended September 30, 2020. Weighted average common shares outstanding used to compute diluted earnings per share increased from 16,102,879 for the 2020 period to 16,199,693 for the 2021 period, primarily attributable to stock option exercises since the third quarter of 2020 and an increase in the average stock price used to compute diluted shares from $6.89 for the first nine months of 2020 to $7.94 for the first nine months of 2021.
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA as net income (loss) attributable to Ultralife before interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expenses/income that we do not consider reflective of our ongoing operations. We also use Adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We believe the use of Adjusted EBITDA facilitates investors’ understanding of operating performance from period to period by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the amortization of intangible assets acquired through our business acquisitions (affecting relative amortization expense and provision (benefit) for income taxes), the age and book value of facilities and equipment (affecting relative depreciation expense) and one-time charges/benefits relating to income taxes. We also present Adjusted EBITDA from operations because we believe it is frequently used by securities analysts, investors and other interested parties as a measure of financial performance. We reconcile Adjusted EBITDA to net income attributable to Ultralife, the most comparable financial measure under GAAP.
We use Adjusted EBITDA in our decision-making processes relating to the operation of our business together with GAAP financial measures such as operating income. We believe that Adjusted EBITDA permits a comparative assessment of our operating performance, relative to our performance based on our GAAP results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by presenting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.
The term Adjusted EBITDA is not defined under GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with GAAP. Some of these limitations include, but are not limited to, the following:
| ● |
Adjusted EBITDA does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business; |
| ● |
Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements; |
| ● |
While stock-based compensation is a component of cost of products sold and operating expenses, the impact on our Consolidated Financial Statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock; and |
| ● |
Other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. |
We compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only on a supplemental basis. Neither current nor potential investors in our securities should rely on Adjusted EBITDA as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EBITDA to net income (loss) attributable to Ultralife.
Adjusted EBITDA is calculated as follows for the periods presented:
| Three-Month Period Ended |
Nine-Month Period Ended |
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| September 30, |
September 30, |
September 30, |
September 30, |
|||||||||||||
| 2021 |
2020 |
2021 |
2020 |
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| Net (loss) income attributable to Ultralife Corporation |
$ | (585 | ) | $ | 407 | $ | 897 | $ | 3,124 | |||||||
| Adjustments: |
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| Interest expense |
53 | 92 | 164 | 372 | ||||||||||||
| Income tax (benefit) provision |
(175 | ) | 192 | 290 | 1,010 | |||||||||||
| Depreciation expense |
700 | 582 | 2,160 | 1,743 | ||||||||||||
| Amortization expense |
148 | 161 | 458 | 480 | ||||||||||||
| Stock-based compensation expense |
142 | 222 | 512 | 756 | ||||||||||||
| Adjusted EBITDA |
$ | 283 | $ | 1,656 | $ | 4,481 | $ | 7,485 | ||||||||
Adjusted EPS
In evaluating our business, we consider and use Adjusted EPS, a non-GAAP financial measure, as a supplemental measure of our business performance in addition to GAAP financial measures. We define Adjusted EPS as net income (loss) attributable to Ultralife Corporation, excluding the provision (benefit) for deferred income taxes, divided by our weighted average shares outstanding on both a basic and diluted basis. We believe that this information is useful in providing period-to-period comparisons of our results by reflecting the portion of our income tax provision (benefit) that we expect will be offset by our U.S. NOL carryforwards and other tax credits for the foreseeable future. We reconcile Adjusted EPS to EPS, the most comparable financial measure under GAAP. Neither current nor potential investors in our securities should rely on Adjusted EPS as a substitute for any GAAP measures and we encourage investors to review the following reconciliation of Adjusted EPS to EPS and net income (loss) attributable to Ultralife.
Adjusted EPS is calculated as follows for the periods presented:
| Three-Month Period Ended |
||||||||||||||||||||||||
| September 30, 2021 |
September 30, 2020 |
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| Amount |
Per Basic Share |
Per Diluted Share |
Amount |
Per Basic Share |
Per Diluted Share |
|||||||||||||||||||
| Net (loss) income attributable to Ultralife Corporation |
$ | (585 | ) | $ | (.04 | ) | $ | (.04 | ) | $ | 407 | $ | .03 | $ | .03 | |||||||||
| Deferred income tax (benefit) provision |
(218 | ) | (.01 | ) | (.01 | ) | 188 | .01 | .01 | |||||||||||||||
| Adjusted net (loss) income attributable to Ultralife Corporation |
$ | (803 | ) | $ | (.05 | ) | $ | (.05 | ) | $ | 595 | $ | .04 | $ | .04 | |||||||||
| Weighted average shares outstanding |
16,065 | 16,065 | 15,908 | 16,089 | ||||||||||||||||||||
| Nine-Month Period Ended |
||||||||||||||||||||||||
| September 30, 2021 |
September 30, 2020 |
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| Amount |
Per Basic Share |
Per Diluted Share |
Amount |
Per Basic Share |
Per Diluted Share |
|||||||||||||||||||
| Net income attributable to Ultralife Corporation |
$ | 897 | $ | .06 | $ | .06 | $ | 3,124 | $ | .20 | $ | .19 | ||||||||||||
| Deferred income tax provision |
127 | - | - | 821 | .05 | .05 | ||||||||||||||||||
| Adjusted net income attributable to Ultralife Corporation |
$ | 1,024 | $ | .06 | $ | .06 | $ | 3,945 | $ | .25 | $ | .24 | ||||||||||||
| Weighted average shares outstanding |
16,020 | 16,200 | 15,889 | 16,103 | ||||||||||||||||||||
Liquidity and Capital Resources
As of September 30, 2021, cash totaled $15,853 (including restricted cash of $87), an increase of $5,200 as compared to $10,653 of cash held at December 31, 2020. The increase was attributable to cash generated from operations, partially offset by cash used in investing and financing activities.
During the nine-month period ended September 30, 2021, operating activities provided cash of $8,462, consisting of net income of $898, deferred income taxes of $127, non-cash expenses of depreciation, amortization, and stock-based compensation totaling $3,208, and a $4,229 reduction in net working capital primarily attributable to a decrease in accounts receivable.
Cash used in investing activities for the nine months ended September 30, 2021 was $2,324, primarily attributable to strategic capital investments for our Battery & Energy Products business segment.
Net cash used in financing activities for the nine months ended September 30, 2021 was $936, consisting of $1,186 of principal payments against our remaining term loan balance and $148 of tax withholdings for stock awards, partially offset by stock option exercise proceeds of $398.
We continue to have significant U.S. NOL carryforwards available to utilize as an offset to future taxable income. See Note 6 to the Consolidated Financial Statements of this Form 10-Q for additional information.
Going forward, we expect that positive operating cash flow and the availability under our Revolving Credit Facility will be sufficient to meet our general funding requirements for the foreseeable future. Over the long-term, we expect that some of our future investments, including strategic business opportunities such as acquisitions, may be made through a number of sources, including internally available cash, availability of borrowing under our Credit Facilities, new debt financing, the issuance of equity securities or any combination of these sources.
To provide flexibility in accessing the capital market, the Company filed a shelf registration statement on Form S-3 on March 30, 2021, which was declared effective by the SEC on April 2, 2021. Under this registration statement, upon the filing of an appropriate supplemental prospectus, we may offer and sell certain of our securities from time to time in one or more offerings, at our discretion, of up to an aggregate offering price of $100 million. We intend to use the net proceeds resulting from any sales of our securities for general corporate purposes which may include, but are not limited to, potential acquisitions of complementary businesses or technologies, strategic capital expenditures to expand and protect our competitive position, and investments in the development of transformational, competitively-differentiated products for attractive growth markets.
Commitments
As of September 30, 2021, the Company had $288 outstanding principal on the Term Loan Facility, all of which is included in current portion of long-term debt on the Consolidated Balance Sheet, net of $35 unamortized debt issuance costs, and no amounts outstanding on the Revolving Credit Facility. The Company was in full compliance with all covenants under the Credit Facilities as of September 30, 2021.
As of September 30, 2021, we had made commitments to purchase approximately $1,100 of production machinery and equipment.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and applying accounting policies and methodologies in many areas. Not only are these decisions necessary to comply with GAAP, but they also reflect management’s view of the most appropriate manner in which to record and report our overall financial performance. All accounting policies are important, and all policies described in Note 1 (“Summary of Operations and Significant Accounting Policies”) to our Consolidated Financial Statements in our 2020 Annual Report on Form 10-K should be reviewed for a greater understanding of how our financial performance is recorded and reported.
During the first nine months of 2021, there were no significant changes in the manner in which our significant accounting policies were applied or in which related assumptions and estimates were developed.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our President and Chief Executive Officer (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer) have evaluated our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e)) as of the end of the period covered by this quarterly report. Based on this evaluation, our President and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of such date.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
| Exhibit Index |
Exhibit Description |
Incorporated by Reference from |
||
| 31.1 |
Filed herewith |
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| 31.2 |
Filed herewith |
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| 32 |
Furnished herewith |
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| 101.INS |
Inline XBRL Instance Document |
Filed herewith |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
Filed herewith |
||
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
Filed herewith |
||
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
Filed herewith |
||
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
Filed herewith |
||
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
Filed herewith |
||
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Filed herewith |
Attached as Exhibit 101 to this report are the following formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (v) Notes to Consolidated Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ULTRALIFE CORPORATION |
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| (Registrant) |
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| Date: October 28, 2021 |
By: | /s/ Michael D. Popielec |
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| Michael D. Popielec |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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| Date: October 28, 2021 |
By: | /s/ Philip A. Fain |
|
| Philip A. Fain |
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| Chief Financial Officer and Treasurer |
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| (Principal Financial Officer and |
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| Principal Accounting Officer) |
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