ULTRALIFE CORPORATION The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto appearing in Item 8 of this Form 10-K.
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. All figures presented below represent results from continuing operations, 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, manufacture, install and
maintain power and communications systems including rechargeable and
non-rechargeable batteries, communications and electronics systems and
accessories and custom engineered systems. We sell our products internationally
through a variety of trade channels, including original equipment manufacturers
("OEMs"), industrial and defense supply distributors and directly to
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 such as cables. The Communications Systems segment includes RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated communication systems for fixed or vehicle applications such as vehicle amplifier-adaptors ("VAA") for multiple programs. 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.
We continually evaluate ways to grow, including opportunities to expand through mergers, acquisitions and joint ventures, which we believe can broaden the scope of our products and services, expand operating and market opportunities and provide the ability to enter new lines of business synergistic with our portfolio of product offerings.
In
On
On
Currently, we do not experience significant seasonal sales trends in either of
our operating segments, although sales to the
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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 its related strains 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 material protocols established by public health officials. We continue to strive to ensure an uninterrupted flow of our mission critical products serving medical device, first responder, public safety, energy and national security customers.
As we enter the third year of the pandemic, our workforce, customers and vendors
still face the risk of the emergence of new strains, availability of effective
treatment, and potential regulatory and macroeconomic effects stemming from such
impacts. Except for certain situations in
Consolidated revenues increased by
Gross margin decreased to 22.3% for the year ended
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Operating expenses increased by
Other expenses totaled
Income tax benefit was
Net loss attributable to Ultralife was
Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before
net interest expense, provision (benefit) for income taxes, depreciation and
amortization, plus/minus income/expense that we do not consider reflective of
our continuing operations, amounted to
The Company's liquidity remains solid, with cash on hand of
As we look ahead, we believe our backlog, durable customer relationships, diversified end markets, new product initiatives, and actions underway to improve our gross margins position us to deliver high-quality, sustainable profitable growth.
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Results of Operations
Year Ended
Year Ended December 31, Increase/
2022 2021 (Decrease)
Revenues:
Battery & Energy Products $ 119,995 $ 87,083 $ 32,912
Communications Systems 11,845 11,184 661
Total 131,840 98,267 33,573
Cost of Products Sold:
Battery & Energy Products 93,841 66,021 27,820
Communications Systems 8,599 7,604 995
Total 102,440 73,625 28,815
Gross Profit:
Battery & Energy Products 26,154 21,062 5,092
Communications Systems 3,246 3,580 (334 )
Total 29,400 24,642 4,758
Operating Expenses 29,271 24,607 4,664
Operating Income 129 35 94
Other Expense, Net 575 186 389
Loss Before Taxes (446 ) (151 ) (295 )
Income Tax (Benefit) Provision (326 ) 79 (405 )
Net Loss (120 ) (230 ) 110
Net (Loss) Income Attributable to
Non-Controlling Interest (1 ) 4 (5 )
Net Loss Attributable to Ultralife $ (119 ) $ (234 ) $ 115
Net Loss Attributable to Ultralife Common
Shares - Basic $ (0.01 ) $ (0.01 ) $ -
Net Loss Attributable to Ultralife Common
Shares - Diluted $ (0.01 ) $ (0.01 ) $ -
Weighted Average Shares Outstanding -Basic 16,125,239 16,036,676 88,563
Weighted Average Shares Outstanding -
Diluted 16,125,239 16,036,676 88,563
Revenues. Total revenues for the year ended
Battery & Energy Products revenues increased
Communications Systems revenues increased
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Our order backlog at
For our Communications Systems business, the backlog increased
Cost of Products Sold and Gross Profit. Cost of products sold for the year ended
For our Battery & Energy Products segment, the cost of products sold increased
For our Communications Systems segment, the cost of products sold increased by
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Operating Expenses. Total operating expenses for the year ended
Overall, operating expenses as a percentage of revenues was 22.2% for the year
ended
Other (Income) Expense. Other expense totaled
Income Tax (Benefit) Provision. Income tax benefit was
Net loss attributable to Ultralife was
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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 net interest expense, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense, plus/minus expense/income that we do not consider reflective of our ongoing continuing operations. We also use adjusted EBITDA as a supplemental measure to review and assess our operating performance and to enhance comparability between periods. We also 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 (loss) 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 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:
a. 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;
b. 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;
c. 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
d. Other companies may calculate adjusted EBITDA differently than we do,
limiting its usefulness as a comparative measure.
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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 attributable to Ultralife.
Year ended December 31,
2022 2021
Net loss attributable to Ultralife
951 242
Income tax (benefit) provision (326 ) 79
Depreciation expense 3,177 2,906
Amortization of intangible assets 1,282 633
Stock-based compensation expense 776 671
Non-cash purchase accounting adjustments 55 121
Severance to Former President & CEO 779 -
Adjusted EBIDTA $ 6,575 $ 4,418 Liquidity and Capital Resources
Cash Flows and General Business Matters
As of
During the year ended
Cash used in investing activities for the year ended
Cash provided by financing activities for the year ended
We continue to have significant
Going forward, we expect positive operating cash flow and the availability under our Revolving Credit Facility will be sufficient to meet our obligations for both financing and investing.
Commitments
On
As of
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We typically offer standard warranties against product defects that range from ninety (90) days to three (3) years from the date of purchase. We also offer separately priced extended warranty contracts on certain Communications Systems products. Warranty costs expected to be incurred are estimated based on the Company's experience and recorded as costs of products sold. There is no assurance that future warranty claims will be consistent with our estimates, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves will be sufficient. Excessive warranty claims could have a material adverse effect on our business, financial condition and results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires the application of accounting policies and the use of estimates. The accounting policies most important to the preparation of the consolidated financial statements and estimates that require management's most difficult, subjective or complex judgments are described below.
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.
Separately priced extended warranty contracts are offered on certain products. Extended warranties are treated as separate performance obligations and recognized to revenue evenly over the term of the respective contract. Revenue not yet recognized on extended warranty contracts is recorded as deferred revenue on the consolidated balance sheet.
For customer contracts with an original expected duration of less than one year, we apply 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.
Valuation of Inventory:
Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-in, first-out ("FIFO") method. Our inventory includes raw materials, work in process and finished goods. We recognize provisions for excess, obsolete or slow-moving inventory. Inherent in our estimates of net realizable value in determining inventory valuation are assumptions related to expectations of future demand for our products, product lifecycles, product support, technical obsolescence, regulatory requirements, and economic and market conditions. Estimates related to the valuation of inventory are susceptible to changes as the underlying assumptions are continuously evaluated. If our assumptions are adversely different from those estimated by management, inventory adjustments to reduce inventory values would result in an increase in inventory write-offs and a decrease in gross margins.
Under the acquisition method of accounting, the total consideration transferred to consummate the acquisition is allocated to the identified tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values as of the acquisition date with the residual amount recorded to goodwill. We do not amortize goodwill and other intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually and whenever events or circumstances indicate that impairment may exist.
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The annual impairment test for goodwill consists of a comparison of the estimated fair value for each reporting unit to which goodwill is assigned to the carrying value of the respective reporting unit. The annual impairment test for the other intangible assets with an indefinite life consists of a comparison of the estimated fair value of each asset to the carrying value of the respective asset. If the estimated fair value of a reporting unit or other indefinite-lived intangible asset exceeds its respective carrying value, the goodwill or indefinite-lived intangible asset is considered not impaired. If carrying value of a reporting unit or indefinite-lived intangible asset exceeds its estimated fair value, the excess carrying value of the respective goodwill or indefinite-lived intangible asset is recognized as an impairment loss.
We conducted our annual impairment test for goodwill and other indefinite-lived
intangible assets as of
Impairment of Long-Lived Assets:
We assess our long-lived assets for impairment whenever events or circumstances indicate their carrying amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate undiscounted future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either through the assistance of an independent valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our evaluation is an industry-based weighted average cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment charge is recognized.
Income Taxes:
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Pursuant to ASC 740, a valuation allowance is recognized when the realizability of deferred tax assets is not more likely than not, based all available evidence, both positive and negative, weighted based on objective verifiability.
As of
As of
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Stock-Based Compensation:
We recognize compensation cost relating to share-based payment transactions in
our financial statements. The cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as an expense over the
employee's requisite service period (generally the vesting period of the equity
award). We calculate implied volatility for stock options based on an average of
historical volatility over the expected life of the awards. The computation of
expected term is determined based on historical experience of similar awards,
giving consideration to the contractual terms of the awards and the vesting
period. The interest rate for periods within the contractual life of the award
is based on the
Business Combinations:
We account for businesses acquired using the acquisition method of accounting. Under this method, all acquisition-related costs are expensed as incurred, and the total consideration transferred to consummate the acquisition is allocated to the identified tangible and intangible assets acquired and liabilities assumed based on their respective estimated fair values as of the acquisition date with the residual amount recorded to goodwill. As part of this process, we identify and attribute values and estimated lives to property and equipment and intangible assets acquired. These determinations involve significant estimates and assumptions, including those with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These determinations affect the amount of depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in the consolidated statements of income and comprehensive income beginning on the respective acquisition date.
Warranties:
We typically offer standard warranties against product defects that range from ninety (90) days to three (3) years from the date of purchase. We also offer separately priced extended warranty contracts on certain products. Warranty costs expected to be incurred are estimated based on the Company's experience and recorded as costs of products sold. Standard warranty costs are recognized upon product sale. Extended warranty costs are recognized over the term of the contract. Provision for warranty costs is recorded in accrued expenses and other current liabilities and other noncurrent liabilities on our consolidated balance sheet based on the duration of the warranty.
Environmental Issues:
Environmental expenditures, if any, that relate to current operations, are generally expensed. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated.
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