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| ULBI > SEC Filings for ULBI > Form 10-Q on 10-Aug-2009 | All Recent SEC Filings |
10-Aug-2009
Quarterly Report
segments and are not considered in the performance of the segments are
considered to be Corporate charges. (See Note 12 in the Notes to Condensed
Consolidated Financial Statements for additional information.)
We continually evaluate ways to grow, including opportunities to expand
through mergers, acquisitions and joint ventures, which 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
offerings.
In March 2008, we formed a joint venture, named Ultralife Batteries India
Private Limited ("India JV"), with our distributor partner in India. The India
JV assembles Ultralife power solution products and manages local sales and
marketing activities, serving commercial, government and defense customers
throughout India. We have invested $86 in cash into the India JV, as
consideration for our 51% ownership stake in the India JV.
In June 2008, we changed our corporate name from Ultralife Batteries, Inc.
to Ultralife Corporation. The purpose of the name change was to align our
corporate name more closely with the business now being conducted by us, as we
are no longer exclusively a battery manufacturing company.
On November 10, 2008, we acquired certain assets of U.S. Energy Systems,
Inc. and its service affiliate, U.S. Power Services, Inc. ("USE" collectively),
a nationally recognized standby power installation and power management services
business. USE is located in Riverside, California. Under the terms of the
agreement, the initial purchase price consisted of $2,865 in cash. In addition,
on the achievement of certain annual post-acquisition financial milestones, we
will issue up to an aggregate of 200,000 unregistered shares of our common
stock, during the period ending December 31, 2012. (See Note 2 in the Notes to
Condensed Consolidated Financial Statements for additional information.)
On March 20, 2009, we acquired substantially all of the assets and assumed
substantially all of the liabilities of the tactical communications products
business of Science Applications International Corporation. The tactical
communications products business ("AMTI"), located in Virginia Beach, Virginia,
designs, develops and manufactures tactical communications products including
amplifiers, man-portable systems, cables, power solutions and ancillary
communications equipment. Under the terms of the asset purchase agreement for
AMTI, the purchase price consisted of $5,717 in cash. (See Note 2 in the Notes
to Condensed Consolidated Financial Statements for additional information.)
On June 1, 2009, the Board of Directors appointed John C. Casper as our
Vice-President of Finance and Chief Financial Officer, succeeding Robert W.
Fishback.
Overview
Revenue during the second quarter of 2009 was consistent with the first
quarter of 2009 due to continued delays in contracting associated with funded
government programs. Revenue was virtually zero in automotive telematics due to
further inventory corrections in the automotive business and declined in the
standby power business due to the deferral of capital spending in the data
processing and telecom industries. Revenue was slightly up in other sectors of
the business.
In the second quarter of 2009, we booked a number of non-recurring charges
due to a legal action, various operational changes resulting in termination
costs and an increase in inventory provisions. While the legal action resulted
in a judgment in our favor, defending our position in court against
counterclaims asserted against us cost us higher than normal legal fees. Our
operational changes included the closing of our Seattle area amplifier operation
and the consolidation of it into our newly acquired AMTI operation, and certain
severance costs. Inventory reserves resulted from an examination of our
inventory in the light of a slower economy. The slowdown in economic activity
has caused us to re-evaluate the parts deemed to be slow-moving and the
relationship of their cost to their market value.
Sales of batteries remained strong with notable weakness only in the
automotive sector and in the standby power market. We are still being designed
into new and existing applications, with particular strength in military
markets.
In the standby power market, we have seen the weakness in the capital
markets manifest itself with continued deferrals of projects. This has pushed
out several significant programs with major customers. It is also exerting
pricing pressure on lead-acid battery sales as suppliers are fighting to
liquidate inventories and generate cash in a tighter market. We have reduced
expenses in this business segment, consistent with further consolidation of
operations, while remaining poised to execute, as we believe, that the mission
critical applications that this area addresses can only defer replacements,
upgrades and investments in backup power for so long.
In the communications systems business, apart from being ready for the
SATCOM-on-the-Move orders, we have now consolidated our amplifier manufacturing
under the AMTI operation that we purchased in the first quarter of 2009 from
SAIC. By consolidating our Seattle area operation into the AMTI operation in
Virginia Beach, we are able to reduce overhead costs, while leveraging a strong
technical base. This involved the outsourcing of some of the Seattle area
production and the relocation of some of the technical talent along with the
closing of a facility that is estimated to save us up to $2,000 a year in
expenses. The AMTI operation got off to a strong start in the second quarter of
2009 with sales of amplifiers in support of our communications systems business.
Delays in two separate major programs have affected our ability to be
profitable in the first half of 2009; the delay in SATCOM-on-the-Move orders and
the delay in our program with the U.K. Ministry of Defence ("UKMOD"). We are
still specified as the government furnished equipment provider ("GFE"), for the
MRAP and other programs, including the MATV program that has just been awarded
to Oshkosh Corporation. Because we supply this product through one or more prime
contractors, our visibility on timing is derived from the information that we
receive from the contractors involved. The government has been in negotiations
now for over nine months and we still believe that an award is imminent. We
believe that it is not an issue of whether this will happen, but one of when
this will happen.
During the first quarter of 2009, we were selected as the new battery
supplier for the UKMOD for their primary communications radios. This program was
delayed from an anticipated first quarter of 2009 start and we have been making
the engineering changes that are desired by the customer for this new set of
products. We have had a major engineering commitment on this program for over
one year now and we expect the revenue from this to commence in the fourth
quarter of 2009 on a three year contract.
Either of these programs would be expected to put us into positive
quarterly earnings and despite our certainty about these programs, we have still
taken the responsible steps to get expenses down to as low a level as prudent,
so that profit from these programs can be as incremental as possible. Some of
those cost cutting measures include: implementing a four-day work week for
production personnel in our Newark operations, beginning in the third quarter of
2009, to align inventory and production levels with current sales levels;
consolidation of operations that are designed to lower the fixed costs basis of
our operations; overall cost reductions and tightening of cost controls; and
deferral of some discretionary spending.
Effective June 28, 2009, we entered into Waiver and Amendment Number One to
Amended and Restated Credit Agreement ("Waiver and Amendment") with the Lenders
and Agent. The Waiver and Amendment provided that the Lenders and Agent would
waive their right to exercise their respective rights and remedies under the
credit facility arising from our failure to comply with the financial covenants
in the credit facility with respect to the fiscal quarter ended June 28, 2009.
In addition to a number of revisions to non-financial covenants, the Waiver and
Amendment revised the applicable revolver rate under the Restated Credit
Agreement to an interest rate structure based on the Prime Rate plus 200 basis
points or LIBOR plus 500 basis points.
Results of Operations
Three-month periods ended June 28, 2009 and June 28, 2008
Revenues. Consolidated revenues for the three-month period ended June 28,
2009 amounted to $39,593, a decrease of $48,305, or 55.0%, from the $87,898
reported in the same quarter in the prior year.
Non-Rechargeable product sales increased $1,226, or 6.9%, from $17,699 last
year to $18,925 this year. The increase in Non-Rechargeable revenues was mainly
attributable to higher shipments of our BA-5390 batteries to government/defense
customers, offset in part by a decline in sales to automotive telematics
customers.
Rechargeable product sales increased $5,817, or 129.6%, from $4,490 last
year to $10,307 this year. The increase in Rechargeable revenues was mainly
attributable to strong demand for batteries and charging systems from U.S.
defense customers.
Communications Systems revenues decreased $55,345, or 89.3%, from $61,946
last year to $6,601 this year, due to deliveries of SATCOM-on-the-Move and other
advanced communications systems in 2008 resulting primarily from the sizeable
orders we received during the latter part of 2007, that did not reoccur in 2009.
Continued delays in finalizing the contract vehicle with prime contractors for
government programs, where we have been specified as the GFE, have caused this
non-reoccurrence of sales for advanced communications systems.
Design and Installation Services revenues were relatively unchanged from
$3,763 last year to $3,760 this year.
Cost of Products Sold. Cost of products sold totaled $32,813 for the
quarter ended June 28, 2009, a decrease of $34,457, or 51.2%, from the $67,270
reported for the same three-month period a year ago. Consolidated cost of
products sold as a percentage of total revenue increased from 76.5% for the
three-month period ended June 28, 2008 to 82.9% for the three-month period ended
June 28, 2009. Correspondingly, consolidated gross margin was 17.1% for the
three-month period ended June 28, 2009, compared with 23.5% for the three-month
period ended June 28, 2008, generally attributable to the margin decreases in
the Communications Systems and Design and Installation Services segments, offset
by improvements in the Non-Rechargeable Products and Rechargeable Products
segments. These results are impacted as well by the significant reduction in
sales of our higher margin Communications Systems products.
In our Non-Rechargeable Products segment, the cost of products sold
increased $120, from $15,448 in the three-month period ended June 28, 2008 to
$15,568 in 2009. Non-Rechargeable gross margin for 2009 was $3,357, or 17.7% of
revenues, an increase of $1,106 from 2008's gross margin of $2,251, or 12.7% of
revenues. Non-Rechargeable gross margin increased for the three-month period
ended June 28, 2009, primarily as a result of higher sales volumes and product
mix, in comparison to the three-month period ended June 28, 2008. Also, the
approximate $750 restructuring charge that was recorded relating to refocusing
our U.K. operations toward enhancing our ability to serve our customers,
including the U.K. Ministry of Defence, resulting in employee termination costs
and certain asset valuation adjustments in 2008, did not reoccur in 2009.
In our Rechargeable Products segment, the cost of products sold increased
$4,651, from $3,669 in the three-month period ended June 28, 2008 to $8,320 in
2009. Rechargeable gross margin for 2009 was $1,987, or 19.3% of revenues, an
increase of $1,166 from 2008's gross margin of $821, or 18.3% of revenues.
Rechargeable gross margin improved primarily as a result of higher sales volumes
and favorable product mix, as well as lower costs for material and component
parts.
In our Communications Systems segment, the cost of products sold decreased
$39,779, from $45,205 in the three-month period ended June 28, 2008 to $5,426 in
2009. Communications Systems gross margin for 2009 was $1,175, or 17.8% of
revenues, a decrease of $15,566 from 2008's gross margin of $16,741, or 27.0% of
revenues. The decrease in the gross margin for Communications Systems resulted
mainly from the change in the overall sales mix and lower sales volume in this
segment, in addition to increased inventory reserves. We have also implemented a
four-day work week for production personnel in our Newark operations, which
includes a significant portion of our communications systems manufacturing
operations, beginning in the third quarter of 2009, to align inventory and
production levels with current sales levels.
In our Design and Installation Services segment, the cost of sales
increased $551, from $2,948 in the three-month period ended June 28, 2008 to
$3,499 in 2009. Design and Installation Services gross margin for 2009 was $261,
or 6.9% of revenues, a decrease of $554 from 2008's gross margin of $815, or
21.7% of revenues. Gross margin in this particular segment was weaker than
expected due to expected short-term price competition with component suppliers,
relatively low margin jobs that carried over from year-end, and ongoing
integration efforts related to the USE acquisition.
Operating Expenses. Total operating expenses for the three-month period
ended June 28, 2009 totaled $13,105, an increase of $2,414 from the prior year's
amount of $10,691. Overall, operating expenses as a percentage of sales
increased to 33.1% in the second quarter of 2009 from 12.2% reported in the
prior year, due to the overall expense increase over a lower revenue base. In
response to this unfavorable change to the percentage of sales, we have
consolidated some of our operations in an effort to lower the fixed costs basis
of our operations, performed an overall cost reduction analysis and tightened
our cost controls, and deferred some of our discretionary spending. Amortization
expense associated with intangible assets related to our acquisitions was $466
for 2009 ($318 in selling, general and administrative expenses and $148 in
research and development costs), compared with $526 for 2008 ($368 in selling,
general, and administrative expenses and $158 in research and development
costs). Research and development costs were $2,514 in 2009, an increase of $377,
or 17.6%, over the $2,137 reported in 2008 as we increased our investment in
product development and design activity. Selling, general, and administrative
expenses increased $2,037, or 23.8%, to $10,591. This increase was comprised of
costs related to recently acquired companies, in addition to higher sales and
marketing expenses related to development of new territories for the standby
power business and generally higher administrative costs.
Other Income (Expense). Other income (expense) totaled ($558) for the
second quarter of 2009, compared to ($198) for the second quarter of 2008.
Interest expense, net of interest income, increased $111, to $349 for the second
quarter of 2009 from $238 for the comparable period in 2008, mainly as a result
of higher average borrowings under our revolving credit facility. Miscellaneous
income/expense amounted to expense of $209 for the second quarter of 2009
compared with income of $40 for the same period in 2008. The expense in 2009 was
primarily due to transactions impacted by changes in foreign currencies relative
to the U.S. dollar.
Income Taxes. We reflected a tax provision of $95 for the second quarter of
2009 compared with $3,359 in the second quarter of 2008. The second quarter of
2008 tax provision included an approximate $3,100 non-cash charge to record a
deferred tax liability for liabilities generated from book/tax differences
pertaining to goodwill and certain intangible assets that cannot be predicted to
reverse during our loss carryforward periods. Substantially all of this
adjustment related to book/tax differences that occurred during 2007 and was
identified during the second quarter of 2008. In connection with this
adjustment, we reviewed the illustrative list of qualitative considerations
provided in SEC Staff Accounting Bulletin No. 99 and other qualitative factors
in our determination that this adjustment was not material to the 2007
consolidated financial statements or this quarterly report on Form 10-Q. The
effective consolidated tax rate for the second quarter of 2009 was (1.4%)
compared with 34.5% for the same period in 2008.
During the fiscal quarter ended December 31, 2006, we recorded a full
valuation allowance on our net deferred tax asset, due to the determination, at
that time, that it was more likely than not that we would not be able to utilize
our U.S. and U.K. net operating loss carryforwards ("NOL's") that had
accumulated over time. At June 28, 2009, we continue to recognize a valuation
allowance on our U.S. deferred tax asset, to the extent that we believe, that it
is more likely than not that we will not be able to utilize that portion of our
U.S. NOL's that had accumulated over time. A U.S. valuation allowance is not
required for the portion of the deferred tax asset that will be realized by the
reversal of temporary differences related to deferred tax liabilities to the
extent those temporary differences are expected to reverse in our carryforward
period. At June 28, 2009, we continue to recognize a full valuation allowance on
our U.K. net deferred tax asset, as we believe, at this time, that it is more
likely than not that we will not be able to utilize our U.K. NOL's that had
accumulated over time. (See Note 8 in the Notes to Condensed Consolidated
Financial Statements for additional information.) We continually monitor the
assumptions and performance results to assess the realizability of the tax
benefits of the U.S. and U.K. NOL's and other deferred tax assets, in accordance
with the applicable accounting standards.
We have determined that a change in ownership, as defined under Internal
Revenue Code Section 382, occurred in 2005 and 2006. As such, the domestic NOL
carryforward will be subject to an annual limitation estimated to be in the
range of approximately $12,000 to $14,500. The unused portion of the annual
limitation can be carried forward to subsequent periods. We believe such
limitation will not impact our ability to realize the deferred tax asset.
In addition, certain of our NOL carryforwards are subject to U.S.
alternative minimum tax such that carryforwards can offset only 90% of
alternative minimum taxable income. This limitation did not have an impact on
income taxes determined for the second quarter of 2009. However, this limitation
did have an impact of $264 on income taxes determined for the second quarter of
2008. The use of our U.K. NOL carryforwards may be limited due to the change in
the U.K. operation during 2008 from a manufacturing and assembly center to
primarily a distribution and service center. For further discussion, see
Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2008.
Net Income (Loss) Attributable to Ultralife. Net loss attributable to
Ultralife and loss attributable to Ultralife common shareholders per diluted
share were $6,964 and $0.41, respectively, for the three months ended June 28,
2009, compared to a net income attributable to Ultralife and earnings
attributable to Ultralife common shareholders per diluted share of $6,395 and
$0.36, respectively, for the same quarter last year, primarily as a result of
the reasons described above. Average common shares outstanding used to compute
diluted earnings per share decreased from 17,708,000 in the second quarter of
2008 to 16,894,000 in 2009, mainly due to the share repurchase program we
initiated in the fourth quarter of 2008, offset by stock option and warrant
exercises and restricted stock grants.
Six-month periods ended March 29, 2009 and March 29, 2008
Revenues. Consolidated revenues for the six-month period ended June 28,
2009 amounted to $79,396, a decrease of $58,089, or 42.3%, from the $137,485
reported in the same quarter in the prior year.
Non-Rechargeable product sales increased $2,182, or 6.8%, from $32,315 last
year to $34,497 this year. The increase in Non-Rechargeable revenues was mainly
attributable to higher shipments of our BA-5390 batteries to government/defense
customers, offset in part by a decline in sales to automotive telematics
customers.
Rechargeable product sales increased $12,933, or 115.2%, from $11,228 last
year to $24,161 this year. The increase in Rechargeable revenues was mainly
attributable to strong demand for batteries and charging systems from U.S.
defense customers.
Communications Systems revenues decreased $75,163, or 87.4%, from $86,000
last year to $10,837 this year, due to deliveries of SATCOM-on-the-Move and
other advanced communications systems in 2008 resulting primarily from the
sizeable orders we received during the latter part of 2007, that did not reoccur
in 2009. Continued delays in finalizing the contract vehicle with prime
contractors for government programs, where we have been specified as the GFE,
have caused this non-reoccurrence of sales for advanced communications systems.
Design and Installation Services revenues increased $1,959, or 24.7%, from
$7,942 last year to $9,901 this year, mainly due to the added revenue base
provided from the acquisition of USE in the fourth quarter of 2008.
Cost of Products Sold. Cost of products sold totaled $64,835 for the
six-month period ended June 28, 2009, a decrease of $41,147, or 38.8%, from the
$105,982 reported for the same six-month period a year ago. Consolidated cost of
products sold as a percentage of total revenue increased from 77.1% for the
six-month period ended June 28, 2008 to 81.7% for the six-month period ended
June 28, 2009. Correspondingly, consolidated gross margin was 18.3% for the
six-month period ended June 28, 2009, compared with 22.9% for the six-month
period ended June 28, 2008, generally attributable to the margin decreases in
the Communications Systems and Design and Installation Services segments, offset
by improvements in the Non-Rechargeable Products and Rechargeable Products
segments. These results are impacted as well by the significant reduction in
sales of our higher margin Communications Systems products.
In our Non-Rechargeable Products segment, the cost of products sold
increased $1,310, from $27,008 in the six-month period ended June 28, 2008 to
$28,318 in 2009. Non-Rechargeable gross margin for 2009 was $6,179, or 17.9% of
revenues, an increase of $872 from 2008's gross margin of $5,307, or 16.4% of
revenues. Non-Rechargeable gross margin increased for the six-month period ended
June 28, 2009, primarily as a result of higher sales volumes and product mix, in
comparison to the six-month period ended June 28, 2008. Also, the approximate
$750 restructuring charge that was recorded relating to refocusing our U.K.
. . .
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