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ULBI > SEC Filings for ULBI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for ULTRALIFE CORP


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, future demand for our products and services, addressing the process of U.S. defense procurement, reduced U.S. defense spending, the successful commercialization of our products, our reliance on certain key customers, the impairment of our intangible assets, general domestic and global economic conditions, including the uncertainty with government budget approvals, the unique risks associated with our Chinese operations, government and environmental regulations, finalization of non-bid government contracts, competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries, changes in our business strategy or development plans, capital deployment, business disruptions, including those caused by fires, raw material supplies, 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" or "expect" or words of similar import 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, 2011.

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any factors or to publicly announce the results of any revisions to any of the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2011.

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 portable power solutions to communications and electronics systems. Through our engineering and collaborative approach to problem solving, we serve government, defense and commercial customers across the globe. 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 and solutions. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers ("OEMs"), industrial and retail distributors, national retailers and directly to U.S. and international defense departments.

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables. The Communications Systems segment includes: power supplies, cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case equipment, integrated communication system kits 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.


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.

On March 8, 2011, our senior management, as authorized by our Board of Directors, decided to exit our Energy Services business. As a result of management's review of our business segments and products, and taking into account the lack of growth and profitability potential of the Energy Services segment as well as its sizeable operating losses, we determined it was appropriate to refocus our operations on profitable growth opportunities presented in our other segments, Battery & Energy Products and Communications Systems. In the fourth quarter of 2010, we recorded a non-cash impairment charge of $13,793 to write-off the goodwill and intangible assets and certain fixed assets associated with the standby power portion of our Energy Services business. The actions taken to exit our Energy Services business resulted in the elimination of approximately 40 jobs and the closing of five facilities, primarily in California, Florida and Texas. We completed all exit activities with respect to our Energy Services segment by the end of the second quarter of 2011, and have reclassified our Energy Services segment as a discontinued operation.

In connection with the exit activities described above, we recorded total restructuring charges of approximately $2,924. The restructuring charges include approximately $703 of employee-related costs, including termination benefits, approximately $250 of lease termination costs, approximately $941 of inventory and fixed asset write-downs and approximately $1,030 of other associated costs. The cash component of the aggregate total restructuring charges was approximately $1,984. Subsequent to the completion of our exit activities, adjustments have been made to estimates of certain reserves and accruals that existed at that time. These adjustments amount to $39 and were due to the difference in our actual experience compared to our expectations as of the completion of our exit activities.

In 2011, we implemented a series of Lean initiatives throughout our entire organization. Lean is a disciplined management philosophy which is 100% focused on using resources more effectively and the elimination of non-value added functions to any process. The expected result is a reduction in costs and increased efficiency.

On February 16, 2012, we announced our intention to divest our RedBlack Communications, Inc. ("RedBlack") business in 2012. RedBlack, a wholly owned subsidiary of ours based in Hollywood, Maryland, designs, integrates and fields mobile, modular and fixed site communication and electronic systems. As a result of management's ongoing review of our business portfolio, management had determined that RedBlack offered limited opportunities to achieve the operating thresholds of our new business model.

On September 28, 2012, we entered into and closed a Stock Purchase Agreement to sell 100% of our capital stock in RedBlack to BCF Solutions, Inc (the "Agreement"). In exchange for the sale of RedBlack, we received $2,533 as a purchase price, comprised of cash at closing in the amount of $2,133, funds held in escrow for up to one year in the amount of $250, as well as $150 to be available for RedBlack employee retention programs. In addition, there will be a customary post-closing working capital adjustment to the purchase price which is expected to be completed within ninety days.

The Agreement contains customary representations and warranties that will survive for a period of two or three years. The Agreement also contains customary indemnification for breaches of the representations and warranties identified in the Agreement.

Pursuant to the Agreement, we are prohibited from engaging or participating with any current customer of RedBlack in any business, directly or indirectly, that competes with the business conducted by RedBlack for two years. We are also prohibited from hiring, soliciting, or recruiting any current employee, independent contractor, or consultant of BCF Solutions, Inc. or RedBlack for two years.

Commencing with the first quarter of 2012, the results of the RedBlack operations and related divestiture costs will be reported as a discontinued operation. Certain items included within income from discontinued operations are based upon management's best estimates as of the date of sale and may change should our estimates be different from our actual experience.


Overview

Consolidated revenues for the three-month period ended September 30, 2012 decreased by $9,023, or 25.6%, from the three-month period ended October 2, 2011. The decrease was primarily attributable to continued slowdown in the government and defense order rate for rechargeable and non-rechargeable batteries, partially offset by an order for our M-1 battery products to service an allied country's department of defense and an increase in Communications Systems sales, reflecting shipments of SATCOM systems and the fulfillment of amplifier orders that were delayed from the second quarter.

Gross profit for the third quarter of 2012 was $8,219, or 31.4% of revenues, compared to $9,360, or 26.6% of revenues, for the same quarter a year ago. The year-over-year comparison was impacted by the $1,100 non-cash charge recorded in the third quarter of 2011 to write-off discontinued legacy amplifiers, which equaled approximately 300 basis points of gross margin. The increase in the gross margin percentage was attributable to improved 9-volt margins resulting from the transition of production to our China operations and increases in average selling price of the newly designed 9-volt product, scrap and productivity improvements in our manufacturing operations, as well as favorable sales mix in both our business segments.

Operating expenses decreased to $6,465 during the three-month period ended September 30, 2012, a decrease of $1,350, or 17.3%, from the $7,815 during the three-month period ended October 2, 2011, primarily due to headcount reductions completed in the first half of 2012 in addition to discretionary spending cuts and lower sales commissions. Operating expenses as a percentage of revenue increased from 22.2% during the quarter ended October 2, 2011 to 24.7% during the quarter ended September, 2012 primarily because of lower sales volumes.

Operating income was $1,754, a 13.6% increase over the $1,545 for the same period in 2011, reflecting the benefits of favorable sales mix, productivity gains and operating expense reductions. Operating margin was 6.7%, compared to 4.4% for the year-earlier period, an increase of 230 basis points.

Net income from continuing operations was $1,468, or $0.09 per share, compared to net income of $1,348, or $0.08 per share, for the third quarter of 2011. Net income from discontinued operations was $200 or $0.01 per share, versus $4 or $0.00 per share for the same quarter last year.

Adjusted EBITDA from continuing operations, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, plus/minus expenses/income that we do not consider reflective of our ongoing continuing operations, amounted to $3,052 in the third quarter of 2012 compared to $3,000 for the third quarter of 2011. This increase in Adjusted EBITDA from continuing operations was primarily attributable to our operating results. See the section "Adjusted EBITDA from continuing operations" beginning on page 32 for a reconciliation of Adjusted EBITDA from continuing operations to net income (loss) attributable to Ultralife.

There was no outstanding balance on our credit facility as of September 30, 2012. By comparison, as of October 2, 2011 and as of December 31, 2011, the outstanding revolver balance under our credit facility was $2,481 and $-0-, respectively. The decrease from the third quarter of 2011 is primarily attributable to cash generated from operations and diligent working capital management.

Outlook

Management reaffirms its outlook for 2012. Management expects high-single to low-double digit year-over-year revenue growth for its Communication Systems segment and China operations. Given the continued uncertainty in government and defense orders for the Battery & Energy Products segment, the company's largest segment, management expects year-over-year total sales to decline by between 20% and 30%. Based on the third quarter results and the actions taken in the first half of 2012 to reduce spending and align capacity, management expects a return to operating profitability for the second half of 2012 with operating margin in the low- to mid- single digits. The magnitude of the first half operating loss is expected to result in a total year operating loss.


Results of Operations

Three-month periods ended September 30, 2012 and October 2, 2011

Revenues. Consolidated revenues for the three-month period ended September 30, 2012 amounted to $26,181, a decrease of $9,023, or 25.6%, from the $35,204 reported in the same quarter in 2011.

Battery & Energy Products sales decreased $12,201, or 42.3%, from $28,834 during the third quarter last year to $16,633 during the third quarter this year. This decrease was primarily attributable to the continued slowdown in the US government and defense order rate for rechargeable and non-rechargeable batteries and charger systems. Partially offsetting this decline was an order for our M-1 battery products to service an allied country's department of defense.

Communications Systems revenues increased $3,178, or 49.9%, from $6,370 during the third quarter last year to $9,548 during the third quarter this year. This increase was attributable to shipments of SATCOM units to a large prime customer contract which services the US Department of Defense and continued solid global demand for our 20 watt amplifier products.

Cost of Products Sold. Cost of products sold totaled $17,962 for the quarter ended September 30, 2012, a decrease of $7,882, or 30.5%, from the $25,844 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 73.4% for the three-month period ended October 2, 2011 to 68.6% for the three-month period ended September 30, 2012. Correspondingly, consolidated gross margin was 31.4% for the three-month period ended September 30, 2012, compared with 26.6% for the three-month period ended October 2, 2011. The year-over-year comparison was impacted by the $1,100 non-cash charge recorded in the third quarter of 2011 to write-off discontinued legacy amplifiers, which equaled approximately 300 basis points of gross margin. The increase in the gross margin percentage was attributable to improved 9-volt margins resulting from the transition of production to our China operations and increases in average selling price of the newly designed 9-volt, scrap and productivity improvements in our manufacturing operations, as well as favorable sales mix in both our business segments.

In our Battery & Energy Products segment, the cost of products sold decreased $9,042, from $20,905 during the three-month period ended October 2, 2011 to $11,863 during the three-month period ended September 30, 2012. Battery & Energy Products' gross profit for the third quarter of 2012 was $4,770, or 28.7% of revenues, a decrease of $3,159 from gross profit of $7,929, or 27.5% of revenues, for the third quarter of 2011. Battery & Energy Products' gross margin as a percentage of revenues increased by 120 basis points for the three-month period ended September 30, 2012, primarily attributable to scrap reductions and productivity improvements, as well as improved 9-volt margins and favorable sales mix.

In our Communications Systems segment, the cost of products sold increased $1,160 from $4,939 during the three-month period ended October 2, 2011 to $6,099 during the three-month period ended September 30, 2012. Communications Systems' gross profit for the third quarter of 2012 was $3,449, or 36.1% of revenues, an increase of $2,018 from gross profit of $1,431, or 22.5% of revenues, for the third quarter of 2011, which was impacted by the $1,100 inventory charge to write-off discontinued legacy amplifiers. Excluding this adjustment, the gross margin for the third quarter of 2011 would have been 38.4%. Gross margin as a percent of revenues, excluding the 2011 inventory charge, decreased 230 basis points because of the higher proportion of amplifier sales in 2011.

Operating Expenses. Total operating expenses for the three-month period ended September 30, 2012 totaled $6,465, a decrease of $1,350 from $7,815 for the three-month period ended October 2, 2011, resulting from the reductions in force completed in the first half of 2012, general and administrative discretionary spending cuts, lower sales commissions and more focused R&D and new product spending.


Overall, operating expenses as a percentage of revenues increased to 24.7% during the third quarter of 2012 from 22.2% reported in the third quarter of 2011 because of lower sales volumes. Amortization expense associated with intangible assets related to our acquisitions was $122 for the third quarter of 2012 ($57 in selling, general and administrative expenses and $65 in research and development costs), compared with $155 for the third quarter of 2011 ($78 in selling, general, and administrative expenses and $77 in research and development costs). Research and development costs were $1,596 in the third quarter of 2012, a decrease of $698, or 30.4%, from the $2,294 reported in the third quarter of 2011, as we focused our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $652, or 11.8%, to $4,869 during the third quarter of 2012 as compared to $5,521 in the third quarter of 2011, reflecting lower sales commission and the impact of actions taken in the first half of 2012 to reduce general and administrative expenses.

Other Income (Expense). Other income (expense) totaled $(111) for the third quarter of 2012, compared to $(75) for the third quarter of 2011. Interest expense, net of interest income, decreased $28, to $96 for the third quarter of 2012 from $124 for the comparable period in 2011, as a result of lower average borrowings under our revolving credit facilities. Miscellaneous income/expense amounted to expense of $15 for the third quarter of 2012 compared with income of $49 for the third quarter of 2011. The expense in the third quarter of 2012 and income in the third quarter of 2011 were primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We reflected a tax provision of $175 for the third quarter of 2012 compared with $122 during the third quarter of 2011. The expense is primarily due to (a) the recognition of deferred tax liabilities generated from goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods, and (b) the income reported for our China operations during the periods. The effective consolidated tax rate for the three-month periods ended September 30, 2012 and October 2, 2011 was:

                                             Three-Month Periods Ended
                                          September 30,         October 2,
                                              2012                 2011
Income (Loss) before Incomes Taxes (a)   $         1,643       $      1,470

Total Income Tax Provision (b)           $           175       $        122

Effective Tax Rate (b/a)                            10.7 %              8.3 %

See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional information regarding our income taxes.

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 net operating loss ("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. Our ability to utilize NOL carryforwards due to successive ownership changes is currently limited to a minimum of approximately $12,000 annually, plus the carryover from unused portions of the annual limitations. 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 quarters of 2012 and 2011. 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.


Discontinued Operations. Income (loss) from discontinued operations, net of tax, totaled $200 for the third quarter of 2012, compared to $4 for the third quarter of 2011. The income in the third quarter of 2012 reflects the operating results, sale, and related divestiture costs and tax benefits for RedBlack. For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Income (Loss) Attributable to Ultralife. Net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share was $1,679 and $0.10, respectively, for the three months ended September 30, 2012, compared to a net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share of $1,363 and $0.08, respectively, for the third quarter of 2011. Average common shares outstanding used to compute diluted earnings per share increased from 17,341,000 in the third quarter of 2011 to 17,418,000 in the third quarter of 2012, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Nine-month periods ended September 30, 2012 and October 2, 2011

Revenues. Consolidated revenues for the nine-month period ended September 30, 2012 amounted to $72,388, a decrease of $33,843, or 31.9%, from the $106,231 reported in the same period in 2011.

Battery & Energy Products sales decreased $32,083, or 38.0%, from $84,321 during the first nine months last year to $52,238 during the first nine months this year. Revenues for Battery & Energy Products decreased due to the absence of shipments of 5390 batteries to the DLA, the completion of large non-recurring telematics orders in 2011 and a slower government and defense order rate for rechargeable and non-rechargeable batteries and charger systems.

Communications Systems revenues decreased $1,760, or 8.0%, from $21,910 during the first nine months last year to $20,150 during the first nine months this year. The year-over-year comparison was impacted by larger shipments of SATCOM units in 2011 over 2012, partially offset by our broader focus on large, global modernization opportunities, which resulted in higher amplifier sales in 2012.

Cost of Products Sold. Cost of products sold totaled $53,109 for the nine-month period ended September 30, 2012, a decrease of $27,788, or 34.3%, from the $80,897 reported for the same nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.2% for the nine-month period ended October 2, 2011 to 73.4% for the nine-month period ended September 30, 2012. Correspondingly, consolidated gross margin was 26.6% for the nine-month period ended September 30, 2012, compared with 23.8% for the nine-month period ended October 2, 2011, primarily attributable to higher margins in our Batteries and Energy Products segment, last year's $2,730 DCAA settlement charge and $1,100 charge to write-off components associated with a discontinued amplifier line, partially offset by lower sales volumes and sales mix in our Communications Systems segment.

In our Battery & Energy Products segment, the cost of products sold decreased $26,336, from $66,098 during the nine-month period ended October, 2011 to $39,762 during the nine-month period ended September 30, 2012. Battery & Energy Products' gross profit for the first nine months of 2012 was $12,476, or 23.9% of revenues, a decrease of $5,747 from gross profit of $18,223, or 21.6% of revenues, for the first nine months of 2011. Battery & Energy Products' gross margin increased by 230 basis points for the nine-month period ended September 30, 2012, primarily as a result of last year's DCAA settlement charge.

In our Communications Systems segment, the cost of products sold decreased $1,452 from $14,799 during the nine-month period ended October 2, 2011 to $13,347 during the first nine months of 2012. Communications Systems' gross profit for the first nine months of 2012 was $6,803, or 33.8% of revenues, a decrease of $308 from gross profit of $7,111, or 32.5% of revenues. The year-over-year comparison was impacted by the $1,100 non-cash charge recorded in the third quarter of 2011 to write-off discontinued legacy amplifiers. Excluding this adjustment, the gross margin for the first nine months period of 2011 would have been 37.5%. The decrease in gross margin was attributable to sales mix, which included a much higher concentration of radio accessory products and the sale of some legacy products in the current period, as well as, reduced volume pricing for certain large projects in the first quarter of 2012.


Operating Expenses. Total operating expenses for the nine-month period ended September 30, 2012 totaled $21,747, a decrease of $2,941 or 11.9% from $24,688 for the nine-month period ended October 3, 2011, resulting from continued actions to reduce general and administrative expenses and focused spending in the development of new products.

Overall, operating expenses as a percentage of revenues increased to 30.0% during the first nine months of 2012 from 23.2% reported in the first nine months of 2011 because of lower sales volumes. Amortization expense associated with intangible assets related to our acquisitions was $372 for the first nine months of 2012 ($177 in selling, general and administrative expenses and $195 in research and development costs), compared with $469 for the first nine months of 2011 ($235 in selling, general, and administrative expenses and $234 in research and development costs). Research and development costs were $5,706 in the first nine months of 2012, a decrease of $1,207, or 17.5%, from the $6,913 reported in the first nine months of 2011, as we focused our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $1,734, or 9.8%, to $16,041 during the first nine months of 2012 as compared to $17,775 in first nine months of 2011, reflecting on-going actions to reduce general and administrative expenses.

Other Income (Expense). Other income (expense) totaled $(295) for the first nine . . .

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