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ULBI > SEC Filings for ULBI > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for ULTRALIFE CORP


15-Mar-2013

Annual Report


ITEM 7. 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, our reliance on certain key customers, reduced U.S. defense spending, including the uncertainty with government budget approvals, general domestic and global economic conditions, future demand for our products and services, the successful commercialization of our products, our resources being overwhelmed by our growth prospects, residual effects of negative news related to our industries, government and environmental regulations, business disruptions, including those caused by fires, the impairment of our intangible assets, the unique risks associated with our Chinese operations, loss of top management, the process of U.S. defense procurement, finalization of non-bid government contracts, raw material supplies, competition and customer strategies, technological innovations in the non-rechargeable and rechargeable battery industries, changes in our business strategy or development plans, capital deployment, 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 "Risk Factors" in Item 1A of this annual report.

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 annual report on Form 10-K to reflect new information, future events or other developments.

The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto appearing elsewhere in 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 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. 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 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: RF amplifiers, power supplies, cable and connector assemblies, 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, we 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 in 2011. 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 $241 and were due to the difference in our actual experience compared to our expectations as of the completion of our exit activities.

On February 16, 2012, we announced our intention to divest our RedBlack Communications, Inc. ("RedBlack") business in 2012. 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. 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 have been 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.

During the fourth quarter of 2012, management elected not to renew the lease for its U.K. manufacturing facility which expires on March 24, 2013, and to relocate its sales and services operations to a smaller facility. As a result of this decision, Ultralife is required to restore the facility back to its original condition per a previous contractual commitment. The estimated costs associated with the restoration total approximately $950 of which $200 was recorded in fourth quarter of 2012 as general & administrative expenses and $750 has been recorded as discontinued operations. In addition, we expect to realize net savings of approximately $500 on an annualized basis beginning in the second quarter of 2013.

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.

Currently, we do not experience significant seasonal sales trends in any of our operating segments, although sales to the U.S. Defense Department and other international defense organizations can be sporadic based on the needs of those particular customers.

Overview

Consolidated revenues decreased by $34,080 or 25.1% to $101,657 for the year-ended December 31, 2012 compared to $135,737 during the year ended December 31, 2011. This decrease was caused by declining revenues in our Battery & Energy Products segment in 2012 when compared to 2011, as a result of lower government and defense sales, the completion of a long-running telematics contract in 2011 that was not continued, and lower sales of rechargeable batteries to commercial customers, partially offset by the impact of the $2,730 non-recurring charge related to the DCAA settlement during the first quarter of 2011 and increased shipments of 20-Watt amplifier sales in our Communications Systems segment. Gross margin increased to 28.3% for the year ended December 31, 2012, as opposed to 25.2% for the year ended December 31, 2011, due to favorable product mix, increased pricing for some of our products and Lean manufacturing improvements, as well as, last year's non-recurring $2,730 DCAA settlement charge and $1,100 charge to write-off components associated with a discontinued amplifier line.


Operating expenses decreased by $2,935 or 9.2% to $28,844 during the year ended December 31, 2012, compared to $31,779 during the year ended December 31, 2011, reflecting continued Lean initiatives, actions to reduce general and administrative expenses, as well as more focused spending on the development of new products, while investing a portion of our savings in the expansion of the sales force to increase our geographic coverage and penetrate new markets. Operating expenses as a percentage of revenues increased to 28.4% in 2012 from 23.4% reported in 2011 due to the impact of lower revenues in 2012.

Net loss from continuing operations was $1,128, or $0.06 per share, for the year ended December 31, 2012, compared to net income of $1,549, or $0.09 per share, for the year ended December 31, 2011. Net loss from discontinued operations, net of tax, was $501, or $0.03 per share, for the year ended December 31, 2012, compared to a net loss, net of tax of $3,687, or $0.21 per share, for the year ended December 31, 2011.

Adjusted EBITDA, 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 operations, amounted to $5,054 for the year ended December 31, 2012 compared to $7,913 for the year ended December 31, 2011. See the section "Adjusted EBITDA" beginning on page 32 for a reconciliation of Adjusted EBITDA to net loss attributable to Ultralife.

As a result of careful working capital management and cash generated from operations, our liquidity remains solid with cash of $10,078, a $4,592 improvement over the cash position of $5,486 as of December 31, 2011. The company had no debt as of December 31, 2012. Our inventory levels decreased by $4,597, or 13.1%, to $30,370 at the end of 2012 from $34,967 at the end of 2011 due to more focused inventory management and planning.

Outlook

For 2013, management expects low- to mid-single digit organic revenue growth reflecting strong growth in Communications Systems sales and modest gains in the Battery & Energy Products business, despite continued constraints on U.S. government spending. Based on this outlook for revenue growth, ongoing productivity improvements and plans to continue prudently investing in new product development, management expects to increase operating profitability for the year and to generate a mid-single digit operating margin.

Management cautions that the timing of orders and shipments may cause variability in quarterly results.


Results of Operations

Twelve Months Ended December 31, 2012 Compared With the Twelve Months Ended

December 31, 2011

                                                                  12 Months Ended              Increase /
                                                             12/31/2012       12/31/2011       (Decrease)

Revenues                                                   $    101,657     $    135,737     $    (34,080 )
Cost of products sold                                            72,927          101,546          (28,619 )
Gross margin                                                     28,730           34,191           (5,461 )
Operating expenses                                               28,844           31,779           (2,935 )
Operating income (loss)                                            (114 )          2,412           (2,526 )
Other expense, net                                                 (460 )           (383 )            (77 )
Income (loss) from continuing operations before taxes              (574 )          2,029           (2,603 )
Income tax provision                                                554              480               74
Net income (loss) from continuing operations                     (1,128 )          1,549           (2,677 )
Loss from discontinued operations, net of tax                      (501 )         (3,687 )          3,186
Net loss                                                         (1,629 )         (2,138 )            509
Net loss attributable to noncontrolling interest                     31               58              (27 )
Net loss attributable to Ultralife                         $     (1,598 )   $     (2,080 )            482
Net income (loss) attributable to Ultralife common
shares - basic
  Continuing operations                                    $      (0.06 )   $       0.09     $      (0.15 )
  Discontinued operations                                  $      (0.03 )   $      (0.21 )   $       0.18
Net income (loss) attributable to Ultralife common
shares - diluted
  Continuing operations                                    $      (0.06 )   $       0.09     $      (0.15 )
  Discontinued operations                                  $      (0.03 )   $      (0.21 )   $       0.18

Weighted average shares outstanding-basic                    17,403,000       17,304,000           99,000
Weighted average shares outstanding-diluted                  17,403,000       17,336,000           67,000

Revenues. Total revenues for the twelve months ended December 31, 2012 amounted to $101,657, a decrease of $34,080, or 25.1% from the $135,737 reported for the twelve months ended December 31, 2011.

Battery & Energy Products revenues decreased $37,119, or 34.3%, to $71,084 for the twelve months ended December 31, 2012 from the $108,203 reported for the twelve months ended December 31, 2011 as a result of lower government and defense sales, the completion of a long-running telematics contract in 2011, as well as lower sales of rechargeable batteries to commercial customers, partially offset by last year's $2,730 non-recurring DCAA settlement charge. The decline in government and defense sales and lower sales of rechargeable batteries was primarily caused by reductions in government spending that negatively impacted our entire industry.

Communications Systems revenues increased $3,039, or 11.0%, from $27,534 for the twelve months ended December 31, 2011 to $30,573 for the twelve months ended December 31, 2012, as a result of the ongoing successful international business development efforts leading to increased shipments of 20-Watt amplifiers in our Communications Systems segment.

Cost of Products Sold. Cost of products sold decreased $28,619, or 28.2%, from $101,546 for the year ended December 31, 2011 to $72,927 for the year ended December 31, 2012. Consolidated cost of products sold as a percentage of total revenue decreased from 74.8% for the year ended December 31, 2011 to 71.7% for the year ended December 31, 2012. Correspondingly, consolidated gross margin was 28.3% for the year ended December 31, 2012, compared with a gross margin of 25.2% for the year ended December 31, 2011. The increase is primarily attributable to favorable product mix, increased pricing for some of our products and Lean manufacturing improvements, as well as, last year's $2,730 non-recurring DCAA settlement charge and $1,100 charge to write-off components associated with a discontinued amplifier line.

In our Battery & Energy Products segment, the cost of products sold decreased $29,512, from $83,034 for the year ended December 31, 2011 to $53,522 for the year ended December 31, 2012. Battery & Energy Products gross margin for 2012 was $17,562 or 24.7%, a decrease of $7,607 from 2011's gross margin of $25,169, or 23.3%. Battery & Energy Products' gross margin increased by 140 basis points for the twelve-month period ended December 31, 2012, primarily as a result of last year's non-recurring DCAA settlement charge.


In our Communications Systems segment, the cost of products sold increased $893 from $18,512 for the year ended December 31, 2011 to $19,405 for the year ended December 31, 2012. Communications Systems gross margin for 2012 was $11,168, or 36.5%, an increase of $2,146 from 2011's gross margin of $9,022, or 32.8%. 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 2011 would have been 36.8%. The slight decrease in gross margin after excluding the non-cash amplifier charge from 2011 was attributable to sales mix, as well as, reduced volume pricing for certain large projects earlier in the year.

Operating Expenses. Operating expenses decreased by $2,935, or 9.2%, to $28,844 for the year ended December 31, 2012 compared to $31,779 for the year ended December 31, 2011, reflecting continued Lean initiatives, actions to reduce general and administrative expenses and focused spending in the development of new products while investing a portion of our savings in the expansion of the sales force to increase our geographic coverage and penetrate new markets. Overall, operating expenses as a percentage of revenues increased to 28.4% in 2012 from 23.4% reported for the prior year, due to the impact of lower revenues in 2012. Amortization expense associated with intangible assets related to our acquisitions was $497 for 2012 ($237 in selling, general and administrative expenses and $260 in research and development costs), compared with $627 for 2011 ($314 in selling, general, and administrative expenses and $313 in research and development costs). Research and development costs were $7,216 in 2012, a decrease of $1,377 or 16.0%, over the $8,593 reported in 2011. Selling, general, and administrative expenses decreased $1,558, or 6.7%, to $21,628 for the year ended December 31, 2012 from $23,186 for the year ended December 31, 2011, reflecting on-going actions to reduce general and administrative expenses, while investing a portion of our savings in the expansion of our sales force to increase our geographic coverage and penetrate new markets.

Other Income (Expense). Other income (expense) totaled ($460) for the year ended December 31, 2012, compared to ($383) for the year ended December 31, 2011. Interest expense, net of interest income, decreased $118, from $554 during 2011 to $436 during 2012, as a result of lower average borrowings under our revolving credit facilities during the course of 2012. Miscellaneous expense amounted to $24 for 2012 compared with income of $171 for 2011, primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We recorded a tax provision of $554 for the year ended December 31, 2012 compared with a tax provision of $480 for the same period of 2011. The expense is primarily due to (a) the income reported for our China operations during the periods, and (b) 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. The effective consolidated tax rate for the years ended December 31, 2012 and 2011 was:

                                              Years Ended December 31,
                                              2012               2011
Income (Loss) before Incomes Taxes (a)     $      (574 )     $       2,029

Total Income Tax Provision (Benefit) (b)   $       554       $         480

Effective Tax Rate (b/a)                          96.5 %              23.7 %

In 2012 and 2011, in the U.S. and the U.K., we continue to report a valuation allowance for our deferred tax assets that cannot be offset by reversing temporary differences. This results from the conclusion that it is more likely than not that we would not utilize our U.S. and U.K. NOL's that had accumulated over time. The recognition of a valuation allowance on our deferred tax assets resulted from our evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOL's was based on a number of factors including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of the end of 2012. We concluded that these factors represent sufficient negative evidence and have concluded that we should record a full valuation allowance under Financial Accounting Standards Board's ("FASB") guidance on the accounting for income taxes. (See Notes 1 and 8 in the Notes to Consolidated Financial Statements for additional information.)

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. Loss from discontinued operations, net of tax, totaled $501 for the year ended December 31, 2012, compared to a loss of $3,687 in the same period of 2011. The 2012 charge is primarily due to restoration costs related to our decision to not renew the lease of our present UK manufacturing facility and to relocate our UK sales and services operations to a small facility. Discontinued operations for 2011 include the operating results of the RedBlack business, which was sold in the third quarter of 2012, as well as, the costs associated with exiting the Energy Services business. For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Loss Attributable to Ultralife. Net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per diluted share were $1,598 and $0.09, respectively, for the year ended December 31, 2012, compared to net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per diluted share of $2,080 and $0.12, respectively, for the year ended December 31, 2011, primarily as a result of the reasons described above. Average common shares outstanding used to compute diluted earnings per share increased from 17,336,000 in 2011 to 17,403,000 in 2012, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Adjusted EBITDA from continuing operations

In evaluating our business, we consider and use Adjusted EBITDA from continuing operations, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA from continuing operations 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. We use Adjusted EBITDA from continuing operations 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 from continuing operations facilitates investors' use of operating performance comparisons from period to period and company to company by backing out potential differences caused by variations in such items as capital structures (affecting relative interest expense and stock-based compensation expense), the book amortization of intangible assets (affecting relative amortization expense), the age and book value of facilities and equipment (affecting relative depreciation expense) and other significant non-operating expenses or income. We also present Adjusted EBITDA from continuing 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 from continuing operations to net income (loss) attributable to Ultralife, the most comparable financial measure under U.S. generally accepted accounting principles ("U.S. GAAP").

We use Adjusted EBITDA from continuing operations in our decision-making processes relating to the operation of our business together with U.S. GAAP financial measures such as income (loss) from operations. We believe that Adjusted EBITDA from continuing operations permits a comparative assessment of our operating performance, relative to our performance based on our U.S. GAAP . . .

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