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ULBI > SEC Filings for ULBI > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for ULTRALIFE CORP


9-Aug-2013

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, our reliance on certain key customers, reduced U.S. defense spending, including the uncertainty with government budget approvals, timing delays in receiving orders relating to funded government projects, 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, product liability risks, 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 Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2012.

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, 2012.

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, charging systems, communications and electronics systems and accessories and custom engineered systems. We continually evaluate ways to grow, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as seeking opportunities to expand through acquisitions. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers ("OEMs"), industrial and defense supply distributors and directly to U.S. and international defense departments.


We 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. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance. As such we report segment performance at the gross profit level and operating expenses as Corporate charges. (See Note 11 in the Notes to Consolidated Financial Statements)

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, in the second quarter of 2013 we recorded $125 for a customary post-closing working capital adjustment, which is reflected as a loss from discontinued operations. 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.

During the fourth quarter of 2012, we elected not to renew the lease for our U.K. manufacturing facility which expired on March 24, 2013, and relocated our sales and services operations to a smaller facility. As a result of this decision, we were required to restore the facility back to its original condition pursuant to the terms of the U.K. Facility Lease. In the fourth quarter of 2012, we recorded approximately $950 related to this requirement of which $200 was recorded as general & administrative expenses and $750 was recorded as discontinued operations. This liability was settled in the first quarter of 2013 resulting in a gain from discontinued operations of $241. We expect to realize net savings of approximately $500 on an annualized basis beginning in the second quarter of 2013 due to this election.

Despite these dispositions, 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 the second quarter of 2013, we received a termination notice from the New York State Energy Research and Development Authority ("NYSERDA") regarding our collaborative agreement to develop and demonstrate a large hybrid grid-connected energy storage system. Pursuant to the terms of the agreement, NYSERDA will reimburse us for certain construction and project research and development costs incurred through the date of termination. We plan to continue this project internally with smaller form batteries which provide greater opportunity and applicability in the markets we serve. However, due to the termination letter and the change in scope of the project, we performed a review of the details of costs capitalized in connection with this project to determine their future use. Those costs without an identifiable future use were written off in the second quarter of 2013 and totaled $56. The remaining capitalized costs were subjected to an impairment test based upon forecasted future cash flows, in accordance with current accounting guidance. No impairment was taken on the remaining capitalized costs.


Overview

Consolidated revenues of $17,279 for the three month period ended June 30, 2013, decreased by $1,427, or 7.6%, from $18,706 during the three month period ended July 1, 2012, primarily due to lower sales of rechargeable batteries in the Battery & Energy Products segment reflecting the timing of orders from non-US defense and commercial customers, as well as lower sales of Communications Systems products caused by timing delays in the final sign-off and issuance of contracts for large projects now expected to close in the third quarter of 2013.

Gross profit for the three month period ended June 30, 2013 was $4,522, or 26.2% of revenues, compared to $4,467, or 23.9% of revenues for the three month period ended July 1, 2012. The improvement in gross margin as a percentage of revenue is due primarily to strong product mix and continued productivity improvements in the Communications Systems segment, as well as, the impact in the second quarter of 2012 of a warranty reserve related to the request by a strategically important customer to rework and upgrade certain products.

Operating expenses decreased to $6,396 during the three month period ended June 30, 2013, compared to $7,399 during the three month period ended July 1, 2012, resulting primarily from continued actions to reduce general and administrative expenses and more focused spending in the development of new products.

Despite lower sales, higher gross margin and lower operating expenses resulted in a $1,058 year-over-year improvement to an operating loss of $1,874 for the three month period ended June 30, 2013, compared to an operating loss of $2,932 for the three month period ended July 1, 2012.

Net loss from continuing operations was $1,956, or $0.11 per share, for the three month period ended June 30, 2013, compared to a net loss of $3,236, or $0.18 per share, for the three month period ended July 1, 2012. Net loss from discontinued operations was $120, or $0.01 per share, for the three month period ended June 30, 2013 versus net income of $49, or $0.00 per share, for the three month period ended July 1, 2012.

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 $(802) in the second quarter of 2013 compared to $(1,682) for the second quarter of 2012. 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.

As a result of careful working capital management and cash generated from operations, our liquidity remains solid with no debt, and cash and cash equivalents, including restricted cash, of $11,572, a $7,394 improvement over the cash position of $4,178 as of the second quarter of 2012. The increase in cash and cash equivalents from the second quarter of 2012 is primarily attributable to our financial cost reductions and cash generated from our Lean initiatives, including reductions in inventory.

Outlook

For 2013, although our pending funded project pipelines remain strong, given the slower than expected contracting rate for current U.S. government and defense opportunities, we now expect an overall year-over-year revenue decline in the range of 10% to 12%. Driven by the potential for continued softness in government spending and contracting delays for funded projects, we expect Battery & Energy Products' revenues to decline in the range of 15% to 20% and Communication Systems' revenues to be in the flat to low-single digit growth range for the full year. However, with additional second half discretionary spending reductions and ongoing productivity improvements, we still expect to be profitable for the year and to generate a low-single digit operating margin.


Results of Operations

Three month periods ended June 30, 2013 and July 1, 2012

Revenues. Consolidated revenues for the three month period ended June 30, 2013 amounted to $17,279, a decrease of $1,427, or 7.6%, from the $18,706 reported for the three month period ended July 1, 2012.

Battery & Energy Products sales decreased $867, or 5.6%, from $15,523 for the three month period ended July 1, 2012 to $14,656 for the three month period ended June 30, 2013. Revenues for Battery & Energy Products decreased primarily due to the timing of orders for rechargeable batteries from non-US defense and commercial customers. This was partially offset by a 12% increase in 9 Volt battery shipments over the prior year.

Communications Systems revenues decreased $560, or 17.6%, from $3,183 during the three month period ended July 1, 2012 to $2,623 for the three month period ended June 30, 2013, reflecting the timing of the final sign-off and issuance of several funded, high margin contracts for large projects totaling approximately $5,000. During July, we subsequently received Communications Systems orders approximating $3,000.

Cost of Products Sold. Cost of products sold totaled $12,757 for the quarter ended June 30, 2013, a decrease of $1,482, or 10.4%, from the $14,239 reported for the same three month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.1% for the three month period ended July 1, 2012 to 73.8% for the three month period ended June 30, 2013. Correspondingly, consolidated gross margin was 26.2% for the three month period ended June 30, 2013, compared with 23.9% for the three month period ended July 1, 2012, primarily reflecting strong product mix, continued productivity improvements in the Communications Systems segment, as well as, the impact in the second quarter of 2012 of a reserve related to the request by a strategically important customer to rework and upgrade certain products.

In our Battery & Energy Products segment, the cost of products sold decreased $594, from $11,760 during the three month period ended July 1, 2012 to $11,166 during the three month period ended June 30, 2013. Battery & Energy Products' gross profit for the second quarter of 2013 was $3,490, or 23.8% of revenues, a decrease of $273 from gross profit of $3,763, or 24.2% of revenues, for the second quarter of 2012. Battery & Energy Products' gross margin as a percentage of revenues decreased by 40 basis points for the three month period ended June 30, 2013, reflecting the lower fixed overhead cost absorption associated with lower sales volume.

In our Communications Systems segment, the cost of products sold decreased by $888 from $2,479 during the three month period ended July 1, 2012 to $1,591 during the three month period ended June 30, 2013. Communications Systems' gross profit for the second quarter of 2013 was $1,032, or 39.3% of revenues, an increase of $328 from gross profit of $704, or 22.1% of revenues, for the second quarter of 2012. The increase in gross margin as a percentage of revenue during the second quarter of 2013 by 1,720 basis points is due primarily to strong product mix and continued productivity improvements, as well as, the impact in the second quarter of 2012 of a warranty reserve for approximately $200 related to the request by a strategically important customer to rework and upgrade certain products.

Operating Expenses. Total operating expenses for the three month period ended June 30, 2013 totaled $6,396, a decrease of $1,003 or 13.6% from $7,399 recorded during the three month period ended July 1, 2012, resulting primarily from continued actions to reduce general and administrative expenses and more focused spending in the development of new products.


Operating expenses as a percentage of revenues were 37.0% during the three month period ended June 30, 2013 as compared to 39.6% in the three month period ended July 1, 2012. Amortization expense associated with intangible assets related to our acquisitions was $98 for the second quarter of 2013 ($43 in selling, general and administrative expenses and $55 in research and development costs), compared with $125 for the second quarter of 2012 ($60 in selling, general, and administrative expenses and $65 in research and development costs). Research and development costs were $1,669 for the three month period ended June 30, 2013, a decrease of $301, or 15.3%, from $1,970 for the three month ended July 1, 2012, as we focused our spending on the development of new products with the highest estimated return on investment. The importance of new products is reflected in the fact that almost 42% of our Battery & Energy Products sales and 32% of our Communications Systems sales during the first six months of 2013 resulted from products introduced over the last three years. Selling, general, and administrative expenses decreased $702, or 12.9%, to $4,727 during the three month period ending June 30, 2013 from $5,429 during the three month period ended July 1, 2012, reflecting continued actions to reduce discretionary general and administrative expenses to help fund additional revenue producing resources.

Other Income (Expense). Other income (expense) totaled $(29) for the three month period ended June 30, 2013 compared to $(133) for the three month period ended July 1, 2012. Interest expense, net of interest income, decreased $82, to $31 for the second quarter of 2013 from $113 for the comparable period in 2012, as a result of lower average borrowings under our revolving credit facilities along with a lower unused line fine associated with our new asset based lending facility with PNC Bank. Miscellaneous income (expense) amounted to $2 for the second quarter of 2013 compared with expense of $(20) for the second quarter of 2012, primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We recorded a tax provision of $53 for the three month period ended June 30, 2013 compared with a tax provision of $171 for the three month period ended July 1, 2012. The effective consolidated tax rate for the three month periods ended June 30, 2013 and July 1, 2012 was:

                                     Three Month Periods Ended
                                 June 30, 2013        July 1, 2012
Loss before Incomes Taxes (a)    $       (1,903 )     $      (3,065 )

Total Income Tax Provision (b)   $           53       $         171

Effective Tax Rate (b/a)                    2.8 %               5.6 %

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

We have determined that changes 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 quarter 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 was $120 for the three month period ended June 30, 2013, compared to income of $49 for the three month period ended July 1, 2012. The second quarter of 2013 loss resulted mainly from the final post-closing working capital adjustment to the RedBlack Communications business purchase price. For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Loss Attributable to Ultralife. Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $2,073 and $0.12, respectively, for the three months ended June 30, 2013, compared to a net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share of $3,167 and $0.18, respectively, for the three months ended July 1, 2012. Average common shares outstanding used to compute diluted earnings per share increased from 17,396,000 in the second quarter of 2012 to 17,459,000 in the second quarter of 2013, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Six month periods ended June 30, 2013 and July 1, 2012

Revenues. Consolidated revenues for the six month period ended June 30, 2013 amounted to $38,298, a decrease of $7,909, or 17.1%, from $46,207 for the six month period ended July 1, 2012.

Battery & Energy Products sales decreased $7,896, or 22.2%, from $35,605 during the six month period ended July 1, 2012 to $27,709 for the six month period ended June 30, 2013. Revenues for Battery & Energy Products decreased primarily due to the continued slowdown in U.S. government and defense order rate for rechargeable and non-rechargeable batteries and charger systems and lower sales of 9 Volt batteries resulting from the selloff of the remaining legacy products in the first quarter of 2012 with the introduction of the new battery design.

Communications Systems revenues decreased $13, or 0.1%, from $10,602 during the six month period ended July 1, 2012 to $10,589 during the six month period ended June 30, 2013. The year-over-year comparison reflects the fulfillment of large orders for amplifiers from international defense customers and continued demand for amplifiers from the U.S. government in 2013, offset by timing delays in the second quarter of 2013 of the final sign-off and issuance of several contracts for large, funded, high margin projects.

Cost of Products Sold. Cost of products sold totaled $27,397 for the six month period ended June 30, 2013, a decrease of $7,750, or 22.1%, from the $35,147 reported for the same six month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 76.1% for the six month period ended July 1, 2012 to 71.5% for the six month period ended June 30, 2013. Correspondingly, consolidated gross margin was 28.5% for the six month period ended June 30, 2013, compared with 23.9% for the six month period ended July 1, 2012, primarily reflecting productivity gains in both businesses, a higher mix of Communications Systems sales and certain property tax credits related to prior years.

In our Battery & Energy Products segment, the cost of products sold decreased $6,780, or 24.3%, from $27,899 during the six month period ended July 1, 2012 to $21,119 during the six month period ended June 30, 2012. Battery & Energy Products' gross profit for the first six months of 2013 was $6,590, or 23.8% of revenues, as compared to gross profit of $7,706, or 21.6% of revenues, for the first six months of 2012. Battery & Energy Products' gross margin increased by 220 basis points for the six month period ended June 30, 2013, reflecting significant improvements in the overall productivity resulting from the elimination of most labor and material manufacturing variances, and, to a lesser extent, the receipt of certain property tax refunds relating to prior years.


In our Communications Systems segment, the cost of products sold decreased $970 from $7,248 during the six month period ended July 1, 2012 to $6,278 during the six month period ended June 30, 2013. Communications Systems' gross profit for the first six months of 2013 was $4,311, or 40.7% of revenues, an increase of $957 from gross profit of $3,354, or 31.6% of revenues, for the first six months of 2012. The increase in gross margin as a percentage of revenue during 2013 by 910 basis points is the result of stronger product mix, continued productivity improvements in line with our Lean initiatives, and the impact in the second quarter of 2012 of a reserve for approximately $200 related to the request by a strategically important customer to rework and upgrade certain products.

Operating Expenses. Total operating expenses for the six month period ended June 30, 2013 totaled $12,400, a decrease of $2,881 or 18.9%, from $15,281 for the six month period ended July 1, 2012, resulting from continued actions to reduce general and administrative expenses, lower sales commissions and focused spending in the development of new products.

Overall, operating expenses as a percentage of revenues decreased to 32.4% during the first six months of 2013 from 33.1% reported in the first six months of 2012. Amortization expense associated with intangible assets related to our acquisitions was $199 for the first six months of 2013 ($88 in selling, general and administrative expenses and $111 in research and development costs), compared with $250 for the first six months of 2012 ($120 in selling, general, and administrative expenses and $130 in research and development costs). Research and development costs were $3,038 in the first six months of 2013, a decrease of $1,071 or 26.1%, from $4,109 reported in the first six months of 2012, as we focused our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $1,810, or 16.2%, to $9,362 during the six month period ended June 30, 2013 from $11,172 reported during the six month period ended July 1, 2012, primarily reflecting on-going actions to reduce discretionary general and administrative expenses.

Other Income (Expense). Other income (expense) totaled $(142) for the first six months of 2013, compared to $(184) for the first six months of 2012. Interest expense, net of interest income, decreased $97, to $119 for the first six months of 2013 from $216 for the comparable period in 2012, as a result of lower average borrowings under our revolving credit facilities. Miscellaneous income/expense amounted to expense of $23 for the first six months of 2013 compared with income of $32 for the first six months of 2012, primarily driven by transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We reflected a tax provision of $151 for the six month period ended June 30, 2013 compared with $262 for the six month period ended July 1, . . .

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