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ULBI > SEC Filings for ULBI > Form 10-Q on 8-Nov-2013All Recent SEC Filings

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Form 10-Q for ULTRALIFE CORP


8-Nov-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 and industry products, 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: radio frequency ("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 criteria 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.

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 $20,361 for the three month period ended September 29, 2013, decreased by $5,820, or 22.2%, from $26,181 during the three month period ended September 30, 2012. This decrease is primarily attributable to the continued slowdown in the US government and defense order rate for rechargeable and non-rechargeable batteries and charger systems, as well as the effect of two large orders for our M-1 primary battery products and SATCOM systems units shipped in the third quarter of 2012.

Gross profit for the three month period ended September 29, 2013 was $6,127, or 30.1% of revenues, compared to $8,219, or 31.4% of revenues for the three month period ended September 30, 2012. The decrease in gross margin as a percentage of revenue is primarily due to lower overhead absorption as a consequence of strict inventory controls in the Battery & Energy Products business segment, partially offset by favorable product mix in the Communications Systems business segment.

Operating expenses decreased to $5,475 or 15.3% during the three month period ended September 29, 2013, from $6,465 during the three month period ended September 30, 2012, resulting primarily from continued actions to reduce general and administrative expenses and more focused spending in the development of new products.

Operating profit was $652 for the three month period ended September 29, 2013, compared to $1,754 for the three month period ended September 30, 2012 reflecting lower gross profit resulting from the impact of the SATCOM system units' shipment in the prior period, partially offset by reductions in operating expenses year over year.

Net income from continuing operations was $607, or $0.04 per share, for the three month period ended September 29, 2013, compared to net income of $1,468, or $0.09 per share, for the three month period ended September 30, 2012. Net income from discontinued operations was $15, or $0.00 per share, for the three month period ended September 29, 2013 versus net income of $200, or $0.01 per share, for the three month period ended September 30, 2012. The income in the third quarter of 2012 reflects the operating results, sale, and related divestiture costs and tax benefits for RedBlack.

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 $1,798 in the third quarter of 2013 compared to $3,003 for the third 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 $10,785, a $5,414 improvement over the cash position of $5,371 as of the third quarter of 2012 and a $707 improvement over the cash position of $10,078 as of year-end. The increase in cash and cash equivalents is primarily attributable to our operating cost reductions and cash generated from our Lean initiatives, including reductions in inventory.

Outlook

For 2013, although the Company's pending project pipelines are growing, the continuing U.S. Government budget challenges have muddled our predictability of converting Communication Systems' sales opportunities in the timeframe originally forecasted. Primarily for this reason, management now expects that an overall year-over-year revenue decline could be approximately 20%, with Communications Systems revenues down in a comparable range for the year versus our prior expectations. Given the potential for reduced revenue, management now expects to report operating results in the range of breakeven to a modest operating loss for the year.


Results of Operations

Three month periods ended September 29, 2013 and September 30, 2012

Revenues. Consolidated revenues for the three month period ended September 29, 2013 amounted to $20,361, a decrease of $5,850, or 22.2%, from the $26,181 reported for the three month period ended September 30, 2012.

Battery & Energy Products revenues decreased $3,126, or 18.8%, from $16,633 for the three month period ended September 30, 2012 to $13,507 for the three month period ended September 29, 2013. This decrease is primarily attributable to a large order for our M-1 primary battery products shipped in the third quarter of 2012 to service an allied country's department of defense. The decrease also reflects the continued slowdown in the US government and defense order rate for rechargeable and non-rechargeable batteries and charger systems.

Communications Systems revenues decreased $2,694, or 28.2%, from $9,548 during the three month period ended September 30, 2012 to $6,854 for the three month period ended September 29, 2013. The decrease is attributable to shipments of SATCOM units in the amount of approximately $3,400 to a large prime contractor which services the US Department of Defense during the third quarter of 2012.

Cost of Products Sold. Cost of products sold totaled $14,234 for the quarter ended September 29, 2013, a decrease of $3,728, or 20.8%, from the $17,962 reported for the same three month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 68.6% for the three month period ended September 30, 2012 to 69.9% for the three month period ended September 29, 2013. Correspondingly, consolidated gross margin was 30.1% for the three month period ended September 29, 2013, compared with 31.4% for the three month period ended September 30, 2012, primarily reflecting lower overhead absorption, partially offset by favorable product mix.

In our Battery & Energy Products segment, the cost of products sold decreased $1,957, from $11,863 during the three month period ended September 30, 2012 to $9,906 during the three month period ended September 29, 2013. Battery & Energy Products' gross profit for the third quarter of 2013 was $3,601, or 26.7% of revenues, a decrease of $1,169 from gross profit of $4,770, or 28.7% of revenues, for the third quarter of 2012. Battery & Energy Products' gross margin as a percentage of revenues decreased by 200 basis points for the three month period ended September 29, 2013, primarily reflecting lower overhead absorption in our Newark facility driven by better balancing of production and inventory levels with demand, which resulted in consolidated inventory reductions of over $3,100 from the second quarter of 2013.

In our Communications Systems segment, the cost of products sold decreased by $1,771 from $6,099 during the three month period ended September 30, 2012 to $4,328 during the three month period ended September 29, 2013. Communications Systems' gross profit for the third quarter of 2013 was $2,526, or 36.9% of revenues, a decrease of $923 from gross profit of $3,449, or 36.1% of revenues, for the third quarter of 2012. The increase in gross margin as a percentage of revenue during the third quarter of 2013 is primarily due to strong product mix and continued productivity improvements.


Operating Expenses. Total operating expenses for the three month period ended September 29, 2013 totaled $5,475, a decrease of $990 or 15.3% from $6,465 recorded during the three month period ended September 30, 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 26.9% during the three month period ended September 29, 2013 as compared to 24.7% in the three month period ended September 30, 2012. Amortization expense associated with intangible assets related to our acquisitions was $102 for the third quarter of 2013 ($46 in selling, general and administrative expenses and $56 in research and development costs), compared with $122 for the third quarter of 2012 ($57 in selling, general, and administrative expenses and $65 in research and development costs). Research and development costs were $1,418 for the three month period ended September 29, 2013, a decrease of $178, or 11.2%, from $1,596 for the three month ended September 30, 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 $812, or 16.7%, to $4,057 during the three month period ending September 29, 2013 from $4,869 during the three month period ended September 30, 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 $(61) for the three month period ended September 29, 2013 compared to $(111) for the three month period ended September 30, 2012. Interest expense, net of interest income, decreased $43, to $53 for the third quarter of 2013 from $96 for the comparable period in 2012, as a result of a lower unused line rate associated with our new asset based lending facility with PNC Bank. Miscellaneous expense amounted to $8 for the third quarter of 2013 compared with expense of $15 for the third 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 benefit of $16 for the three month period ended September 29, 2013 compared with a tax provision of $175 for the three month period ended September 30, 2012. The tax benefit in the third quarter of 2013 was primarily due to the timing of tax expense for our China operations related to a change in the statutory tax rate and the timing of temporary differences related to deferred tax liabilities generated from goodwill and certain intangible assets in our US operations. The effective consolidated tax rates for the three month periods ended September 29, 2013 and September 30, 2012 were:

                                                  Three Month Periods Ended
                                            September 29,           September 30,
                                                2013                    2012
Income before Incomes Taxes (a)            $           591         $         1,643

Total Income Tax Provision (Benefit) (b)   $           (16 )       $           175

Effective Tax Rate (b/a)                               2.7 %                  10.7 %

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

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 third quarter of 2013 and 2012. 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 from discontinued operations, net of tax was $15 for the three month period ended September 29, 2013, compared to income of $200 for the three month period ended September 30, 2012. The income in the three month period ended September 30, 2012 reflects the operating results, sale, and related divestiture costs and tax benefits for the RedBlack Communication business. For more information, see Note 2 to the Condensed Consolidated Financial Statements.

Net Income Attributable to Ultralife. Net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share was $644 and $0.04, respectively, for the three months ended September 29, 2013, compared to a net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share of $1,679 and $0.10, respectively, for the three months ended September 30, 2012. Average common shares outstanding used to compute diluted earnings per share increased from 17,418,000 in the third quarter of 2012 to 17,532,000 in the third quarter of 2013, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

Nine month periods ended September 29, 2013 and September 30, 2012

Revenues. Consolidated revenues for the nine month period ended September 29, 2013 amounted to $58,659, a decrease of $13,729, or 19.0%, from $72,388 for the nine month period ended September 30, 2012.

Battery & Energy Products sales decreased $11,022, or 21.1%, from $52,238 during the nine month period ended September 30, 2012 to $41,216 for the nine month period ended September 29, 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, 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, as well as a large order for our M-1 primary battery products that took place in the third quarter of 2012.

Communications Systems revenues decreased $2,707, or 13.4%, from $20,150 during the nine month period ended September 30, 2012 to $17,443 during the nine month period ended September 29, 2013. The year-over-year comparison reflects timing delays due to the government furloughs and shutdown, which has heightened the uncertainty of converting Communication Systems' sales opportunities as planned, as well as shipments of SATCOM units in the amount of approximately $3,400 to a large prime contractor which services the US Department of Defense during the third quarter of 2012.

Cost of Products Sold. Cost of products sold totaled $41,631 for the nine month period ended September 29, 2013, a decrease of $11,478, or 21.6%, from the $53,109 reported for the same nine month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 73.4% for the nine month period ended September 30, 2012 to 71.0% for the nine month period ended September 29, 2013. Correspondingly, consolidated gross margin was 29.0% for the nine month period ended September 29, 2013, compared with 26.6% for the nine month period ended September 30, 2012, primarily reflecting productivity gains in both businesses, favorable product mix and certain property tax credits related to prior years.

In our Battery & Energy Products segment, the cost of products sold decreased $8,737, or 22.0%, from $39,762 during the nine month period ended September 30, 2012 to $31,025 during the nine month period ended September 29, 2013. Battery & Energy Products' gross profit for the first nine months of 2013 was $10,191, or 24.7% of revenues, as compared to gross profit of $12,476, or 23.9% of revenues, for the first nine months of 2012. Battery & Energy Products' gross margin increased by 80 basis points for the nine month period ended September 29, 2013, reflecting significant improvements in the overall productivity resulting from the reductions in labor and overhead spending, 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 $2,741, or 20.5%, from $13,347 during the nine month period ended September 30, 2012 to $10,606 during the nine month period ended September 29, 2013. Communications Systems' gross profit for the first nine months of 2013 was $6,837, or 39.2% of revenues, an increase of $34 from gross profit of $6,803, or 33.8% of revenues, for the first nine months of 2012. The 540 basis points increase in gross margin as a percentage of revenue during 2013 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 upgrade certain products.

Operating Expenses. Total operating expenses for the nine month period ended September 29, 2013 totaled $17,875, a decrease of $3,872 or 17.8%, from $21,747 for the nine month period ended September 30, 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 increased slightly to 30.5% during the first nine months of 2013 from 30.0% reported in the first nine months of 2012. Amortization expense associated with intangible assets related to our acquisitions was $301 for the first nine months of 2013 ($134 in selling, general and administrative expenses and $167 in research and development costs), compared with $372 for the first nine months of 2012 ($177 in selling, general, and administrative expenses and $195 in research and development costs). Research and development costs were $4,456 in the first nine months of 2013, a decrease of $1,250 or 21.9%, from $5,706 reported in the first nine 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 $2,622, or 16.3%, to $13,419 during the nine month period ended September 29, 2013 from $16,041 reported during the nine month period ended September 30, 2012, primarily reflecting on-going actions to reduce discretionary general and administrative expenses and lower sales commissions.

Other Income (Expense). Other income (expense) totaled $(203) for the first nine months of 2013, compared to $(295) for the first nine months of 2012. Interest expense, net of interest income, decreased $140, to $172 for the first nine months of 2013 from $312 for the comparable period in 2012, as a result of a lower unused line rate associated with our new asset based lending facility with PNC Bank. Miscellaneous income/expense amounted to expense of $31 for the first nine months of 2013 compared with income of $17 for the first nine 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 $135 for the nine month period ended September 29, 2013 compared with a tax provision of $437 for the nine month period ended September 30, 2012. The expense is primarily due to (a) the recognition of deferred tax liabilities generated from goodwill and certain . . .

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