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ULBI > SEC Filings for ULBI > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for ULTRALIFE CORP

Form 10-K for ULTRALIFE CORP


14-Mar-2014

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 associated with government budget approvals, the successful commercialization of our products, future demand for our products, technological innovations in the non-rechargeable and rechargeable battery industries, general domestic and global economic conditions, significant fluctuations in our periodic results and stock price, the unique risks associated with our Chinese operations, the impairment of our intangible assets, business disruptions, including those caused by fires, our resources being overwhelmed by our growth prospects, residual effects of negative news related to our industries, loss of top management, raw material supplies, competition and customer strategies, government and environmental regulations, the process of U.S. defense procurement, finalization of non-bid government contracts, changes in our business strategy or development plans, capital deployment, and other risks and uncertainties, certain of which are beyond our control. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. 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 to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, 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 February 16, 2012, we announced our intention to divest our RedBlack Communications, Inc. ("RedBlack") business. 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 was a customary post-closing working capital adjustment to the purchase price of $125 recorded in 2013. The Agreement contains customary representations and warranties that survive the closing the closing 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, we elected not to renew the lease for its U.K. manufacturing facility which expired on March 24, 2013, and to relocate 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 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 was recorded as discontinued operations. This liability was settled in the first quarter of 2013 resulting in a gain from discontinued operations of $241. In addition, our decision to relocate is generating net savings of approximately $500 on an annualized basis.

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 $22,822 or 22.5% to $78,835 for the year-ended December 31, 2013 compared to $101,657 during the year ended December 31, 2012. This decrease was caused by declining revenues in both our Battery & Energy Products and Communications Systems segments in 2013 when compared to 2012, primarily due to lower government and defense sales resulting from budget and sequestration uncertainties. Gross margin increased to 28.7% for the year ended December 31, 2013, as opposed to 28.3% for the year ended December 31, 2012, due primarily to productivity improvements resulting from our Lean initiatives, increased pricing for some of our products and product mix.

Operating expenses decreased by $5,599 or 19.4% to $23,245 during the year ended December 31, 2013, compared to $28,844 during the year ended December 31, 2012, reflecting the rightsizing of our businesses in line with our revenues. The decreased spending primarily resulted from more focused spending in our research and development activities and our continued efforts to reduce discretionary general and administrative expenses. Operating expenses as a percentage of revenues increased from 28.4% in 2012 to 29.5% in 2013 due to the impact of lower revenues in the current year.

Net loss from continuing operations was $1,088, or $0.06 per share, for the year ended December 31, 2013, compared to a net loss from continuing operations of $1,128, or $0.06 per share, for the year ended December 31, 2012. Net income from discontinued operations, net of tax, was $128, or $0.01 per share, for the year ended December 31, 2013, compared to a net loss, net of tax of $501, or $0.03 per share, for the year ended December 31, 2012.


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 continuing operations, amounted to $3,874 for the year ended December 31, 2013 compared to $5,054 for the prior period. See the section "Adjusted EBITDA" beginning on page 29 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 total cash of $16,489, a $6,411 improvement over the cash position of $10,078 as of December 31, 2012. We had no debt as of December 31, 2013. Our inventory levels decreased by $4,317, or 14.2%, to $26,053 at the end of 2013 from $30,370 at the end of 2012 due primarily to more focused inventory management and planning.

Outlook

For 2014, management expects mid-single digit organic revenue growth, despite anticipated continued constraints on global government spending. Based on this outlook for revenue growth and the improvements made to the business model in 2013, management expects to increase operating profit for the year and 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

Year Ended December 31, 2013 Compared With the Year Ended December 31, 2012

                                                                    Year Ended                 Increase /
                                                             12/31/2013       12/31/2012       (Decrease)

Revenues                                                   $     78,835     $    101,657     $    (22,822 )
Cost of products sold                                            56,214           72,927          (16,713 )
Gross margin                                                     22,621           28,730           (6,109 )
Operating expenses                                               23,245           28,844           (5,599 )
Operating income (loss)                                            (624 )           (114 )           (510 )
Other expense, net                                                 (225 )           (460 )            235
Income (loss) from continuing operations before taxes              (849 )           (574 )           (275 )
Income tax provision                                                239              554             (315 )
Net income (loss) from continuing operations                     (1,088 )         (1,128 )             40
Loss from discontinued operations, net of tax                       128             (501 )            629
Net loss                                                           (960 )         (1,629 )            669
Net loss attributable to noncontrolling interest                     34               31                3
Net loss attributable to Ultralife                         $       (926 )   $     (1,598 )            672
Net income (loss) attributable to Ultralife common
shares - basic
  Continuing operations                                    $      (0.06 )   $      (0.06 )   $       0.00
  Discontinued operations                                  $       0.01     $      (0.03 )   $       0.04
Net income (loss) attributable to Ultralife common
shares - diluted
  Continuing operations                                    $      (0.06 )   $      (0.06 )   $       0.00
  Discontinued operations                                  $       0.01     $      (0.03 )   $       0.04

Weighted average shares outstanding-basic                    17,465,000       17,403,000           62,000
Weighted average shares outstanding-diluted                  17,465,000       17,403,000           62,000

Revenues. Total revenues for the year ended December 31, 2013 amounted to $78,835, a decrease of $22,822, or 22.5% from the $101,657 reported for the year ended December 31, 2012.

Battery & Energy Products revenues decreased $14,007, or 19.7%, to $57,077 for the year ended December 31, 2013 from the $71,084 reported for the year ended December 31, 2012 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 our new battery design, as well as large orders for our M-1 primary battery products during 2012.


Communications Systems revenues decreased $8,815, or 28.8%, from $30,573 for the year ended December 31, 2012 to $21,758 for the year ended December 31, 2013. The year-over-year decline 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 and the shipment of orders under a soldier modernization program of an international allied military in the fourth quarter of 2012.

Cost of Products Sold. Cost of products sold decreased $16,713 or 22.9%, from $72,927 for the year ended December 31, 2012 to $56,214 for the year ended December 31, 2013. Consolidated cost of products sold as a percentage of total revenue decreased slightly from 71.7% for the year ended December 31, 2012 to 71.3% for the year ended December 31, 2013. Correspondingly, consolidated gross margin was 28.7% for the year ended December 31, 2013, compared with a gross margin of 28.3% for the year ended December 31, 2012. The increase in margin is primarily attributable to productivity gains in both businesses resulting from our Lean initiatives and favorable product mix.

In our Battery & Energy Products segment, the cost of products sold decreased $10,783, from $53,522 for the year ended December 31, 2012 to $42,739 for the year ended December 31, 2013. Battery & Energy Products gross margin for 2013 was $14,338 or 25.1%, a decrease of $3,224 from 2012's gross margin of $17,562, or 24.7%. Battery & Energy Products' gross margin increased by 40 basis points for the twelve-month period ended December 31, 2013, primarily as a result of productivity gains from reductions in labor and overhead spending and, to a lesser extent, receipts of property tax credits relating to prior years.

In our Communications Systems segment, the cost of products sold decreased $5,930 from $19,405 for the year ended December 31, 2012 to $13,475 for the year ended December 31, 2013. Communications Systems gross margin for 2013 was $8,283, or 38.1%, a decrease of $2,885 from 2012's gross margin of $11,168, or 36.5%. The 160 basis point increase in gross margin year-over-year is due to more favorable product mix, productivity improvements, and the non-recurrence of a reserve in 2012 of approximately $200 related to a request by a strategically important customer for certain product upgrades.

Operating Expenses. Operating expenses decreased by $5,599, or 19.4%, from $28,844 for the year ended December 31, 2012 to $23,245 for the current period, reflecting more focused spending in our research and development activities, actions to reduce discretionary general and administrative expenses, and reduced sales commissions. Overall, operating expenses as a percentage of revenues increased to 29.5% in 2013 from 28.4% reported for the prior year, due to the impact of lower revenues in 2013. 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 $402 for 2013 ($179 in selling, general, and administrative expenses and $223 in research and development costs). Research and development costs were $5,859 in 2013, a decrease of $1,357 or 18.8%, over the $7,216 reported in 2012. Selling, general, and administrative expenses decreased $4,242, or 19.6%, to $17,386 for the year ended December 31, 2013 from $21,628 for the year ended December 31, 2012, reflecting on-going actions to reduce discretionary general and administrative expenses and a reduction in sales commissions from the prior year period.

Other Income (Expense). Other income (expense) totaled ($225) for the year ended December 31, 2013, compared to ($460) for the year ended December 31, 2012. Interest expense, net of interest income, decreased $237, from $436 during 2012 to $199 during 2013, as a result of no draws under our revolving credit facilities during the course of 2013 and a reduction in the unused line fee associated with our new Credit Facility with PNC, as herein defined. Miscellaneous expense amounted to $26 for 2013, mainly unchanged from the $24 in 2012, and was primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We recorded a tax provision of $239 for the year ended December 31, 2013 compared with a tax provision of $554 for the same period of 2012. 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 the amortization of goodwill and certain intangible assets for tax purposes that cannot be predicted to reverse for book purposes during our loss carryforward periods. The decrease year over year is also partially attributable to a reduction in our effective tax rate in China. The effective consolidated tax rate for the years ended December 31, 2013 and 2012 was:


                                             Years Ended December 31,
                                              2013              2012
Income (Loss) before Incomes Taxes (a)     $      (849 )     $      (574 )

Total Income Tax Provision (Benefit) (b)   $       239       $       554

Effective Tax Rate (b/a)                          28.2 %            96.5 %

In 2013 and 2012, 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 2013. 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.)

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 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, totaled $128 for the year ended December 31, 2013, compared to a loss of $501 in the same period of 2012. The 2013 income is primarily due to lower than anticipated restoration costs related to our decision to not renew the U.K. facility lease in the beginning of 2013, offset slightly by working capital adjustments related to the sale of the RedBlack operations. Discontinued operations for 2012 included the discontinued operations of our U.K. and RedBlack entities. For more information, see Note 2 to the Consolidated Financial Statements.

Net Loss Attributable to Ultralife. Net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per share were $926 and $0.05, respectively, for the year ended December 31, 2013, compared to net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per share of $1,598 and $0.09, respectively, for the year ended December 31, 2012, primarily as a result of the reasons described above. Average common shares outstanding used to compute earnings per share increased from 17,403,000 in 2012 to 17,465,000 in 2013, 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 results, while isolating the effects of depreciation and amortization, which may vary from period to period without any correlation to underlying operating performance, and of non-cash stock-based compensation, which is a non-cash expense that varies widely among companies. We believe that by limiting Adjusted EBITDA to continuing operations, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA from continuing operations so that securities analysts, investors and other interested parties have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA from continuing operations are a valuable indicator of our operating performance on a consolidated basis and of our ability to produce operating cash flows to fund working capital needs, to service debt obligations and to fund capital expenditures.

The term Adjusted EBITDA from continuing operations is not defined under U.S. GAAP, and is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. Our Adjusted EBITDA from continuing operations has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA from continuing operations should not be considered in isolation or as a substitute for net income (loss) attributable to Ultralife or other consolidated statement of operations data prepared in accordance with U.S. GAAP. Some of these limitations include, but are not limited to, the following:

a. Adjusted EBITDA from continuing operations does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) all of the costs associated with operating our business;

b. although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and . . .

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