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ULBI > SEC Filings for ULBI > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ULTRALIFE CORP

Form 10-Q for ULTRALIFE CORP


9-May-2014

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 a certain key customer; possible reduced or further delayed U.S. and foreign defense spending, including the uncertainty of government budget approvals; possible delays or lack of success in our efforts to develop new commercial applications for our products; possible declines in demand for products using our batteries or communications systems; general domestic and global economic conditions; variability in our quarterly and annual results and price of our common stock; the unique risks associated with our Chinese operations; the possibility of impairment of our intangible assets; potential breaches in security and other disruptions; the possibility that our resources could be overwhelmed by our growth prospects; residual effects of negative news related to our industries; potential significant costs from our warranties; loss of top management; possible disruptions in our supply of raw materials and components; failure of customers to meet the volume expectations in our supply agreements; our inability to adequately protect our proprietary and intellectual property; the possibility that our ability to use our NOL carryforwards in the future may be limited; possible adverse effects from violations of the U.S. Foreign Corrupt Practices Act and other anti-corruption laws; variability of foreign currencies; the process of U.S. defense procurement; possible effects of audits of our contracts by the U.S. and foreign governments; our compliance with the regulations for the shipment of our products; business disruptions and other safety risks including those caused by fires; government and environmental regulations; 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, 2013.

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Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk 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 or our Annual Report on Form 10-K for the year ended December 31, 2013 to reflect new information or risks, 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, 2013.

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 and broaden the scope of our products and services, 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)

Overview

Consolidated revenues of $15,285 for the three-month period ended March 30, 2014, decreased by $5,734 or 27.3%, from $21,019 during the three-month period ended March 31, 2013, primarily due to continued slowness in closing new orders for Communications Systems from the U.S. Government, which offset a 7% revenue increase for the Battery & Energy Products business.

Gross profit for the three-month period ended March 30, 2014 was $4,335, or 28.4% of revenues, compared to $6,379, or 30.3% of revenues, for the same quarter a year ago. The 190 basis points decline is due primarily to the decreased overall revenue contribution of the higher margin Communications Systems sales, which declined from 38% in the first quarter of 2013 to 9% in the 2014 period. The impact of the sales mix offset a year-over-year 360 basis point improvement for the Battery & Energy Products gross margin which grew to 27.3% for the 2014 period reflecting ongoing productivity improvements and higher production volumes.

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Operating expenses decreased to $5,431 during the three-month period ended March 30, 2014, compared to $6,004 during the three-month period ended March 31, 2013, resulting primarily from continued actions to reduce general and administrative expenses, focused spending in the development of new products and lower overall sales commissions and selling expense.

The lower revenue and resulting impact on gross profit partially offset by lower operating expenses resulted in an operating loss of $1,096 for the three-month period ended March 30, 2014, compared to an operating profit of $375 for the three-month period ended March 31, 2013.

Net loss from continuing operations was $(1,219), or $(0.07) per share, for the three-month period ended March 30, 2014, compared to a net income of $164 or $0.01 per share, for the three-month period ended March 31, 2013. Net loss from discontinued operations was $(61), or $0.00 per share, for the three-month period ended March 30, 2014 versus a net income of $264, or $0.02 per share, for the three-month period ended March 31, 2013.

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 $(45) in the first quarter of 2014 compared to $1,477 for the first quarter of 2013. See the section "Adjusted EBITDA from continuing operations" beginning on page 20 for a reconciliation of Adjusted EBITDA from continuing operations to net (loss) income 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 of $18,899, a $9,991 (or 89%) improvement over the cash position of $8,908 as of the first quarter of 2013. The increase in cash and cash equivalents from the first quarter of 2013 is primarily attributable to our financial performance and cash generated from our Lean initiatives, including reductions in inventory and more timely accounts receivable collections. Cash and cash equivalents as of March 30, 2014 increased by $2,410 from $16,489 as of December 31, 2013. The increase in cash and cash equivalents from December 31, 2013 is primarily attributable to more timely collections of accounts receivable.

Outlook

For 2014, management still expects mid-single digit organic revenue growth, despite 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 year-over-year and generate a mid-single digit operating margin.

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

Results of Operations

Three-month periods ended March 30, 2014 and March 31, 2013

Revenues. Consolidated revenues for the three-month period ended March 30, 2014 amounted to $15,285, a decrease of $5,734, or 27.3%, from the $21,019 reported for the three-month period ended March 30, 2013.

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Battery & Energy Products revenues increased $869, or 6.7%, from $13,053 for the three-month period ended March 30, 2013 to $13,922 for the three-month period ended March 30, 2014. The increase was attributable to higher shipments to commercial customers which increased by 28.8% over the 2013 period and now comprise 60% of total Battery & Energy Products revenues versus 50% for the first quarter of 2013. Conversely, shipments to government and defense customers declined by 15% from 2013 primarily due to the continued slowdown in U.S. government and defense order rate for rechargeable and non-rechargeable batteries.

Communications Systems revenues decreased $6,603, or 82.9%, from $7,966 during the three-month period ended March 31, 2013 to $1,363 for the three-month period ended March 30, 2014, reflecting ongoing slowness in closing orders with the U.S. government. The 2013 first quarter also reflected larger shipments of amplifiers to an allied country in conjunction with a soldier modernization program.

Cost of Products Sold. Cost of products sold totaled $10,950 for the quarter ended March 30, 2014, a decrease of $3,690, or 25.2%, from the $14,640 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 69.7% for the three-month period ended March 31, 2013 to 71.6% for the three-month period ended March 30, 2014. Correspondingly, consolidated gross margin was 28.4% for the three-month period ended March 30, 2014, compared with 30.3% for the three-month period ended March 31, 2013, reflecting a lower mix of the Communications Systems revenues.

In our Battery & Energy Products segment, the cost of products sold increased $168, from $9,953 during the three-month period ended March 31, 2013 to $10,121 during the three-month period ended March 30, 2014. Battery & Energy Products' gross profit for the first quarter of 2014 was $3,801, or 27.3% of revenues, an increase of $701 from gross profit of $3,100, or 23.7% of revenues, for the first quarter of 2013. Battery & Energy Products' gross margin as a percentage of revenues increased for the three-month period ended March 30, 2014 by 360 basis points, reflecting ongoing productivity improvements and higher production volumes.

In our Communications Systems segment, the cost of products sold decreased by $3,858 or 82.3% from $4,687 during the three-month period ended March 31, 2013 to $829 during the three-month period ended March 30, 2014. Communications Systems' gross profit for the first quarter of 2014 was $534, or 39.2% of revenues, a decrease of $2,745 from gross profit of $3,279, or 41.2% of revenues, for the first quarter of 2013. The 200 basis points decrease in gross margin as a percentage of revenue during 2014 is primarily due to the lower shipments for that period and the resulting impact of lower production volumes on factory overhead absorption.

Operating Expenses. Total operating expenses for the three-month period ended March 30, 2014 totaled $5,431, a decrease of $573 or 9.5% from the $6,004 recorded during the three-month period ended March 31, 2013, resulting primarily from continued tight control over general and administrative expenses.

Overall, operating expenses as a percentage of revenues were 35.5% for the quarter ended March 30, 2014 compared to 28.6% for the quarter ended March 31, 2013. Amortization expense associated with intangible assets related to our acquisitions was $76 for the first quarter of 2014 ($32 in selling, general and administrative expenses and $44 in research and development costs), compared with $101 for the first quarter of 2013 ($45 in selling, general, and administrative expenses and $56 in research and development costs). Research and development costs were $1,436 for the three-month period ended March 30, 2014, an increase of $67, or 4.9%, from $1,369 for the three-months ended March 31, 2013, as we continued to focus our spending on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $640, or 13.8%, to $3,995 during the first quarter of 2014 from $4,635 during the first quarter of 2013, reflecting continued actions to reduce discretionary general and administrative expenses and lower sales commissions earned.

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Other Income (Expense). Other (expense) totaled $(63) for the three-month period ended March 31, 2014 compared to $(113) for the three-month period ended March 31, 2013. Interest and financing expense, net of interest income, decreased $41, to $47 for the first quarter of 2014 from $88 for the comparable period in 2013, as a result of the more favorable unused line fee under our new Credit Agreement with PNC Bank. Miscellaneous income (expense) amounted to $(16) for the first quarter of 2014 compared with ($25) for the first quarter of 2013, primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

Income Taxes. We reflected a tax provision of $60 for the first quarter of 2014 compared with a tax provision of $98 for the first quarter of 2013. The effective consolidated tax rate for the three-month periods ended March 30, 2014 and March 31, 2013 was:

                                                     Three month periods ended
                                                     March 30,         March 31,
                                                        2014              2013
(Loss) income from continuing operations before
  income taxes (a)                                $      (1,159 )     $      262

Income tax provision (b)                                     60               98

Effective income tax rate (b/a)                            -5.2 %           37.4 %

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. 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 and its subsequent change to a sales center in 2012.

Discontinued Operations. Loss from discontinued operations, net of tax, totaled $(61) for the first quarter of 2014, compared to income from discontinued operations, net of tax, of $264 for the first quarter of 2013. The income realized in the first quarter of 2013 was primarily related to the final settlement of the obligation to return the Company's former UK facility back to its original condition per a previous contractual commitment.

Net Income (Loss) Attributable to Ultralife. Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $(1,286) and $(0.07), respectively, for the three months ended March 30, 2014, compared to a net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share of $434 and $0.02, respectively, for the three months ended March 31, 2013. Average common shares outstanding used to compute diluted earnings per share increased from 17,478,000 in the first quarter of 2013 to 17,513,000 in the first quarter of 2014, mainly due to stock option exercises and shares of common stock issued to our non-employee directors.

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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:

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;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and Adjusted EBITDA from continuing operations does not reflect any cash requirements for such replacements;

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while stock-based compensation is a component of cost of products sold and operating expenses, the impact on our consolidated financial statements compared to other companies can vary significantly due to such factors as assumed life of the stock-based awards and assumed volatility of our common stock;

although discontinued operations does not reflect our current business operations, discontinued operations includes the costs we incurred by exiting our Energy Services and certain of our UK businesses and divesting our RedBlack Communications business; and

other companies may calculate Adjusted EBITDA from continuing operations differently than we do, limiting its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA from continuing operations only supplementally. Adjusted EBITDA from continuing operations is calculated as follows for the periods presented:

                                                    Three month periods ended
                                               March 30, 2014      March 31, 2013
Net income (loss) attributable to Ultralife   $      (1,286 )     $           434
Add (subtract):
  Interest and financing expense, net                    47                    88
  Income tax provision                                   60                    98
  Depreciation expense                                  711                   830
  Amortization expense                                   93                   101
  Stock-based compensation expense                      269                   190
  Loss (gain) from discontinued operations               61                  (264 )
Adjusted EBITDA                               $         (45 )     $         1,477

Liquidity and Capital Resources

As of March 30, 2014, cash and cash equivalents totaled $18,899, an increase of $2,410 from the beginning of the year. During the three-month period ended March 30, 2014, we generated $2,704 of cash from our operating activities as compared to using $701 of cash for the three-month period ended March 31, 2013. Cash generated from operations in 2014 was positive despite our net loss of $1,286, as the loss was largely offset by non-cash expenses (depreciation, amortization and stock-based compensation) totaling $1,073. Cash generated from operations in 2014 resulted primarily from a $4,183 decrease in accounts receivable, offset partially by our loss of $1,286, a decrease in accounts payable and other liabilities of $862 and an increase in inventories which totaled $627. The use of cash from operating activities in 2013 resulted mainly from our net income of $434 combined with decreases in our accounts receivable and inventory, more than offset by the decrease in our accounts payable from the end of the year, including our payout in connection with our U.K. facility lease, and the increase in long term receivables.

We used $312 in cash for investing activities during the first three months of 2014 compared with $332 in cash used for investing activities in the same period in 2013. In both periods, this spending was entirely for the purchase of property, equipment and improvements.

Inventory turnover for the first three months of 2014 was an annualized rate of approximately 1.8 turns per year as compared with 2.0 turns for the first three months of 2013. The decrease in this metric is due mainly to lower sales period over period and the prebuild of inventory to meet expected government orders which were delayed into the second quarter of 2014.

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As of March 30, 2014, we had made commitments to purchase approximately $381 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.

On April 28, 2014, the Company's Board of Directors approved a share repurchase program (the "Share Repurchase Program") which became effective on May 1, 2014, under which the Company plans to repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. Share repurchases, if any, will be made in accordance with SEC Rule 10b-18 using a variety of methods, which may include open market purchases, privately negotiated transactions and block trades, or any combination of such methods, in accordance with applicable insider trading and other securities laws and regulations. The timing, manner, price and amount of any repurchase will be determined in the Company's discretion and the Share Repurchase Program may be suspended, terminated or modified at any time and for any reason. The Share Repurchase Program does not obligate the Company to repurchase any specific number of shares.

Debt Commitments

We have financing through our Credit Facility with PNC Bank, which provides a $20 million secured asset-based revolving credit facility that includes a $1 million letter of credit sub-facility. As of March 30, 2014, we had approximately $11,473 of borrowing capacity under our $20 million Credit Facility with PNC Bank, in addition to our cash on hand of $18,899, and we had no outstanding borrowings or outstanding letters of credit under the Credit Facility at either March 30, 2014 or March 31, 2013.

Our available borrowing limit under the Credit Facility is based on a borrowing base formula equal to a percentage of accounts receivable, inventory and eligible foreign in-transit inventory. Interest is payable quarterly and accrues on outstanding indebtedness under the Credit Agreement at either a LIBOR-based rate or an alternate base rate, as defined in the Credit Agreement. We pay a quarterly fee on the Credit Facility's unused availability at 0.375% per annum.

On April 30, 2014, the Company and PNC entered into an amendment (the "Amendment") to the Revolving Credit, Guaranty and Security Agreement between the Company and PNC (the "Credit Agreement") dated as of May 24, 2013. The Amendment permits the Company to commence the Share Repurchase Program described above, provided that (a) the Company is not in default under the Credit Agreement, (b) the Company's undrawn availability under the Credit Agreement is at least $6 million both prior to and immediately following any repurchase, (c) . . .

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