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ULBI > SEC Filings for ULBI > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for ULTRALIFE CORP

Form 10-Q for ULTRALIFE CORP


6-Aug-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 $15,199 for the three-month period ended June 29, 2014, decreased by $2,080 or 12.0%, from $17,279 during the three-month period ended June 30, 2013, primarily due to the continued worldwide retrenchment of government and defense spending, which offset a 19% increase in commercial revenue for the Battery & Energy Products business.

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Gross profit for the three-month period ended June 29, 2014 was $4,212, or 27.7% of revenues, compared to $4,522, or 26.2% of revenues, for the same quarter a year ago. The 150 basis points improvement is due primarily to the increased overall revenue contribution of the higher margin Communications Systems sales, which increased from 15% of revenues in the second quarter of 2013 to 20% in the 2014 period. The impact of the sales mix was accentuated by the improvement of gross margin for the Communications Systems business which grew 470 basis points to 44.0% for the 2014 period reflecting higher production volumes favorable product mix.

Operating expenses decreased to $5,536 during the three-month period ended June 29, 2014, compared to $6,396 during the three-month period ended June 30, 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 was more than offset by lower operating expenses, resulting in an operating loss of $1,324 for the three-month period ended June 29, 2014, compared to an operating loss of $1,874 for the three-month period ended June 30, 2013.

Net loss from continuing operations was $(1,376), or $(0.08) per share, for the three-month period ended June 29, 2014, compared to a net loss of $(1,956) or $0.11 per share, for the three-month period ended June 30, 2013. Net income
(loss) from discontinued operations was $0, or $0.00 per share, for the three-month period ended June 29, 2014 versus $(120), or $(0.01) per share, for the three-month period ended June 30, 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 $(174) in the second quarter of 2014 compared to $(802) for the second quarter of 2013. See the section "Adjusted EBITDA from continuing operations" beginning on page 22 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 $17,160, a $5,588 (or 48%) improvement over the cash position of $11,572 as of the second quarter of 2013. The increase in cash and cash equivalents from the second 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 June 29, 2014 increased by $671 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

Despite the company's commercial sales momentum, management now expects revenue for the year to be approximately 10% below last year given the reductions in global government and defense spending to date that is likely to persist. As a result of the revised outlook for revenue, management now expects a slight operating loss for the year in the range of 2 - 3% of sales.

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

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Results of Operations

Three-month periods ended June 29, 2014 and June 30, 2013

Revenues. Consolidated revenues for the three-month period ended June 29, 2014 amounted to $15,199, a decrease of $2,080, or 12.0%, from the $17,279 reported for the three-month period ended June 30, 2013.

Battery & Energy Products revenues decreased $2,491, or 17.0%, from $14,656 for the three-month period ended June 30, 2013 to $12,165 for the three-month period ended June 29, 2014. Commercial sales of this business increased 19% over the 2013 three month period and now comprise 72% of total segment sales versus 50% last year. This increase was more than offset by lower shipments to government and defense customers which declined by 53% 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 increased $411, or 15.7%, from $2,623 during the three-month period ended June 30, 2013 to $3,034 for the three-month period ended June 29, 2014, driven by the fulfillment of a $1,895 order for the recently introduced Universal Vehicle Adaptors.

Cost of Products Sold. Cost of products sold totaled $10,987 for the quarter ended June 29, 2014, a decrease of $1,770, or 13.9%, from the $12,757 reported for the same three-month period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased from 73.8% for the three-month period ended June 30, 2013 to 72.3% for the three-month period ended June 29, 2014. Correspondingly, consolidated gross margin was 27.7% for the three-month period ended June 29, 2014, compared with 26.2% for the three-month period ended June 30, 2013, reflecting a higher mix of the higher margin Communications Systems revenues.

In our Battery & Energy Products segment, the cost of products sold decreased $1,877, from $11,166 during the three-month period ended June 30, 2013 to $9,289 during the three-month period ended June 29, 2014. Battery & Energy Products' gross profit for the second quarter of 2014 was $2,876, or 23.6% of revenues, a decrease of $614 from gross profit of $3,490, or 23.8% of revenues, for the second quarter of 2013. Battery & Energy Products' gross margin as a percentage of revenues decreased for the three-month period ended June 29, 2014 by 20 basis points, reflecting product mix.

In our Communications Systems segment, the cost of products sold increased by $107 or 6.7% from $1,591 during the three-month period ended June 30, 2013 to $1,698 during the three-month period ended June 29, 2014. Communications Systems' gross profit for the first quarter of 2014 was $1,336, or 44.0% of revenues, an increase of $304 from gross profit of $1,032, or 39.3% of revenues, for the second quarter of 2013. The 470 basis points increase in gross margin as a percentage of revenue during 2014 is due to higher production volumes and favorable product mix.

Operating Expenses. Total operating expenses for the three-month period ended June 29, 2014 totaled $5,536, a decrease of $860 or 13.4% from the $6,396 recorded during the three-month period ended June 30, 2013, resulting primarily from continued tight control over general and administrative expenses.

Overall, operating expenses as a percentage of revenues were 36.4% for the quarter ended June 29, 2014 compared to 37.0% for the quarter ended June 30, 2013. Amortization expense associated with intangible assets related to our acquisitions was $80 for the second quarter of 2014 ($35 in selling, general and administrative expenses and $45 in research and development costs), compared with $98 for the second quarter of 2013 ($43 in selling, general, and administrative expenses and $55 in research and development costs). Research and development costs were $1,560 for the three-month period ended June 29, 2014, a decrease of $109, or 6.5%, from $1,669 for the three-months ended June 30, 2013, as we continued to sharpen our focus on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $751, or 15.9%, to $3,976 during the second quarter of 2014 from $4,727 during the second 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 income totaled $5 for the three-month period ended June 29, 2014 compared to $(29) for the three-month period ended June 30, 2013. Interest and financing expense, net of interest income, decreased $2, to $41 for the second quarter of 2014 from $43 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 amounted to $46 for the second quarter of 2014 compared with $2 for the second 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 $57 for the second quarter of 2014 compared with a tax provision of $53 for the second quarter of 2013. The effective consolidated tax rate for the three-month periods ended June 29, 2014 and June 30, 2013 was:

                                                      Three month periods ended
                                                     June 29,           June 30,
                                                       2014               2013
(Loss) income from continuing operations before
  income taxes (a)                                $     (1,319 )     $     (1,903 )

Income tax provision (b)                                    57                 53

Effective income tax rate (b/a)                           -4.3 %             -2.8 %

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 first quarters of 2014 and 2013. 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. Income (Loss) from discontinued operations, net of tax, totaled $0 for the second quarter of 2014, compared to $(120) for the second quarter of 2013. The loss realized in the second quarter of 2013 was primarily related to the final settlement of the sale of our RedBlack business.

Net Income (Loss) Attributable to Ultralife. Net loss attributable to Ultralife and loss attributable to Ultralife common shareholders per diluted share was $(1,360) and $(0.08), respectively, for the three months ended June 29, 2014, compared to $($2,073) and $(0.11), respectively, for the three months ended June 30, 2013. Average common shares outstanding used to compute diluted earnings per share increased from 17,459,000 in the second quarter of 2013 to 17,533,000 in the second quarter of 2014, mainly due to stock option exercises, vesting of restricted stock units and shares of common stock issued to our non-employee directors.

Six-month periods ended June 29, 2014 and June 30, 2013

Revenues. Consolidated revenues for the six-month period ended June 29, 2014 amounted to $30,484, a decrease of $7,814 or 20.4%, from the $38,298 reported for the six-month period ended June 30, 2013.

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Battery & Energy Products revenues decreased $1,622, or 5.9%, from $27,709 for the six-month period ended June 30, 2013 to $26,087 for the six-month period ended June 29, 2014. Commercial sales of this business increased 23.5% over the 2013 six-month period and now comprise 65.5% of total segment sales versus 49.9% last year. This increase was more than offset by lower shipments to government and defense customers which declined by 29.9% 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 $6,192, or 58.5%, from $10,589 during the six-month period ended June 30, 2013 to $4,397 for the six-month period ended June 29, 2014, reflecting continued slowness in closing new orders from the U.S. government.

Cost of Products Sold. Cost of products sold totaled $21,937 for the six-month period ended June 29, 2014, a decrease of $5,460, or 19.9%, from the $27,397 reported for the same six-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 71.5% for the six-month period ended June 30, 2013 to 72.0% for the six-month period ended June 29, 2014. Correspondingly, consolidated gross margin was 28.0% for the six-month period ended June 29, 2014, compared with 28.5% for the six-month period ended June 30, 2013, reflecting a lower mix of the higher margin Communications Systems revenues.

In our Battery & Energy Products segment, the cost of products sold decreased $1,709, from $21,119 during the six-month period ended June 30, 2013 to $19,410 during the six-month period ended June 29, 2014. Battery & Energy Products' gross profit for the 2014 six-month period was $6,677, or 25.6% of revenues, an increase of $87 from gross profit of $6,590, or 23.8% of revenues, for the 2013 six-month period. Battery & Energy Products' gross margin as a percentage of revenues increased for the six-month period ended June 29, 2014 by 180 basis points, reflecting productivity improvements.

In our Communications Systems segment, the cost of products sold decreased by $3,751 or 59.7% from $6,278 during the six-month period ended June 30, 2013 to $2,527 during the six-month period ended June 29, 2014. Communications Systems' gross profit for the first six months of 2014 was $1,870, or 42.5% of revenues, an decrease of $2,441 from gross profit of $4,331, or 40.7% of revenues, for the second quarter of 2013. The 180 basis points increase in gross margin as a percentage of revenue during 2014 is due to product mix, most notably the shipment of recently introduced Universal Vehicle Adaptors in the second quarter of 2014.

Operating Expenses. Total operating expenses for the six-month period ended June 29, 2014 totaled $10,967, a decrease of $1,433 or 11.6% from the $12,400 recorded during the six-month period ended June 30, 2013, resulting primarily from continued tight control over general and administrative expenses.

Overall, operating expenses as a percentage of revenues were 36.0% for the six-month period ended June 29, 2014 compared to 32.4% for the comparable 2013 period. Amortization expense associated with intangible assets related to our acquisitions was $154 for the first six months of 2014 ($67 in selling, general and administrative expenses and $87 in research and development costs), compared with $199 for the first six months of 2013 ($88 in selling, general, and administrative expenses and $111 in research and development costs). Research and development costs were $2,996 for the six-month period ended June 29, 2014, a decrease of $42, or 1.4%, from $3,038 for the six-months ended June 30, 2013, as we continued to sharpen our focus on the development of new products with the highest estimated return on investment. Selling, general, and administrative expenses decreased $1,391, or 14.9%, to $7,971 during the first six months of 2014 from $9,362 during the first six months of 2013, reflecting continued actions to reduce discretionary general and administrative expenses and lower sales commissions earned.

Other Income (Expense). Other income (expense) totaled $(67) for the six-month period ended June 29, 2014 compared to $(156) for the three-month period ended June 30, 2013. Interest and financing expense, net of interest income, decreased $36, to $97 for the 2014 period from $133 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 $30 for the first six months of 2014 compared with $(23) for the first six months of 2013, primarily due to transactions impacted by changes in foreign currencies relative to the U.S. dollar.

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Income Taxes. We reflected a tax provision of $117 for the first two quarters of 2014 compared with a tax provision of $151 for the first two quarters of 2013. The effective consolidated tax rate for the six-month periods ended June 29, 2014 and June 30, 2013 was:

                                                     Six-month periods ended
                                                     June 29,         June 30,
                                                       2014             2013
(Loss) income from continuing operations before
  income taxes (a)                                $     (2,478 )     $ (1,641 )

Income tax provision (b)                                   117            151

Effective income tax rate (b/a)                           -4.7 %         -9.2 %

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

Discontinued Operations. Income (Loss) from discontinued operations, net of tax, totaled $(61) for the first six months of 2014, compared to $144 for the comparable period in 2013. The expense for the 2014 period reflects the final settlements of the sale of our RedBlack business, and the income for the 2013 period primarily reflects 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 $(2,646) and $(0.15), respectively, for the six months ended June 29, 2014, compared to $($1,639) and $(0.10), respectively, for the six months ended June 30, 2013. Average common shares outstanding used to compute diluted earnings per share increased from 17,458,000 in the 2013 period to 17,523,000 in the 2014 peirod, mainly due to stock option exercises, vesting of restricted stock units 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").

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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 . . .

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