Ultralife Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; this is an annual filing, not a standalone fourth-quarter report. Unless otherwise noted, amounts are in thousands of dollars. Ultralife sells battery and energy products and military communications systems worldwide.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $101,657 | $135,737 |
| Gross profit / margin | $28,730 / 28.3% | $34,191 / 25.2% |
| Operating income (loss) | ($114) | $2,412 |
| Continuing-operations net income (loss) | ($1,128) | $1,549 |
| Net loss attributable to Ultralife | ($1,598), or ($0.09) per share | ($2,080), or ($0.12) per share |
| Adjusted EBITDA from continuing operations (non-GAAP) | $5,054 | $7,913 |
| Cash provided by operating activities | $4,768 | $10,962 |
Battery & Energy Products revenue fell 34.3% to $71,084; segment gross profit was $17,562 (24.7% margin). Communications Systems revenue rose 11.0% to $30,573; segment gross profit was $11,168 (36.5% margin). Corporate operating expenses were $28,844.
At year-end, cash and cash equivalents were $9,656, with another $422 in restricted cash; total cash including restricted cash was $10,078. Inventory was $30,370, down 13.1% year over year. The company reported no borrowings or debt on its balance sheet. Its asset-based revolving facility had approximately $13,157 of borrowing capacity, including letters of credit, and $413 of letters of credit outstanding. Current assets were $63,822 and current liabilities were $19,892.
Changes versus FY2011
- Revenue declined 25.1%, principally due to reduced government and defense demand, the completion of a telematics contract, and lower commercial rechargeable-battery sales. Communications Systems growth partially offset these declines.
- Gross margin improved by 3.1 percentage points, reflecting product mix, pricing and Lean manufacturing improvements, as well as prior-year charges: a $2,730 government-contract settlement charge and a $1,100 write-off related to a discontinued amplifier line.
- Operating expenses declined 9.2% to $28,844, but increased as a share of revenue to 28.4% from 23.4% because of lower sales. Adjusted EBITDA decreased to $5,054 from $7,913.
- Operating cash flow fell to $4,768 from $10,962. Cash generation in 2012 benefited from inventory reductions; 2011 had substantially higher cash generated from accounts receivable.
- Backlog was $12,599 at year-end, compared with $24,110 a year earlier: Battery & Energy Products backlog fell to $8,932 from $22,555, while Communications Systems backlog increased to $3,667 from $1,555.
Outlook, commentary and notable items
- Management forecast low- to mid-single-digit organic revenue growth in 2013, with strong Communications Systems growth and modest Battery & Energy Products gains despite continuing U.S. government spending constraints. It expected improved operating profitability and a mid-single-digit operating margin. Order and shipment timing could make quarterly results uneven.
- The existing credit facility, originally due to mature February 17, 2013, was extended to May 15, 2013. Management was seeking replacement financing and expressed optimism, but gave no assurance it could secure acceptable terms or obtain a replacement facility.
- Ultralife sold RedBlack Communications in September 2012 for stated consideration of $2,533, including $2,133 cash at closing, $250 in escrow and $150 for employee retention; a working-capital adjustment remained to be finalized. RedBlack results were classified as discontinued operations.
- The company decided not to renew its U.K. manufacturing-facility lease, expiring in March 2013, and planned to move sales and service operations to smaller premises. It recorded estimated restoration and related costs; management expected approximately $500 in annualized net savings beginning in the second quarter of 2013.
- FY2012 discontinued-operations loss was $501, versus $3,687 in FY2011. The 2012 amount included U.K. facility exit costs; prior-year results included Energy Services exit costs. The earlier $2,700 government settlement, plus interest, was fully paid in 2012.
- One large defense prime represented 21% of revenue in both years. Sales to U.S. and foreign militaries were approximately 65% of 2012 revenue; U.S. Government sales were approximately 43%.
- Goodwill and indefinite-lived intangibles had no impairment recorded in 2012. Management cautioned that the McDowell Communications Systems trademark, carried at $2,400, could be impaired in 2013 if projected revenue targets were not met.
- Two related Arista/ former-employee trade-secret and competition lawsuits remained in discovery. The filing describes the parties’ opposing allegations; the company stated it believed Arista’s claims were without merit. Management believed ordinary-course legal matters would not materially affect financial condition, results or cash flows.
- Other material risks include defense-budget and procurement uncertainty, customer concentration, supplier constraints, lithium-battery fire and transport risks, competition and product obsolescence, China operating risks, foreign-currency movements, and the possibility of warranty or environmental costs. The company reported $58,030 of tax-loss carryforwards and a full valuation allowance on U.S. and U.K. deferred tax assets that could not be offset by reversing temporary differences.
Investor verification priorities
- Confirm 2013 revenue and margin progress against management’s stated growth and operating-margin outlook, particularly by segment.
- Verify replacement of the credit facility after the May 15, 2013 extension, including availability, covenants, fees and any borrowing needs.
- Track the timing and conversion to shipments of the $12,599 backlog, and assess continued exposure to delayed government orders and the major defense-prime customer.
- Reconcile operating cash generation with working-capital movements, inventory levels and capital spending; distinguish unrestricted cash from restricted cash.
- Follow U.K. facility restoration costs and savings, the RedBlack sale adjustment and escrow, and any further discontinued-operation charges.
- Monitor the McDowell trademark impairment risk and developments in the Arista litigation and other contingencies.