Ultralife Corporation (ULBI) — FY 2014 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2014, with comparison to FY 2013; it does not provide standalone fourth-quarter results. Ultralife designs and sells battery and energy products and military communications systems to commercial, government, and defense customers. Amounts below are in U.S. dollars; financial-statement amounts are shown in millions unless otherwise stated.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $66.494 | $78.835 |
| Gross profit / gross margin | $19.350 / 29.1% | $22.621 / 28.7% |
| Operating expenses | $20.793 | $23.245 |
| Operating loss | $(1.443) | $(0.624) |
| Net loss attributable to Ultralife | $(2.116), or $(0.12) per share | $(0.926), or $(0.05) per share |
| Adjusted EBITDA from continuing operations (non-GAAP) | $2.644 | $3.874 |
| Cash provided by operating activities | $3.665 | $6.897 |
| Capital expenditures | $1.653 | $0.766 |
- Revenue fell 15.7%. Battery & Energy Products revenue was $56.772 million, down 0.5%; Communications Systems revenue was $9.722 million, down 55.3%.
- Battery & Energy Products gross profit was $15.516 million, with a 27.3% margin, versus $14.338 million and 25.1% in 2013. Communications Systems gross profit was $3.834 million, with a 39.4% margin, versus $8.283 million and 38.1%.
- Cash and cash equivalents were $17.711 million at year-end, with $0.155 million of restricted cash. The filing also describes total cash, including restricted cash, of $17.866 million. Total debt outstanding was zero; reported additional borrowing capacity under the revolving facility was approximately $12.628 million. The facility expires in May 2017 and is secured by substantially all company assets.
- Current assets were $56.850 million and current liabilities were $11.211 million at year-end. The company reported no off-balance-sheet arrangements and was in compliance with credit-facility covenants.
Material changes and management commentary
- Communications Systems’ revenue decline reflected slower U.S. defense orders for tactical-radio amplifiers and a $3.2 million international amplifier shipment in 2013 that did not recur.
- Battery & Energy commercial revenue rose 32.3% to $35.232 million, driven mainly by medical-device and medical-cart batteries and multi-kilowatt systems. Government and defense revenue in that segment fell 29.3% to $21.540 million.
- Consolidated gross margin improved 0.4 percentage points, attributed to higher-margin commercial and new products and productivity gains. Operating expenses declined 10.5% as the company reduced discretionary spending and focused R&D.
- Government and defense sales fell to 47% of revenue from 66% in 2013; U.S. government sales were approximately 36%, versus 50%. One large defense prime contractor accounted for 18% of revenue, down from 25%.
- Year-end backlog increased to approximately $14.8 million from $6.3 million; most was expected to ship during 2015. Battery & Energy Products backlog was $14.1 million and Communications Systems backlog was $0.7 million.
- Management said the company closed 2014 on a strong note and believed it was positioned to generate organic revenue growth and profitability in 2015. This is qualitative commentary, not quantified guidance.
Outlook, risks, contingencies, and unusual items
- Key risks include reliance on a major customer and defense spending, unpredictable government order timing, competition and product obsolescence, customer-volume shortfalls, and dependence on certain suppliers. Lithium-battery fire and safety risks, foreign-exchange exposure, and regulatory and export-compliance obligations are also disclosed.
- The company relocated its Shenzhen operations after being told its former lease would not be extended. It signed a five-year lease for a replacement facility and reported the move substantially complete by year-end without known business disruption. It received $0.815 million in government compensation; approximately $0.219 million remained deferred to offset estimated 2015 relocation expenses. Total relocation-related costs were estimated at approximately $1.060 million.
- No goodwill or indefinite-lived intangible impairment was recorded for 2014. However, the McDowell communications trademark, carried at $2.4 million, passed its impairment test by a narrow margin; management warned that it could be impaired if projected revenue targets are missed. Communications Systems goodwill and net intangible assets totaled $18.275 million.
- The company recorded a $0.161 million write-off of capitalized costs after deciding not to continue a grid-connected energy-storage development project. Discontinued operations included a $0.061 million loss in 2014, primarily from final RedBlack sale adjustments.
- Ultralife’s lawsuit against Arista Power remained ongoing, with discovery in progress; the outcome and any recovery could not be predicted. Arista’s separate claims against Ultralife and related parties were discontinued with prejudice in October 2014.
- The company supported an investigation into a 2013 fire involving a Boeing 787 aircraft. Preliminary findings indicated the fire was likely related to an emergency locator transmitter made by another company; the regulatory investigation had not concluded.
- Approximately $67 million of U.S. and U.K. net operating loss and credit carryforwards were disclosed. The company maintained a full valuation allowance against relevant U.S. and U.K. deferred tax assets due to uncertainty about their realization.
- The financial statements received an unqualified audit opinion. Management concluded internal control over financial reporting was effective; the auditor was not engaged to audit internal controls.
Important facts for investors to verify
- Whether the higher backlog converts to revenue and operating profit during 2015, particularly in defense and Communications Systems.
- Whether commercial Battery & Energy growth can offset continued weakness in government orders and the concentrated customer exposure.
- Cash generation, working-capital needs, and borrowing availability under the asset-based facility as sales and inventory levels change.
- Progress against forecasts supporting the carrying value of Communications Systems goodwill and the McDowell trademark.
- Final costs and compensation from the China relocation, and any material developments in the Arista litigation or aircraft-fire investigation.