Ultralife Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with FY2012. Amounts are in thousands of dollars except per-share data. Ultralife designs and manufactures battery and energy products and military communications systems, reported in two segments. RedBlack and certain U.K. operations are presented as discontinued operations.
Financial results and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $78,835 | $101,657 |
| Gross profit / margin | $22,621 / 28.7% | $28,730 / 28.3% |
| Operating loss | $(624) | $(114) |
| Continuing-operations net loss | $(1,088), or $(0.06) per share | $(1,128), or $(0.06) per share |
| Net loss attributable to Ultralife | $(926), or $(0.05) per share | $(1,598), or $(0.09) per share |
| Adjusted EBITDA | $3,874 | $5,054 |
| Cash provided by operating activities | $6,897 | $4,768 |
Revenue fell 22.5%, with declines in both segments. Gross margin edged up on productivity improvements, pricing and product mix, but lower sales left the company with a larger operating loss. Operating expenses declined 19.4% to $23,245. Discontinued operations generated $128 of income in FY2013 versus a $501 loss in FY2012, contributing to the lower overall net loss.
- Battery & Energy Products: revenue of $57,077, down 19.7%; segment gross profit of $14,338 (25.1% margin), compared with $17,562 (24.7%) in FY2012.
- Communications Systems: revenue of $21,758, down 28.8%; segment gross profit of $8,283 (38.1% margin), compared with $11,168 (36.5%) in FY2012.
- Cash and liquidity: cash and cash equivalents were $16,066 at year-end, up from $9,656; restricted cash was another $423. Management describes total cash including restricted cash as $16,489. Inventory declined to $26,053 from $30,370.
- Debt and facility: no borrowings outstanding at year-end. The PNC asset-based revolver is $20 million, with approximately $12,969 of additional borrowing capacity; the company reported covenant compliance. Current assets were $58,658 and current liabilities $12,024.
- Capital spending: $766 of property and equipment purchases in FY2013; $221 of machinery and equipment purchase commitments remained at year-end.
Material changes and management commentary
- Battery & Energy revenue was pressured by slower U.S. government and defense orders, lower 9-volt battery sales after a product redesign, and large M-1 battery orders in FY2012. Communications Systems sales fell with order delays and because sizeable 2012 shipments did not recur.
- Backlog decreased to $6,316 from $12,599. Battery & Energy backlog was $6,069, versus $8,932; Communications Systems backlog was $247, versus $3,667, largely after completion of a multi-year international order. Most remaining backlog was expected to ship during 2014.
- Management attributed improved gross margin to Lean-related productivity and mix, while expense reductions reflected lower discretionary spending, more focused R&D and reduced commissions. R&D expense was $5,859, down from $7,216.
- Cash from operations benefited from lower receivables and inventory, partly offset by declines in accounts payable and other liabilities. Capital expenditures were substantially lower than FY2012.
- RedBlack was sold in September 2012. U.K. manufacturing operations were discontinued and the facility lease ended in March 2013; management cited approximately $500 in annualized savings from relocation. The lower-than-estimated U.K. restoration costs contributed to FY2013 discontinued-operations income.
Outlook, risks and unusual items
- 2014 outlook: management expected mid-single-digit organic revenue growth despite continued constraints on global government spending, higher operating profit, and a mid-single-digit operating margin. It cautioned that order and shipment timing could cause quarterly variability.
- Government and defense exposure is substantial: approximately 66% of FY2013 revenue was derived directly or indirectly from U.S. and foreign militaries; U.S. government-related sales were approximately 50%. One large defense prime contractor represented 25% of revenue, up from 21% in FY2012.
- Subsequent to year-end, the landlord of the China facility informally indicated that a lease extension beyond October 2014 might not be possible because of possible village zoning changes. Relocation costs and production effects were not yet estimated.
- The company was assisting a downstream customer and regulators with an investigation of a fire in an unoccupied Boeing 787 in the third quarter of 2013. The filing does not state a finding of cause or quantify any exposure.
- Annual impairment testing found no goodwill or indefinite-lived intangible impairment in 2013, but management warned that the McDowell communications trademark, carried at $2,400, could be impaired in 2014 if projected revenue targets are missed.
- Other key risks include defense budget reductions and procurement delays, dependence on the major customer, supply constraints, China operating and regulatory risks, lithium battery fire and product-liability exposure, foreign exchange movements, and environmental and export-control compliance. Arista Power litigation was ongoing; the company considered the claims against it meritless. Management stated routine legal matters were not expected to materially affect financial position, results or cash flows.
- The company reported approximately $62,152 of U.S. and U.K. net operating loss carryforwards and a full valuation allowance on relevant deferred tax assets. FY2013 tax expense was $239 despite a pretax loss, principally reflecting foreign taxes and deferred tax liabilities.
Important facts for investors to verify
- Whether 2014 revenue growth and the targeted mid-single-digit operating margin were achieved, and how much depended on government orders.
- Customer concentration, defense exposure, order conversion and subsequent backlog changes, particularly the very low Communications Systems backlog.
- The status, timing and financial or operational impact of any relocation from the China facility.
- Any findings, claims, insurance recoveries or product-liability consequences related to the Boeing 787 fire investigation.
- Whether McDowell trademark impairment indicators emerged and whether the company’s U.S. and U.K. tax-loss assets became more realizable.
- Cash-flow sustainability: operating cash generation included substantial working-capital benefits, while Adjusted EBITDA declined year over year.