Ultralife Corporation — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 2012. Unless noted otherwise, dollar amounts are in thousands. Ultralife designs and manufactures batteries and power products, military communications systems and related services. It reports Battery & Energy Products and Communications Systems as continuing operating segments; Energy Services is reported as a discontinued operation.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $139.386 million | $166.819 million |
| Gross profit / margin | $35.393 million / 25.4% | $46.656 million / 28.0% |
| Operating income / margin | $2.475 million / 1.8% | $11.862 million / 7.1% |
| Income from continuing operations | $1.564 million | $11.168 million |
| Net loss attributable to Ultralife | $2.080 million | $6.179 million |
| Loss from discontinued operations, net of tax | $3.702 million | $17.377 million |
| Adjusted EBITDA from continuing operations | $8.248 million | $17.636 million |
| Cash from operating activities | $10.962 million | $10.909 million |
| Cash and cash equivalents at year-end | $5.320 million | $4.641 million |
| Working capital | $41.075 million | $39.309 million |
| Revolver borrowings / long-term debt and capital leases | $0 / $0 | $8.541 million repaid during 2011; $251 thousand long-term debt and capital leases at year-end |
Capital expenditures were $2.362 million. The $35 million asset-based revolving facility had no balance drawn at year-end; reported borrowing capacity was approximately $14.078 million, including letters of credit. Ultralife reported a 3.41:1 fixed-charge ratio against a 1.20:1 minimum covenant. The filing reports no off-balance-sheet arrangements.
Material changes and segment results
- Revenue fell 16.4% year over year. Communications Systems revenue declined 49.5% to $31.183 million, largely because SATCOM deliveries fell to $7.549 million from $30.865 million. Delayed U.S. government funding for amplifier orders also weighed on sales.
- Battery & Energy Products revenue rose 2.9% to $108.203 million, including a $2.730 million reduction related to the government-contract settlement. Segment gross profit was $25.169 million; excluding that settlement, management said segment margin improved to 25.1% from 23.6%.
- Communications Systems gross profit was $10.224 million, or 32.8%. Excluding a $1.050 million non-cash charge for discontinued legacy amplifier components, management reported a 36.2% margin versus 35.4% in 2010.
- Reported consolidated gross margin declined to 25.4%; management said it would have been 27.6% excluding the $2.730 million settlement and $1.050 million component write-off. Operating expenses decreased 5.4% to $32.918 million, but rose to 23.6% of revenue from 20.9% as sales declined.
- Year-end backlog was approximately $24.110 million, down from approximately $38.912 million in 2010, primarily reflecting delayed government orders and completed SATCOM orders. Most remaining backlog was expected to ship during 2012.
Outlook, management commentary and risks
- Management expected year-over-year revenue growth approaching double digits in 2012, with operating-income growth outpacing revenue and an operating margin of approximately 7%–7.5%. It cautioned that order and shipment timing could make quarterly results variable.
- Ultralife completed its exit from Energy Services by the end of the second quarter of 2011. Related exit charges totaled approximately $2.924 million, including $1.984 million in cash costs; the segment recorded a $3.702 million after-tax loss in 2011. A $13.793 million non-cash impairment had been recorded in 2010.
- On February 15, 2012, management decided to divest RedBlack Communications, which had 2011 revenue of $3.649 million and gross profit contribution of $1.202 million. The timing and proceeds of a sale, and any related restructuring charge, were not determined. RedBlack results and divestiture costs were expected to be reported as discontinued operations beginning in 2012.
- A $2.730 million charge was recorded in the first quarter of 2011 to settle claims concerning historical, non-bid U.S. government contracts. The settlement required $2.700 million plus interest in four installments; the first two principal payments had been made by year-end.
- A June 2011 fire at the China facility caused approximately $1.573 million of asset damage and related costs. The facility resumed full operation without significant customer disruption; a $1.441 million insurance receivable was recorded, net of the deductible.
- Key exposures include reliance on government and defense demand (54% of revenue was directly or indirectly tied to U.S. and foreign militaries), customer concentration (Harris Corporation represented 21% of 2011 revenue), and the possibility of further delays or reductions in defense spending. The transition of 9-volt battery production from New York to China was expected to finish in the first half of 2012.
- Impairment testing found no 2011 charge, but management disclosed narrow headroom for RedBlack goodwill ($2.025 million carrying value) and the McDowell communications trademark ($2.400 million), with impairment possible if projections are not met.
- Ultralife and Arista Power have pending litigation involving allegations of trade-secret misuse and unfair competition. A separate Japanese customer warranty claim sought approximately $1.1 million; Ultralife disputed the claim and had not accrued a liability. The Newark environmental remediation was administratively closed, with $8 thousand reserved at year-end.
- The company reported $57.977 million of tax-loss carryforwards, subject to limitations and expiration dates; it maintained a valuation allowance on U.S. and U.K. deferred tax assets. The RBS facility matures February 17, 2013 and is secured by substantially all company assets.
Important facts for investors to verify
- Whether 2012 revenue, operating-margin and shipment targets were achieved, particularly given the lower backlog and dependence on government orders.
- Actual cash conversion and margin performance, separating recurring operating results from the government settlement, amplifier write-off and fire-related recovery.
- Availability under the asset-based facility, covenant compliance and repayment of the remaining government-settlement installments.
- Outcome and accounting treatment of the RedBlack divestiture, including proceeds, restructuring costs and any goodwill impairment.
- Developments in the Arista and Japanese warranty litigation, and recoverability of the fire-insurance receivable.
- Realizability of deferred tax assets and the assumptions supporting goodwill and trademark valuations.
BDO USA, LLP issued an unqualified audit opinion on the financial statements and internal control over financial reporting; management also concluded that disclosure controls and financial-reporting controls were effective at December 31, 2011.