Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 26, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-20852
ULTRALIFE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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16-1387013 |
(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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2000 Technology Parkway, Newark, New York 14513
(Address of principal executive offices)
(Zip Code)
(315) 332-7100
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Common stock, $.10 par value 17,243,007 shares of common stock outstanding, net of
1,371,900 treasury shares, as of October 31, 2010.
ULTRALIFE CORPORATION
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ULTRALIFE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
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(Unaudited) |
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September 26, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
7,093 |
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$ |
6,094 |
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Restricted cash |
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475 |
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Trade accounts receivable (less allowance for doubtful accounts
of $646 at September 26, 2010 and $1,024 at December 31, 2009) |
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29,855 |
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32,449 |
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Inventories |
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38,037 |
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35,503 |
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Deferred tax asset current |
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288 |
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288 |
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Prepaid expenses and other current assets |
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2,081 |
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1,624 |
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Total current assets |
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77,829 |
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75,958 |
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Property, plant and equipment, net |
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14,818 |
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16,648 |
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Other assets: |
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Goodwill |
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26,218 |
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25,436 |
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Intangible assets, net |
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11,870 |
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13,064 |
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Security deposits and other long-term assets |
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285 |
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60 |
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38,373 |
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38,560 |
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Total Assets |
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$ |
131,020 |
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$ |
131,166 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Current portion of debt and capital lease obligations |
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$ |
12,143 |
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$ |
19,082 |
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Accounts payable |
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16,951 |
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19,177 |
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Income taxes payable |
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191 |
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28 |
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Other current liabilities |
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11,840 |
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9,847 |
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Total current liabilities |
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41,125 |
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48,134 |
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Long-term liabilities: |
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Debt and capital lease obligations |
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303 |
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267 |
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Deferred tax liability long-term |
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4,507 |
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4,100 |
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Other long-term liabilities |
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525 |
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551 |
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Total long-term liabilities |
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5,335 |
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4,918 |
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Commitments and contingencies (Note 11) |
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Shareholders equity: |
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Ultralife equity: |
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Preferred stock, par value $0.10 per share, authorized 1,000,000 shares;
none issued and outstanding |
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Common stock, par value $0.10 per share, authorized 40,000,000 shares;
issued 18,614,907 at September 26, 2010 and 18,384,916 at December 31, 2009 |
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1,863 |
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1,831 |
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Capital in excess of par value |
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170,725 |
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169,064 |
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Accumulated other comprehensive loss |
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(1,220 |
) |
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(1,256 |
) |
Accumulated deficit |
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(79,188 |
) |
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(84,021 |
) |
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92,180 |
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85,618 |
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Less Treasury stock, at cost 1,371,900 and 1,358,507 shares outstanding,
respectively |
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7,652 |
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7,558 |
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Total Ultralife equity |
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84,528 |
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78,060 |
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Noncontrolling interest |
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32 |
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54 |
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Total shareholders equity |
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84,560 |
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78,114 |
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Total Liabilities and Shareholders Equity |
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$ |
131,020 |
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$ |
131,166 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
3
ULTRALIFE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(unaudited)
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Three-Month Periods Ended |
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Nine-Month Periods Ended |
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September 26, |
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September 27, |
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September 26, |
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September 27, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenues |
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$ |
53,281 |
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$ |
42,363 |
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$ |
128,812 |
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$ |
121,759 |
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Cost of products sold |
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38,409 |
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31,999 |
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94,762 |
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96,834 |
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Gross margin |
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14,872 |
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10,364 |
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34,050 |
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24,925 |
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Operating expenses: |
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Research and development (including $116, $139, $376 and $397
respectively, of amortization of intangible assets) |
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2,611 |
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2,748 |
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6,242 |
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7,242 |
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Selling, general, and administrative (including $262, $310,
$875 and $859
respectively, of amortization of intangible assets) |
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7,545 |
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8,020 |
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21,827 |
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26,669 |
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Total operating expenses |
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10,156 |
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|
10,768 |
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28,069 |
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33,911 |
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Operating income (loss) |
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4,716 |
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|
(404 |
) |
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5,981 |
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(8,986 |
) |
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Other income (expense): |
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Interest income |
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16 |
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2 |
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20 |
|
Interest expense |
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(253 |
) |
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(470 |
) |
|
|
(972 |
) |
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(1,002 |
) |
Miscellaneous |
|
|
449 |
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|
350 |
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|
370 |
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|
152 |
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|
Income (loss) before income taxes |
|
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4,912 |
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(508 |
) |
|
|
5,381 |
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(9,816 |
) |
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Income tax provision-current |
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130 |
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17 |
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|
164 |
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19 |
|
Income tax provision-deferred |
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|
284 |
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|
88 |
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|
406 |
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272 |
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Total income taxes |
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414 |
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|
105 |
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|
|
570 |
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|
291 |
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Net income (loss) |
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4,498 |
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(613 |
) |
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4,811 |
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(10,107 |
) |
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Net (income) loss attributable to noncontrolling interest |
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|
28 |
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8 |
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22 |
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|
26 |
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Net income (loss) attributable to Ultralife |
|
$ |
4,526 |
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|
$ |
(605 |
) |
|
$ |
4,833 |
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|
$ |
(10,081 |
) |
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Net income (loss) attributable to Ultralife common
shareholders basic |
|
$ |
0.26 |
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|
$ |
(0.04 |
) |
|
$ |
0.28 |
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|
$ |
(0.59 |
) |
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Net income (loss) attributable to Ultralife common
shareholders diluted |
|
$ |
0.26 |
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|
$ |
(0.04 |
) |
|
$ |
0.28 |
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|
$ |
(0.59 |
) |
|
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Weighted average shares outstanding basic |
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17,225 |
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|
16,921 |
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17,131 |
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|
16,996 |
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Weighted average shares outstanding diluted |
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17,449 |
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|
16,921 |
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17,136 |
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16,996 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these
statements.
4
ULTRALIFE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
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Nine-Month Periods Ended |
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|
September 26, |
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September 27, |
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|
2010 |
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|
2009 |
|
OPERATING ACTIVITIES
Net income (loss) |
|
$ |
4,811 |
|
|
$ |
(10,107 |
) |
Adjustments to reconcile net income (loss)
to net cash used in operating activities: |
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Depreciation and amortization of financing fees |
|
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2,952 |
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|
2,986 |
|
Amortization of intangible assets |
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|
1,251 |
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|
1,256 |
|
Gain on long-lived asset disposal and write-offs |
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(220 |
) |
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Foreign exchange gain |
|
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(332 |
) |
|
|
(150 |
) |
Gain on litigation settlement |
|
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|
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|
|
(1,256 |
) |
Non-cash stock-based compensation |
|
|
835 |
|
|
|
995 |
|
Changes in deferred income taxes |
|
|
406 |
|
|
|
272 |
|
Changes in operating assets and liabilities, net of effects
from acquisitions: |
|
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|
|
|
|
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|
Accounts receivable |
|
|
2,609 |
|
|
|
(5,307 |
) |
Inventories |
|
|
(2,524 |
) |
|
|
135 |
|
Prepaid expenses and other current assets |
|
|
(794 |
) |
|
|
(112 |
) |
Income taxes payable |
|
|
163 |
|
|
|
(567 |
) |
Accounts payable and other liabilities |
|
|
(315 |
) |
|
|
(3,203 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities |
|
|
8,842 |
|
|
|
(15,058 |
) |
|
|
|
|
|
|
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|
|
|
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|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(901 |
) |
|
|
(1,443 |
) |
Proceeds from asset disposal |
|
|
464 |
|
|
|
|
|
Change in restricted cash |
|
|
(475 |
) |
|
|
|
|
Payments for acquired companies, net of cash acquired |
|
|
(137 |
) |
|
|
(6,766 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,049 |
) |
|
|
(8,209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net change in revolving credit facilities |
|
|
(6,867 |
) |
|
|
26,550 |
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
310 |
|
Proceeds from issuance of debt |
|
|
|
|
|
|
751 |
|
Principal payments on debt and capital lease obligations |
|
|
(288 |
) |
|
|
(1,468 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
(3,326 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities |
|
|
(7,155 |
) |
|
|
22,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
361 |
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
999 |
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
6,094 |
|
|
|
1,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,093 |
|
|
$ |
1,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
605 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
641 |
|
|
$ |
823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock for purchase of acquired companies |
|
$ |
858 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Purchase of property and equipment via notes payable |
|
$ |
252 |
|
|
$ |
102 |
|
|
|
|
|
|
|
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of
these statements.
5
ULTRALIFE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands Except Share and Per Share Amounts)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of Ultralife
Corporation and our subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions to Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and footnotes for
complete financial statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals and adjustments) considered necessary for a fair presentation of the
Condensed Consolidated Financial Statements have been included. Results for interim periods
should not be considered indicative of results to be expected for a full year. Reference should
be made to the Consolidated Financial Statements contained in our Form 10-K for the twelve-month
period ended December 31, 2009.
The year-end condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting principles generally
accepted in the United States of America.
Certain items previously reported in specific financial statement captions have been
reclassified to conform to the current presentation.
Our monthly closing schedule is a 5/4/4 weekly-based cycle for each fiscal quarter, as
opposed to a calendar month-based cycle for each fiscal quarter. While the actual dates for the
quarter-ends will change slightly each year, we believe that there are not any material
differences when making quarterly comparisons.
2. ACQUISITIONS AND JOINT VENTURES
We accounted for the following acquisitions in accordance with the purchase method of
accounting provisions of the revised Financial Accounting Standards Board (FASB) guidance for
business combinations, whereby the purchase price paid to effect an acquisition is allocated to
the acquired tangible and intangible assets and liabilities at fair value.
AMTITM Brand
On March 20, 2009, we acquired substantially all of the assets and assumed substantially
all of the liabilities of the tactical communications products business of Science Applications
International Corporation. The tactical communications products business (AMTI), located in
Virginia Beach, Virginia, designs, develops and manufactures tactical communications products
including amplifiers, man-portable systems, cables, power solutions and ancillary communications
equipment that are sold by Ultralife Corporation under the brand name of AMTI.
Under the terms of the asset purchase agreement for AMTI, the purchase price consisted of
$5,717 in cash.
6
The results of operations of AMTI and the estimated fair value of assets acquired and
liabilities assumed were included in our financial statements beginning on the acquisition date.
For the three- and nine-month periods ended September 26, 2010, AMTI contributed net sales of
$3,064 and
$9,107, respectively, and net income of $248 and $1,410, respectively. For the three-month
period ended and from the date of acquisition through September 27, 2009, AMTI contributed net
sales of $3,896 and $7,161, respectively, and net income of $743 and $814, respectively. Pro
forma information has not been presented, as it would not be materially different from amounts
reported. The estimated excess of the purchase price over the net tangible and intangible
assets acquired of $4,684 was recorded as goodwill in the amount of $1,033. The acquired
goodwill has been assigned to the Communications Systems segment and is expected to be fully
deductible for income tax purposes.
The following table represents the final allocation of the purchase price to assets
acquired and liabilities assumed at the acquisition date:
|
|
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash |
|
$ |
|
|
Trade accounts receivable, net |
|
|
693 |
|
Inventories |
|
|
2,534 |
|
|
|
|
|
Total current assets |
|
|
3,227 |
|
Property, plant and equipment, net |
|
|
339 |
|
Goodwill |
|
|
1,033 |
|
Intangible Assets: |
|
|
|
|
Trademarks |
|
|
450 |
|
Patents and Technology |
|
|
800 |
|
Customer Relationships |
|
|
970 |
|
|
|
|
|
Total assets acquired |
|
|
6,819 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
|
|
801 |
|
Other current liabilities |
|
|
301 |
|
|
|
|
|
Total current liabilities |
|
|
1,102 |
|
Long-term liabilities: |
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
1,102 |
|
|
|
|
|
|
|
|
|
|
Total Purchase Price |
|
$ |
5,717 |
|
|
|
|
|
Trademarks have an indefinite life and are not being amortized. The intangible assets
related to patents and technology and customer relationships are being amortized as the economic
benefits of the intangible assets are being utilized over their weighted-average estimated
useful life of thirteen years.
7
3. INVENTORIES
Inventories are stated at the lower of cost or market with cost determined under the
first-in, first-out (FIFO) method. The composition of inventories was:
|
|
|
|
|
|
|
|
|
|
|
September 26, 2010 |
|
|
December 31, 2009 |
|
Raw materials |
|
$ |
19,578 |
|
|
$ |
19,743 |
|
Work in process |
|
|
6,850 |
|
|
|
6,044 |
|
Finished goods |
|
|
11,609 |
|
|
|
9,716 |
|
|
|
|
|
|
|
|
|
|
$ |
38,037 |
|
|
$ |
35,503 |
|
|
|
|
|
|
|
|
4. PROPERTY, PLANT AND EQUIPMENT
Major classes of property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 26, 2010 |
|
|
December 31, 2009 |
|
Land |
|
$ |
123 |
|
|
$ |
123 |
|
Buildings and leasehold improvements |
|
|
6,192 |
|
|
|
6,127 |
|
Machinery and equipment |
|
|
44,887 |
|
|
|
43,996 |
|
Furniture and fixtures |
|
|
1,835 |
|
|
|
1,829 |
|
Computer hardware and software |
|
|
3,387 |
|
|
|
3,397 |
|
Construction in progress |
|
|
877 |
|
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
57,301 |
|
|
|
56,796 |
|
Less: Accumulated depreciation |
|
|
42,483 |
|
|
|
40,148 |
|
|
|
|
|
|
|
|
|
|
$ |
14,818 |
|
|
$ |
16,648 |
|
|
|
|
|
|
|
|
Depreciation expense for property, plant and equipment was $973 and $2,836 for the three-
and nine-month periods ended September 26, 2010, respectively, and $1,016 and $2,910 for the
three- and nine-month periods ended September 27, 2009, respectively.
8
5. GOODWILL AND INTANGIBLE ASSETS
a. Goodwill
The following table summarizes the goodwill activity by segment for the nine-month periods
ended September 26, 2010 and September 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery & |
|
|
Communications |
|
|
Energy |
|
|
|
|
|
|
Energy Products |
|
|
Systems |
|
|
Services |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
2,072 |
|
|
$ |
14,262 |
|
|
$ |
6,609 |
|
|
$ |
22,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to purchase price
allocation |
|
|
|
|
|
|
838 |
|
|
|
431 |
|
|
|
1,269 |
|
Acquisition of AMTI |
|
|
|
|
|
|
1,397 |
|
|
|
|
|
|
|
1,397 |
|
Effect of foreign currency
translations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 27, 2009 |
|
|
2,072 |
|
|
|
16,497 |
|
|
|
7,040 |
|
|
|
25,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to purchase price
allocation |
|
|
|
|
|
|
(181 |
) |
|
|
8 |
|
|
|
(173 |
) |
Effect of foreign currency
translations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
2,072 |
|
|
|
16,316 |
|
|
|
7,048 |
|
|
|
25,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to purchase price
allocation |
|
|
|
|
|
|
(183 |
) |
|
|
929 |
|
|
|
746 |
|
Effect of foreign currency
translations |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 26, 2010 |
|
$ |
2,108 |
|
|
$ |
16,133 |
|
|
$ |
7,977 |
|
|
$ |
26,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through September 26, 2010, we have accrued $71 for the 2010 portion of the contingent cash
consideration in connection with the purchase price for RPS Power Systems, Inc., which is
included in the other current liabilities line of our Condensed Consolidated Balance Sheet.
This accrual resulted in an increase to goodwill of $71 in the Energy Services segment.
On April 27, 2010, we entered into an agreement (the Amendment Agreement) with Ken
Cotton, Shawn OConnell, Simon Baitler and Tim Jacobs (together, the Share Recipients). The
Amendment Agreement amends the terms of the asset purchase agreement dated October 31, 2008
whereby we acquired substantially all of the assets of U.S. Energy Systems, Inc. (the Asset
Purchase Agreement).
Under the terms of the Asset Purchase Agreement, on the achievement of certain annual
post-acquisition financial milestones during the period ending December 31, 2012, we were to
issue up to an aggregate of 200,000 unregistered shares of our common stock to Ken Cotton, Shawn
OConnell and Simon Baitler (together, the Selling Shareholders). At the time the Amendment
Agreement was entered into, we had not issued any shares of our common stock to the Selling
Shareholders because none of the financial milestones had been achieved.
Under the terms of the Amendment Agreement, we agreed to issue the Share Recipients an
aggregate of 200,000 shares of our unregistered common stock, valued at approximately $858, in
full satisfaction of our outstanding obligations to the Selling Shareholders under the Asset
Purchase Agreement. Under the terms of the Amendment Agreement, the Selling Shareholders agreed
to release us from any past or present claims relating to the purchase price provisions of the
Asset Purchase Agreement.
9
We elected to enter into the Amendment Agreement because our consolidation plan and the
reorganization of our reporting units involved reorganizing the operations of the business
purchased in the Asset Purchase Agreement. The post-acquisition financial milestones in the
Asset Purchase Agreement did not support our current consolidation and reorganization plans and
it was determined that it would be in our best interests to satisfy our obligations under the
Asset Purchase Agreement. The Amendment Agreement did not change our original assessment that
the contingent payout of shares of common stock was related to the acquisition of the assets of
U.S. Energy Systems, Inc. Accordingly, we reflected the payment as additional purchase price.
See Note 12 for additional information relating to the revised reporting of our operating
segments.
b. Intangible Assets
The composition of intangible assets was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26, 2010 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross Assets |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
4,857 |
|
|
$ |
|
|
|
$ |
4,857 |
|
Patents and technology |
|
|
5,127 |
|
|
|
3,234 |
|
|
|
1,893 |
|
Customer relationships |
|
|
9,839 |
|
|
|
4,815 |
|
|
|
5,024 |
|
Distributor relationships |
|
|
358 |
|
|
|
262 |
|
|
|
96 |
|
Non-compete agreements |
|
|
394 |
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
20,575 |
|
|
$ |
8,705 |
|
|
$ |
11,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross Assets |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
4,856 |
|
|
$ |
|
|
|
$ |
4,856 |
|
Patents and technology |
|
|
5,119 |
|
|
|
2,852 |
|
|
|
2,267 |
|
Customer relationships |
|
|
9,772 |
|
|
|
3,972 |
|
|
|
5,800 |
|
Distributor relationships |
|
|
352 |
|
|
|
215 |
|
|
|
137 |
|
Non-compete agreements |
|
|
393 |
|
|
|
389 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
$ |
20,492 |
|
|
$ |
7,428 |
|
|
$ |
13,064 |
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $378 and $1,251 for the three- and
nine-month periods ended September 26, 2010, respectively, and $449 and $1,256 for the three-
and nine-month periods ended September 27, 2009, respectively.
The change in the gross assets value of total intangible assets from December 31, 2009 to
September 26, 2010 is a result of changes in the valuation of tangible and intangible assets in
connection with the AMTI acquisition and the effect of foreign currency translations.
10
6. DEBT
On February 17, 2010, we entered into a new senior secured asset based revolving credit
facility (Credit Facility) of up to $35,000 with RBS Business Capital, a division of RBS Asset
Finance, Inc. (RBS). The proceeds from the Credit Facility can be used for general working
capital purposes, general corporate purposes, and letter of credit foreign exchange
support. The Credit Facility has a maturity date of February 17, 2013 (Maturity Date). The
Credit Facility is secured by substantially all of our assets. We paid RBS a facility fee of
$263.
On February 18, 2010, we drew down $9,870 from the Credit Facility to repay all outstanding
amounts due under the Amended and Restated Credit Agreement with JP Morgan Chase Bank, N.A. and
Manufacturers and Traders Trust Company, with JP Morgan Chase Bank acting as the administrative
agent. Our available borrowing under the Credit Facility fluctuates from time to time based
upon amounts of eligible accounts receivable and eligible inventory. Available borrowings under
the Credit Facility equals the lesser of (1) $35,000 or (2) 85% of eligible accounts receivable
plus the lesser of (a) up to 70% of the book value of our eligible inventory or (b) 85% of the
appraised net orderly liquidation value of our eligible inventory. The borrowing base under the
Credit Facility is further reduced by (1) the face amount of any letters of credit outstanding,
(2) any liabilities of ours under hedging contracts with RBS and (3) the value of any reserves
as deemed appropriate by RBS. We are required to have at least $3,000 available under the
Credit Facility at all times.
Interest currently accrues on outstanding indebtedness under the Credit Facility at LIBOR
plus 4.50%. We have the ability, in certain circumstances, to fix the interest rate for up to
90 days from the date of borrowing. Upon delivery of our audited financial statements for the
fiscal year ended December 31, 2010 to RBS, and assuming no events of default exist at such
time, the rate of interest under the Credit Facility can fluctuate based on the available
borrowings remaining under the Credit Facility as set forth in the following table:
|
|
|
|
|
Excess Availability |
|
LIBOR Rate Plus |
|
|
|
|
|
|
Greater than $10,000 |
|
|
4.00 |
% |
|
|
|
|
|
Greater than $7,500 but less than or equal to $10,000 |
|
|
4.25 |
% |
|
|
|
|
|
Greater than $5,000 but less than or equal to $7,500 |
|
|
4.50 |
% |
|
|
|
|
|
Greater than $3,000 but less than or equal to $5,000 |
|
|
4.75 |
% |
In addition to paying interest on the outstanding principal under the Credit Facility, we
are required to pay an unused line fee of 0.50% on the unused portion of the $35,000 Credit
Facility. We must also pay customary letter of credit fees equal to the LIBOR rate and the
applicable margin and any other customary fees or expenses of the issuing bank. Interest that
accrues under the Credit Facility is to be paid monthly with all outstanding principal, interest
and applicable fees due on the Maturity Date.
We are required to maintain a fixed charge coverage ratio of 1.20 to 1.00 or greater at all
times as of and after March 28, 2010. As of September 26, 2010, our fixed coverage ratio was
3.72 to 1.00. Accordingly, we were in compliance with the financial covenants of the Credit
Facility. All borrowings under the Credit Facility are subject to the satisfaction of customary
conditions, including the absence of an event of default and accuracy of our representations and
warranties. The Credit Facility also includes customary representations and warranties,
affirmative covenants and events of default. If an event default occurs, RBS would be entitled
to take various actions, including
accelerating the amount due under the Credit Facility, and all actions permitted to be
taken by a secured creditor.
11
As of September 26, 2010, we had $8,633 outstanding under the Credit Facility. At
September 26, 2010, the interest rate on the asset based revolver component of the Credit
Facility was 4.76%. As of September 26, 2010, the revolver arrangement provided for up to
$35,000 of borrowing capacity, including outstanding letters of credit. At September 26, 2010,
we had $-0- of outstanding letters of credit related to this facility, leaving up to $26,367 of
additional borrowing capacity.
On November 16, 2007, under the terms of the stock purchase agreement for Stationary Power
Services, Inc. (SPS), we issued a $4,000 subordinated convertible promissory note to be held
by the previous owner of SPS for partial consideration of the purchase price. The $4,000
subordinated convertible promissory note carries a three-year term, bears interest at the rate
of 5% per year and is convertible at $15.00 per share into 266,667 shares of our common stock,
with a forced conversion feature at $17.00 per share. We have evaluated the terms of the
conversion feature under applicable accounting literature, including FASBs guidance in
accounting for derivative instruments and hedging activities and accounting for derivative
financial instruments indexed to, and potentially settled in, a companys own stock, and
concluded that this feature should not be separately accounted for as a derivative. Effective
March 28, 2009, we entered into Amended and Restated Subordinated Convertible Promissory Note
(Amended Note) with William Maher, the former owner of SPS. The Amended Note reduced the
principal amount under the original subordinated convertible promissory note (Original Note),
as issued in connection with the SPS acquisition in November 2007, by an amount equal to $580.
This reduction was an offset of amounts owed to SPS from WMSP Holdings, LLC (an entity wholly
owned by William Maher). There were no other revisions to any of the other terms of the
Original Note. In February 2010, in connection with the closing on the new credit facility with
RBS, we made a prepayment of $129 on the outstanding principal balance of the Amended Note. In
April 2010, we changed the name of Stationary Power Services, Inc. to Ultralife Energy Services
Corporation (Energy Services). As of September 26, 2010, the outstanding balance on the
Amended Note was $3,291. The Amended Note matures on November 16, 2010, with principal and
accrued interest due in full, totaling $3,312. We expect to pay the $3,312 amount primarily
from cash on hand and cash generated from operations, in addition to borrowing from our credit
facility, as necessary.
7. SHAREHOLDERS EQUITY
a. Common Stock
In February 2010, we issued 19,346 shares of unrestricted common stock to our non-employee
directors, valued at $76.
In May 2010, we issued 18,528 shares of unrestricted common stock to our non-employee
directors, valued at $87.
In August 2010, we issued 16,616 shares of unrestricted common stock to our non-employee
directors, valued at $76.
See Note 5a for additional information relating to the issuance of 200,000 shares of our
common stock to the Share Recipients of U.S. Energy Systems, Inc.
b. Treasury Stock
At September 26, 2010 and December 31, 2009, we had 1,371,900 and 1,358,507 shares,
respectively, of treasury stock outstanding, valued at $7,652 and $7,558, respectively. The
increase
in treasury shares related to the vesting of restricted stock awards for certain key employees,
a portion of which were withheld as treasury shares to cover estimated individual income taxes,
since the vesting of such awards is a taxable event for the individuals.
12
c. Stock Options
We have various stock-based employee compensation plans, for which we follow the provisions
of FASBs guidance on share-based payments, which requires that compensation cost relating to
share-based payment transactions be recognized in the financial statements. The cost is
measured at the grant date, based on the fair value of the award, and is recognized as an
expense over the employees requisite service period (generally the vesting period of the equity
award).
Our shareholders have approved various equity-based plans that permit the grant of stock
options, restricted stock and other equity-based awards. In addition, our shareholders have
approved the grant of options outside of these plans.
In December 2000, our shareholders approved a stock option plan for grants to key
employees, directors and consultants. The shareholders approved reservation of 500,000 shares of
common stock for grants under the plan. In December 2002, the shareholders approved an
amendment to the plan increasing the number of shares of common stock reserved by 500,000, to a
total of 1,000,000 shares.
In June 2004, our shareholders adopted the 2004 Long-Term Incentive Plan (LTIP) pursuant
to which we were authorized to issue up to 750,000 shares of common stock in the form of stock
option grants, restricted stock awards, stock appreciation rights and other stock-based awards.
In June 2006, the shareholders approved an amendment to the LTIP, increasing the number of
shares of common stock by an additional 750,000, bringing the total shares authorized under the
LTIP to 1,500,000. In June 2008, the shareholders approved another amendment to the LTIP,
increasing the number of shares of common stock by an additional 500,000, bringing the total
shares authorized under the LTIP to 2,000,000 shares.
Stock options granted under the amended stock option plan and the LTIP are either Incentive
Stock Options (ISOs) or Non-Qualified Stock Options (NQSOs). Key employees are eligible to
receive ISOs and NQSOs; however, directors and consultants are eligible to receive only NQSOs.
Most ISOs vest over a three- or five-year period and expire on the sixth or seventh anniversary
of the grant date. All NQSOs issued to non-employee directors vest immediately and expire on
either the sixth or seventh anniversary of the grant date. Some NQSOs issued to non-employees
vest immediately and expire within three years; others have the same vesting characteristics as
stock options granted to employees. As of September 26, 2010, there were 1,579,409 stock options
outstanding under the amended stock option plan and the LTIP.
On December 19, 2005, we granted our President and Chief Executive Officer, John D.
Kavazanjian, an option to purchase 48,000 shares of common stock at $12.96 per share outside of
any of our equity-based compensation plans, subject to shareholder approval. Shareholder
approval was obtained on June 8, 2006. The stock option is fully vested and expires on June 8,
2013.
On March 7, 2008, in connection with his becoming employed by us, we granted our Chief
Financial Officer and Treasurer, Philip A. Fain, an option to purchase 50,000 shares of common
stock at $12.74 per share outside of any of our equity-based compensation plans. The option
vests in annual increments of 16,667 shares over a three-year period which commenced March 7,
2009. The stock option expires on March 7, 2015.
13
In conjunction with FASBs guidance for share-based payments, we recorded compensation cost
related to stock options of $175 and $533 for the three- and nine-month periods ended September
26, 2010, respectively, and $53 and $797 for the three- and nine-month periods ended September
27,
2009, respectively. As of September 26, 2010, there was $680 of total unrecognized
compensation costs related to outstanding stock options, which is expected to be recognized over
a weighted average period of 1.22 years.
We use the Black-Scholes option-pricing model to estimate the fair value of stock-based
awards. The following weighted average assumptions were used to value options granted during
the nine-month periods ended September 26, 2010 and September 27, 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.09 |
% |
|
|
1.44 |
% |
Volatility factor |
|
|
79.34 |
% |
|
|
68.58 |
% |
Dividends |
|
|
0.00 |
% |
|
|
0.00 |
% |
Weighted average expected life (years) |
|
|
3.51 |
|
|
|
3.51 |
|
We calculate expected volatility for stock options by taking an average of historical
volatility over the past five years and a computation of implied volatility. The computation of
expected term was determined based on historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards and vesting schedules. The
interest rate for periods within the contractual life of the award is based on the U.S. Treasury
yield in effect at the time of grant.
Stock option activity for the first nine months of 2010 is summarized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Exercise Price |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of Shares |
|
|
Per Share |
|
|
Term |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option at January 1, 2010 |
|
|
1,805,107 |
|
|
$ |
10.99 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
277,750 |
|
|
|
4.46 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(89,163 |
) |
|
|
5.75 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(316,285 |
) |
|
|
12.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option at September 26, 2010 |
|
|
1,677,409 |
|
|
$ |
9.91 |
|
|
3.89 years |
|
$ |
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of
September 26, 2010 |
|
|
1,559,676 |
|
|
$ |
10.22 |
|
|
3.75 years |
|
$ |
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 26, 2010 |
|
|
994,254 |
|
|
$ |
12.97 |
|
|
2.46 years |
|
$ |
|
|
The total intrinsic value of stock options (which is the amount by which the stock price
exceeded the exercise price of the options on the date of exercise) exercised during the
nine-month period ended September 26, 2010 was $-0-.
FASBs guidance for share-based payments requires cash flows from excess tax benefits to be
classified as a part of cash flows from financing activities. Excess tax benefits are realized
tax benefits from tax deductions for exercised stock options in excess of the deferred tax asset
attributable to stock compensation costs for such stock options. We did not record any excess
tax benefits in the first nine months of 2010 and 2009. Cash received from stock option
exercises under our stock-based
compensation plans for the nine-month periods ended September 26, 2010 and September 27,
2009 was $-0- and $187, respectively.
14
d. Warrants
On May 19, 2006, in connection with our acquisition of ABLE New Energy Co., Ltd., we
granted warrants to acquire 100,000 shares of common stock. The exercise price of the warrants
is $12.30 per share and the warrants have a five-year term. In January 2008, 82,000 warrants
were exercised, for total proceeds received of $1,009. In January 2009, 10,000 warrants were
exercised, for total proceeds received of $123. At September 26, 2010, there were 8,000
warrants outstanding.
e. Restricted Stock Awards
No restricted stock was awarded during the nine-month period ended September 26, 2010.
Restricted stock awarded during the nine-month period ended September 27, 2009 had the
following values:
|
|
|
|
|
|
|
Nine-Month |
|
|
|
Period Ended |
|
|
|
September 27, 2009 |
|
Number of shares awarded |
|
|
24,786 |
|
Weighted average fair value per share |
|
$ |
10.58 |
|
|
|
|
|
Aggregate total value |
|
$ |
246 |
|
|
|
|
|
The activity of restricted stock awards of common stock for the first nine months of 2010
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of Shares |
|
|
Grant Date Fair Value |
|
Unvested at December 31, 2009 |
|
|
46,527 |
|
|
$ |
11.42 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(9,944 |
) |
|
|
12.69 |
|
Forfeited |
|
|
(26,500 |
) |
|
|
10.74 |
|
|
|
|
|
|
|
|
Unvested at September 26, 2010 |
|
|
10,083 |
|
|
$ |
11.96 |
|
|
|
|
|
|
|
|
We recorded compensation cost related to restricted stock awards of $27 and $63 for the
three- and nine-month periods ended September 26, 2010, respectively, and $(211) and $9 for the
three- and nine-month periods ended September 27, 2009, respectively. During the third quarter
of 2009, we determined that the 2009 performance measure for certain performance-based
restricted stock awards would not be achieved. Therefore, these restricted stock awards would
not vest, and we reversed the prior period recognized expense of $301 for these
performance-based restricted stock awards.
As of September 26, 2010, we had $97 of total unrecognized compensation expense related to
restricted stock awards, which is expected to be recognized over the remaining weighted average
period of approximately 1.02 years. The total fair value of these awards that vested during the
nine-month period ended September 26, 2010 was $44.
15
8. INCOME TAXES
The asset and liability method, prescribed by FASBs guidance on the Accounting for Income
Taxes, is used in accounting for income taxes. Under this method, deferred tax assets and
liabilities
are determined based on differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse.
For the three- and nine-month periods ended September 26, 2010, we recorded $414 and $570,
respectively, in income tax expense. For the three- and nine-month periods ended September 27,
2009 we recorded $105 and $291, respectively, in income tax expense. The expense is primarily
due to the recognition of deferred tax liabilities generated from goodwill and certain
intangible assets that cannot be predicted to reverse for book purposes during our loss
carryforward periods. The remaining expense in 2010 was primarily due to the income reported
for U.S. operations during the period.
Our effective consolidated tax rate for the three- and nine-month periods ended September
26, 2010 and September 27, 2009 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Income (Loss) before Incomes Taxes (a) |
|
$ |
4,912 |
|
|
$ |
(508 |
) |
|
$ |
5,381 |
|
|
$ |
(9,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Provision (b) |
|
$ |
414 |
|
|
$ |
105 |
|
|
$ |
570 |
|
|
$ |
291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate (b/a) |
|
|
8.4 |
% |
|
|
20.7 |
% |
|
|
10.6 |
% |
|
|
3.0 |
% |
The overall effective rate is the result of the combination of income and losses in each of
our tax jurisdictions, which is particularly influenced by the fact that we have not recognized
a deferred tax asset pertaining to cumulative historical losses for our U.S. operations and our
U.K. and China subsidiaries, as management does not believe, at this time, it is more likely
than not that we will realize the benefit of these losses. We have substantial net operating
loss carryforwards which offset taxable income in the United States. However, we remain subject
to the alternative minimum tax in the United States. The alternative minimum tax limits the
amount of net operating loss available to offset taxable income to 90% of the current year
income. We incurred $109 and $142 in alternative minimum tax for the three- and nine-month
periods ended September 26, 2010, respectively. However, the alternative minimum tax did not
have an impact on income taxes determined for 2009. The payment of the alternative minimum tax
normally results in the establishment of a deferred tax asset; however, we have established a
valuation allowance for our net U.S. deferred tax asset. Therefore, the expected payment of the
alternative minimum tax does not result in a net deferred tax asset. The tax provision for 2010
also includes a provision for state income taxes, for states in which we do not have the ability
to utilize net operating loss carryforwards.
As of December 31, 2009, we have foreign and domestic net operating loss carryforwards
totaling approximately $61,257 available to reduce future taxable income. Foreign loss
carryforwards of approximately $10,624 can be carried forward indefinitely. The domestic net
operating loss carryforwards of $50,633 expire from 2019 through 2029. The domestic net
operating loss carryforwards include approximately $2,867 of the net operating loss
carryforwards for which a benefit will be recorded in capital in excess of par value when
realized.
We have adopted the provisions of FASBs guidance for the Accounting for Uncertainty in
Income Taxes. We have recorded no liability for income taxes associated with unrecognized tax
benefits during 2009 and 2010, and as such, we have not recorded any interest or penalty in
regard to any unrecognized benefit. Our policy regarding interest and/or penalties related to
income tax matters is to recognize such items as a component of income tax expense (benefit).
16
We file a consolidated income tax return in the U.S. federal jurisdiction and consolidated
and separate income tax returns in various state and foreign jurisdictions. Our U.S. tax
matters for the years 2004 through 2009 remain subject to examination by the Internal Revenue
Service (IRS). Our tax matters for the years 2004 through 2009 remain subject to examination
by various state and local U.S. tax jurisdictions and by the respective foreign tax jurisdiction
authorities.
We have determined that a change in ownership, as defined under Internal Revenue Code
Section 382, occurred during 2005 and 2006. As such, the domestic NOL carryforward will be
subject to an annual limitation estimated to be in the range of approximately $12,000 to
$14,500. The unused portion of the annual limitation can be carried forward to subsequent
periods. We believe such limitation will not impact our ability to realize the deferred tax
asset. The use of our U.K. NOL carryforwards may be limited due to the change in our U.K.
operation during 2008 from a manufacturing and assembly center to primarily a distribution and
service center.
9. EARNINGS PER SHARE
On January 1, 2009, we adopted the provisions of FASBs guidance for determining whether
instruments granted in share-based payment transactions are participating securities. The
guidance requires that all outstanding unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (such as restricted stock awards
granted by us) be considered participating securities. Because the restricted stock awards are
participating securities, we are required to apply the two-class method of computing basic and
diluted earnings per share (the Two-Class Method).
Basic EPS is determined using the Two-Class Method and is computed by dividing earnings
attributable to Ultralife common shareholders by the weighted-average shares outstanding during
the period. The Two-Class Method is an earnings allocation formula that determines earnings per
share for each class of common stock and participating security according to dividends declared
and participation rights in undistributed earnings. Diluted EPS includes the dilutive effect of
securities, if any, and reflects the more dilutive EPS amount calculated using the treasury
stock method or the Two-Class Method. For the three- and nine-month periods ended September 26,
2010 and September 27, 2009, both the Two-Class Method and the treasury stock method
calculations for diluted EPS yielded the same result.
The computation of basic and diluted earnings per share is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net Income (Loss) attributable to Ultralife |
|
$ |
4,526 |
|
|
$ |
(605 |
) |
|
$ |
4,833 |
|
|
$ |
(10,081 |
) |
Net Income (Loss) attributable to
participating securities (unvested
restricted stock awards) (10,000, -0-,
20,000 and -0- shares, respectively) |
|
|
(3 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Ultralife
common shareholders (a) |
|
|
4,523 |
|
|
|
(605 |
) |
|
|
4,827 |
|
|
|
(10,081 |
) |
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Ultralife
common shareholders Adjusted (b) |
|
$ |
4,564 |
|
|
$ |
(605 |
) |
|
$ |
4,827 |
|
|
$ |
(10,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Basic (c) |
|
|
17,225,000 |
|
|
|
16,921,000 |
|
|
|
17,131,000 |
|
|
|
16,996,000 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options / Warrants |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Convertible Notes Payable |
|
|
219,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Common Shares Outstanding Diluted (d) |
|
|
17,449,000 |
|
|
|
16,921,000 |
|
|
|
17,136,000 |
|
|
|
16,996,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS Basic (a/c) |
|
$ |
0.26 |
|
|
$ |
(0.04 |
) |
|
$ |
0.28 |
|
|
$ |
(0.59 |
) |
EPS Diluted (b/d) |
|
$ |
0.26 |
|
|
$ |
(0.04 |
) |
|
$ |
0.28 |
|
|
$ |
(0.59 |
) |
17
There were 1,647,992 and 1,805,776 outstanding stock options, warrants and restricted stock
awards for the three-month periods ended September 26, 2010 and September 27, 2009,
respectively, that were not included in EPS as the effect would be anti-dilutive. We also had
227,995 shares of common stock for the three-month period ended September 27, 2009, reserved
under convertible notes payable, which were not included in EPS as the effect would be
anti-dilutive. The dilutive effect of 47,500 and -0- outstanding stock options, warrants and
restricted stock awards were included in the dilution computation for the three-month periods
ended September 26, 2010 and September 27, 2009, respectively. We also had 219,398 shares of
common stock reserved under convertible notes payable, which were included in the dilution
computation for the three-month period ended September 26, 2010.
There were 1,647,992 and 1,805,776 outstanding stock options, warrants and restricted stock
awards for the nine-month periods ended September 26, 2010 and September 27, 2009, respectively,
that were not included in EPS as the effect would be anti-dilutive. We also had 221,117 and
239,597 shares of common stock for the nine-month periods ended September 26, 2010 and September
27, 2009, respectively, reserved under convertible notes payable, which were not included in EPS
as the effect would be anti-dilutive. The dilutive effect of 47,500 and -0- outstanding stock
options, warrants and restricted stock awards were included in the dilution computation for the
nine-month periods ended September 26, 2010 and September 27, 2009, respectively.
10. COMPREHENSIVE INCOME
The components of our total comprehensive income (loss) were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) attributable to
Ultralife |
|
$ |
4,526 |
|
|
$ |
(605 |
) |
|
$ |
4,833 |
|
|
$ |
(10,081 |
) |
Foreign currency translation
adjustments |
|
|
285 |
|
|
|
(201 |
) |
|
|
36 |
|
|
|
661 |
|
Change in fair value of derivatives |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
4,811 |
|
|
$ |
(805 |
) |
|
$ |
4,869 |
|
|
$ |
(9,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11. COMMITMENTS AND CONTINGENCIES
a. Purchase Commitments
As of September 26, 2010, we have made commitments to purchase approximately $460 of
production machinery and equipment.
b. Product Warranties
We estimate future costs associated with expected product failure rates, material usage and
service costs in the development of our warranty obligations. Warranty reserves are based on
historical experience of warranty claims and generally will be estimated as a percentage of
sales over the warranty period. In the event the actual results of these items differ from the
estimates, an adjustment to the warranty obligation would be recorded. Changes in our product
warranty liability during the first nine months of 2010 were as follows:
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
1,182 |
|
Accruals for warranties issued |
|
|
(118 |
) |
Settlements made |
|
|
(39 |
) |
|
|
|
|
Balance at September 26, 2010 |
|
$ |
1,025 |
|
|
|
|
|
18
c. Contingencies and Legal Matters
We are subject to legal proceedings and claims that arise in the normal course of business.
We believe that the final disposition of such matters will not have a material adverse effect
on our financial position, results of operations or cash flows.
In May 2010, we were served with a summons and complaint by a customer of one of our
subsidiaries that performs energy services. The complaint seeks damages in an amount of at
least $1,500 and includes claims of breach of contract, negligent installation, and breach of
warranty against us and breach of warranty against the manufacturer of the installed batteries.
We dispute the customers allegations against us and intend to vigorously defend the lawsuit.
At this time, we have no basis for assessing whether we may incur any liability as a result of
the lawsuit and no accrual has been made or reflected in the condensed consolidated financial
statements as of September 26, 2010.
In July 2010, we were served with a summons and complaint filed in Japan by one of our
9-volt battery customers. The complaint alleges damages associated with claims of breach of
warranty in an amount of approximately $1,400. We dispute the customers allegations against us
and intend to vigorously defend the lawsuit. At this time, we have no basis for assessing
whether we may incur any liability as a result of the lawsuit and no accrual has been made or
reflected in the condensed consolidated financial statements as of September 26, 2010.
In conjunction with our purchase/lease of our Newark, New York facility in 1998, we entered
into a payment-in-lieu of tax agreement, which provided us with real estate tax concessions upon
meeting certain conditions. In connection with this agreement, a consulting firm performed a
Phase I and II Environmental Site Assessment, which revealed the existence of contaminated soil
and ground water around one of the buildings. We retained an engineering firm, which estimated
that the cost of remediation should be in the range of $230. In February 1998, we entered into
an agreement with a third party which provides that we and this third party will retain an
environmental consulting firm to conduct a supplemental Phase II investigation to verify the
existence of the contaminants and further delineate the nature of the environmental concern.
The third party agreed to reimburse us for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. We have fully reserved for our portion of the
estimated liability. Test sampling was completed in the spring of 2001, and the engineering
report was submitted to the New York State Department of Environmental Conservation (NYSDEC)
for review. The NYSDEC reviewed the report and, in January 2002, recommended additional
testing. We responded by submitting a work plan to the NYSDEC, which was approved in
April 2002. We sought proposals from engineering firms to complete the remedial work contained
in the work plan. A firm was selected to undertake the remediation and in December 2003 the
remediation was completed, and was overseen by the NYSDEC. The report detailing the remediation
project, which included the test results, was forwarded to the NYSDEC and to the New
York State Department of Health (NYSDOH). The NYSDEC, with input from the NYSDOH,
requested that we perform additional sampling. A work plan for this portion of the project was
written and delivered to the NYSDEC and approved. In November 2005, additional soil, sediment
and surface water samples were taken from the area outlined in the work plan, as well as
groundwater samples from the monitoring wells. We received the laboratory analysis and met with
the NYSDEC in March 2006 to discuss the results. On June 30, 2006, the Final Investigation
Report was delivered to the NYSDEC by our outside environmental consulting firm. In November
2006, the NYSDEC completed its review of the Final Investigation Report and requested additional
groundwater, soil and sediment sampling. A work plan to address the additional investigation
was submitted to the NYSDEC in January 2007 and was approved in April 2007. Additional
investigation work was performed in May 2007. A preliminary report of results was prepared by
our outside environmental consulting firm in August 2007 and a meeting with the NYSDEC and
NYSDOH took place in September 2007. As a result of this meeting, the NYSDEC and NYSDOH
requested additional investigation work. A work plan to address this additional investigation
was submitted to and approved by the NYSDEC in November 2007. Additional investigation work was
performed in December 2007. Our environmental consulting firm prepared and submitted a Final
Investigation Report in January 2009 to the NYSDEC for review. The NYSDEC reviewed and approved
the Final Investigation Report in June 2009 and requested the development of a Remedial Action
Plan. Our environmental consulting firm developed and submitted the requested plan for review
and approval by the NYSDEC. In October 2009, we received comments back from the NYSDEC
regarding the content of the remediation work plan. Our environmental consulting firm
incorporated the requested changes and submitted a revised work plan to the NYSDEC in January
2010 for review and approval. The NYSDEC approved the revised work plan and the remediation
activities outlined in the work plan were completed in July 2010. Our environmental consulting
firm has prepared a Final Engineering report which was submitted to the NYSDEC for review and
approval in October 2010. Through September 26, 2010, total costs incurred have amounted to
approximately $313, none of which has been capitalized. At September 26, 2010 and December 31,
2009, we had $34 and $49, respectively, reserved for this matter.
19
From August 2002 through August 2006, we participated in a self-insured trust to manage our
workers compensation activity for our employees in New York State. All members of this trust
had, by design, joint and several liability during the time they participated in the trust. In
August 2006, we left the self-insured trust and have obtained alternative coverage for our
workers compensation program through a third-party insurer. In the third quarter of 2006, we
confirmed that the trust was in an underfunded position (i.e. the assets of the trust were
insufficient to cover the actuarially projected liabilities associated with the members in the
trust). In the third quarter of 2006, we recorded a liability and an associated expense of $350
as an estimate of our potential future cost related to the trusts underfunded status based on
our estimated level of participation. On April 28, 2008, we, along with all other members of
the trust, were served by the State of New York Workers Compensation Board (Compensation
Board) with a Summons with Notice that was filed in Albany County Supreme Court, wherein the
Compensation Board put all members of the trust on notice that it would be seeking approximately
$1,000 in previously billed and unpaid assessments and further assessments estimated to be not
less than $25,000 arising from the accumulated estimated under-funding of the trust. The
Summons with Notice did not contain a complaint or a specified demand. We timely filed a Notice
of Appearance in response to the Summons with Notice. On June 16, 2008, we were served with a
Verified Complaint. Subject to the results of a deficit reconstruction that was pending, the
Verified Complaint estimated that the trust was underfunded by $9,700 during the period of
December 1, 1997 November 30, 2003 and an additional $19,400 for the period December 1, 2003
August 31, 2006. The Verified Complaint estimated our pro-rata share of the liability for the
period of December 1, 1997 November 30, 2003 to be $195. The Verified Complaint did not
contain a pro-rata share liability estimate for the period of December 1, 2003-August 31, 2006.
Further, the Verified Complaint stated that all estimates of the underfunded status of the trust
and the pro-rata share liability for the period of December 1, 1997-November 30, 2003 were
subject to adjustment based on a forensic audit of the trust that was conducted on behalf of the
Compensation Board by a
third-party audit firm. We timely filed our Verified Answer with Affirmative Defenses on
July 24, 2008. In November 2009, the New York Attorney Generals office presented the results
of the deficit reconstruction of the trust. As a result of the deficit reconstruction, the
State of New York has determined that the trust was underfunded by $19,100 instead of $29,100
during the period December 1, 1997 to August 31, 2006. Our pro-rata share of the liability was
determined to be $452. The Attorney Generals office proposed a settlement by which we could
avoid joint and several liability in exchange for a settlement payment of $520. Under the terms
of the settlement agreement, we could satisfy our obligations by either paying (i) a lump sum
of $468, representing a 10% discount, (ii) paying the entire amount in twelve monthly
installments of $43 commencing the month following execution of the settlement agreement, or
(iii) paying the entire amount in monthly installments over a period of up to five years, with
interest of 6.0, 6.5, 7.0, and 7.5% for the two, three, four and five year periods,
respectively. We elected the twelve monthly installments option and on May 3, 2010, we received
written notice from the Attorney Generals office that the Compensation Board had decided to
proceed with the settlement, as proposed, and that payments would commence in June 2010. As of
September 26, 2010, our reserve is $346 to account for the remaining eight monthly installments
of the $520 settlement amount.
20
d. Post-Audits of Government Contracts
We had certain exigent, non-bid contracts with the U.S. government, which were subject to
audit and final price adjustment, which have resulted in decreased margins compared with the
original terms of the contracts. As of September 26, 2010, there were no outstanding exigent
contracts with the government. As part of its due diligence, the government has conducted
post-audits of the completed exigent contracts to ensure that information used in supporting the
pricing of exigent contracts did not differ materially from actual results. In September 2005,
the Defense Contracting Audit Agency (DCAA) presented its findings related to the audits of
three of the exigent contracts, suggesting a potential pricing adjustment of approximately
$1,400 related to reductions in the cost of materials that occurred prior to the final
negotiation of these contracts. We have reviewed these audit reports, have submitted our
response to these audits and believe, taken as a whole, the proposed audit adjustments can be
offset with the consideration of other compensating cost increases that occurred prior to the
final negotiation of the contracts. While we believe that potential exposure exists relating to
any final negotiation of these proposed adjustments, we cannot reasonably estimate what, if any,
adjustment may result when finalized. In addition, in June 2007, we received a request from the
Office of Inspector General of the Department of Defense (DoD IG) seeking certain information
and documents relating to our business with the Department of Defense. We continue to cooperate
with the DCAA audit and DoD IG inquiry by making available to government auditors and
investigators our personnel and furnishing the requested information and documents. At this
time we have no basis for assessing whether we might face any penalties or liabilities on
account of the DoD IG inquiry. The aforementioned DCAA-related adjustments could reduce margins
and, along with the aforementioned DoD IG inquiry, could have an adverse effect on our business,
financial condition and results of operations.
e. Government Grants/Loans
In conjunction with the City of West Point, Mississippi, we applied for a Community
Development Block Grant (CDBG) from the State of Mississippi for infrastructure improvements
to our leased facility that is owned by the City of West Point, Mississippi. The CDBG was
awarded and as of September 26, 2010, approximately $480 has been distributed under the grant.
Under an agreement with the City of West Point, we have agreed to employ at least 30 full-time
employees at the facility, of which 51% of the jobs must be filled or made available to low or
moderate income families, within three years of completion of the CDBG improvement activities.
In addition, we have agreed to invest at least $1,000 in equipment and working capital into the
facility within the first three years of operation of the facility. We are currently in the
process of satisfying both of these commitments, and anticipate meeting both of them before the
three-year period ends in October 2011.
In the event we fail to honor these commitments, we are obligated to reimburse all amounts
received under the CDBG to the City of West Point, Mississippi.
21
In conjunction with Clay County, Mississippi, we applied for a Mississippi Rural Impact
Fund Grant (RIFG) from the State of Mississippi for infrastructure improvements to our leased
facility that is owned by the City of West Point, Mississippi. The RIFG was awarded and as of
September 26, 2010, approximately $150 has been distributed under the grant. Under an agreement
with Clay County, we have agreed to employ at least 30 full-time employees at the facility, of
which 51% of the jobs must be filled or made available to low or moderate income families,
within two years of completion of the RIFG improvement activities. In September 2010, we
received an extension for this commitment to March 2011. In addition, we have agreed to invest
at least $1,000 in equipment and working capital into the facility within the first three years
of operation of the facility. We are currently in the process of satisfying both of these
commitments, and anticipate meeting both of them before the applicable periods end in March 2011
and October 2011, respectively. In the event we fail to honor these commitments, we are
obligated to reimburse all amounts received under the RIFG to Clay County, Mississippi.
12. BUSINESS SEGMENT INFORMATION
Beginning January 1, 2010, we now report our results in three operating segments instead of
four: Battery & Energy Products; Communications Systems; and Energy Services. This change in
segment reporting is more consistent with how we now manage our business operations. The
Non-rechargeable Products and Rechargeable Products segments have been combined into a single
segment called Battery & Energy Products. The Communications Systems segment now includes our
RedBlack Communications business, which was previously included in the Design & Installation
Services segment. The Design & Installation Services segment has been renamed Energy Services
and will continue to encompass our standby power business. Research, design and development
contract revenues and expenses, which were previously included in the Design & Installation
Services segment, have been captured under the respective operating segment in which the work is
performed.
The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various
other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power
supplies and accessories, such as cables. The Communications Systems segment includes: power
supplies, cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts,
case equipment, integrated communication system kits, charging systems and communications and
electronics systems design. The Energy Services segment includes: standby power and systems
design, installation and maintenance activities. We look at our segment performance at the
gross margin level, and we do not allocate research and development, except for research, design
and development contracts as noted above, or selling, general and administrative costs against
the segments. All other items that do not specifically relate to these three segments and are
not considered in the performance of the segments are considered to be Corporate charges.
22
Three-Month Period Ended September 26, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
Communications |
|
|
Energy |
|
|
|
|
|
|
|
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
20,632 |
|
|
$ |
30,180 |
|
|
$ |
2,469 |
|
|
$ |
|
|
|
$ |
53,281 |
|
Segment contribution |
|
|
4,481 |
|
|
|
10,644 |
|
|
|
(253 |
) |
|
|
(10,156 |
) |
|
|
4,716 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253 |
) |
|
|
(253 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449 |
|
|
|
449 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130 |
) |
|
|
(130 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(284 |
) |
|
|
(284 |
) |
Noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
28 |
|
Net income attributable to
Ultralife |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,526 |
|
Total assets |
|
$ |
52,699 |
|
|
$ |
47,306 |
|
|
$ |
19,330 |
|
|
$ |
11,685 |
|
|
$ |
131,020 |
|
Three-Month Period Ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
Communications |
|
|
Energy |
|
|
|
|
|
|
|
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
24,809 |
|
|
$ |
12,228 |
|
|
$ |
5,326 |
|
|
$ |
|
|
|
$ |
42,363 |
|
Segment contribution |
|
|
5,256 |
|
|
|
4,273 |
|
|
|
835 |
|
|
|
(10,768 |
) |
|
|
(404 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(454 |
) |
|
|
(454 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350 |
|
|
|
350 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
(17 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88 |
) |
|
|
(88 |
) |
Noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
8 |
|
Net loss attributable to Ultralife |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(605 |
) |
Total assets |
|
$ |
57,253 |
|
|
$ |
55,814 |
|
|
$ |
20,663 |
|
|
$ |
5,870 |
|
|
$ |
139,600 |
|
Nine-Month Period Ended September 26, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
Communications |
|
|
Energy |
|
|
|
|
|
|
|
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
66,440 |
|
|
$ |
54,488 |
|
|
$ |
7,884 |
|
|
$ |
|
|
|
$ |
128,812 |
|
Segment contribution |
|
|
14,482 |
|
|
|
19,488 |
|
|
|
80 |
|
|
|
(28,069 |
) |
|
|
5,981 |
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(970 |
) |
|
|
(970 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
|
|
370 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(164 |
) |
|
|
(164 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406 |
) |
|
|
(406 |
) |
Noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
22 |
|
Net income attributable to
Ultralife |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,833 |
|
Total assets |
|
$ |
52,699 |
|
|
$ |
47,306 |
|
|
$ |
19,330 |
|
|
$ |
11,685 |
|
|
$ |
131,020 |
|
Nine-Month Period Ended September 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Battery & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
Communications |
|
|
Energy |
|
|
|
|
|
|
|
|
|
Products |
|
|
Systems |
|
|
Services |
|
|
Corporate |
|
|
Total |
|
Revenues |
|
$ |
73,435 |
|
|
$ |
33,850 |
|
|
$ |
14,474 |
|
|
$ |
|
|
|
$ |
121,759 |
|
Segment contribution |
|
|
13,352 |
|
|
|
10,210 |
|
|
|
1,363 |
|
|
|
(33,911 |
) |
|
|
(8,986 |
) |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(982 |
) |
|
|
(982 |
) |
Miscellaneous |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152 |
|
|
|
152 |
|
Income taxes-current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
(19 |
) |
Income taxes-deferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272 |
) |
|
|
(272 |
) |
Noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Net loss attributable to Ultralife |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(10,081 |
) |
Total assets |
|
$ |
57,253 |
|
|
$ |
55,814 |
|
|
$ |
20,663 |
|
|
$ |
5,870 |
|
|
$ |
139,600 |
|
23
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash, accounts receivable, trade accounts payable, accrued liabilities,
our revolving credit facility, and our convertible note payable approximates carrying value due
to the short-term nature of these instruments. The estimated fair value of other long-term debt
and capital lease obligations approximates carrying value due to the variable nature of the
interest rates or the stated interest rates approximating current interest rates that are
available for debt with similar terms.
14. RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In April 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-17, Revenue
Recognition Milestone Method (Topic 605): Milestone Method of Revenue Recognition a
consensus of the FASB Emerging Issues Task Force (EITF). ASU No. 2010-17 is limited to
research or development arrangements and requires that this ASU be met for an entity to apply
the milestone method (record the milestone payment in its entirety in the period received) of
recognizing revenue. However, the FASB clarified that, even if the requirements in this ASU are
met, entities would not be precluded from making an accounting policy election to apply another
appropriate policy that results in the deferral of some portion of the arrangement
consideration. The guidance in this ASU will apply to milestones in both single-deliverable and
multiple-deliverable arrangements involving research or development transactions. ASU No.
2010-17 will be effective prospectively for milestones achieved in fiscal years, and interim
periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.
We are currently evaluating the impact that ASU No. 2010-17 will have on our financial
statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements, which provides additional
guidance to improve disclosures regarding fair value measurements. ASU No. 2010-06 amends
Accounting Standards Codification (ASC) 820-10 to add two new disclosures: (1) transfers in
and out of Level 1 and 2 measurements and the reasons for the transfers, and (2) a gross
presentation of activity within the Level 3 roll forward. ASU 2010-06 also includes
clarifications to existing disclosure requirements on the level of disaggregation and
disclosures regarding inputs and valuation techniques. ASU 2010-06 applies to all entities
required to make disclosures about recurring and nonrecurring fair value measurements. ASU No.
2010-06 will be effective for interim and annual reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measurements, which is effective for fiscal years
beginning after December 15, 2010. The partial adoption of ASU 2010-06 did not have a material
impact on our financial statements. We are currently evaluating the impact of the deferred
portions of ASU No. 2010-06 will have on our financial statements; however, we do not expect the
adoption of the deferred portions of ASU 2010-06 to have a material impact on our financial
statements, except for the additional disclosures that will be required.
24
In January 2010, the FASB issued ASU No. 2010-02, Consolidation (Topic 810): Accounting
and Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification, to address
implementation issues related to the changes in ownership provisions in ASC 810-10. ASU No.
2010-02 amends ASC 810-10 and related guidance to clarify that the scope of the decrease in
ownership provisions applies to the following: a subsidiary or group of assets that is a
business or nonprofit activity; a subsidiary that is a business or nonprofit activity that is
transferred to an equity method investee or joint venture; or an exchange of a group of assets
that constitutes a business or nonprofit activity for a noncontrolling interest in an entity,
including an equity method investee or joint venture. The amendments also clarify that the
decrease in ownership provisions does not apply to the following transactions even if they
involve businesses: sales of real estate; and conveyances of oil and gas mineral rights. If a
decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity,
entities first need to consider whether the substance of the transaction is addressed
in other U.S. GAAP, such as transfers of financial assets, revenue recognition, etc., and
apply that guidance. If no other guidance exists, an entity should apply ASC 810-10. Lastly,
ASU No. 2010-02 expands existing disclosure requirements for transactions within the scope of
ASC 810-10, and adds several new ones that address fair value measurements and related
techniques, the nature of any continuing involvement after the transaction, and whether related
parties are involved. ASU No. 2010-02 is effective beginning in the period that an entity
adopts ASC 810-10. If an entity had previously adopted ASC 810-10, the amendments are effective
beginning in the first interim or annual reporting period ending on or after December 15, 2009.
The amendments must be applied retrospectively to the date ASC 810-10 was adopted. The adoption
of ASU No. 2010-02, with retrospective application to January 1, 2009, did not have a
significant impact on our financial statements.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a consensus of the FASB EITF. ASU No. 2009-13
eliminates the residual method of accounting for revenue on undelivered products and instead
requires companies to allocate revenue to each of the deliverable products based on their
relative selling price. In addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements
entered into for fiscal years beginning on or after June 15, 2010. We are currently evaluating
the impact that ASU No. 2009-13 will have on our financial statements.
In June 2009, the FASB issued amended guidance for the accounting for transfers of
financial assets. The amended guidance removes the concept of a qualifying special-purpose
entity. The amended guidance is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2009. Earlier application is prohibited. The
adoption of this pronouncement did not have a significant impact on our financial statements.
In June 2009, the FASB issued amended guidance for the accounting for variable interest
entities. The amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a variable-interest
entity, and (3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The amended guidance is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2009. Earlier adoption is
prohibited. The adoption of this pronouncement did not have a significant impact on our
financial statements.
25
Item 2. MANAGEMENTS 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, future demand for our products and services,
addressing the process of U.S. military procurement, the successful commercialization of our
products, the successful integration of our acquired businesses, the impairment of our intangible
assets, general domestic and global economic conditions, government and environmental regulation,
finalization of non-bid government contracts, competition and customer strategies, technological
innovations in the non-rechargeable and rechargeable battery industries, changes in our business
strategy or development plans, capital deployment, business disruptions, including those caused by
fires, raw material supplies, and other risks and uncertainties, certain of which are beyond our
control including, but not limited to, the risks described in Item 1A, Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009 and Part II, Item 1A, Risk Factors in
this Quarterly Report on Form 10-Q. 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 is this report, the words
anticipate, believe, estimate or expect or words of similar import are intended to identify
forward-looking statements.
Undue reliance should not be placed on our forward-looking statements. Except as required by
law, we disclaim any obligation to update any 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
to reflect new information, 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, 2009.
The financial information in this Managements Discussion and Analysis of Financial Condition
and Results of Operations is presented in thousands of dollars, except for share and per share
amounts.
General
We offer products and services ranging from portable and standby 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, standby power systems, communications and electronics systems and
accessories, and custom engineered systems, solutions and services. We sell our products worldwide
through a variety of trade channels, including original equipment manufacturers (OEMs),
industrial and retail distributors, national retailers and directly to U.S. and international
defense departments.
Beginning January 1, 2010, we now report our results in three operating segments instead of
four: Battery & Energy Products; Communications Systems; and Energy Services. This change in
segment reporting is more consistent with how we now manage our business operations. The
Non-Rechargeable Products and Rechargeable Products segments have been combined into a single
segment called Battery & Energy Products. The Communications Systems segment now includes our
RedBlack Communications business, which was previously included in the Design & Installation
Services segment. The Design & Installation Services segment has been renamed Energy Services and
will continue to encompass our standby power business. Research, design and development contract
revenues and
expenses, which were previously included in the Design & Installation Services segment, have
been captured under the respective operating segment in which the work is performed.
26
The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and various other
non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies
and accessories, such as cables. The Communications Systems segment includes: power supplies,
cable and connector assemblies, RF amplifiers, amplified speakers, equipment mounts, case
equipment, integrated communication system kits, charging systems and communications and
electronics systems design. The Energy Services segment includes: standby power and systems
design, installation and maintenance activities. We look at our segment performance at the gross
margin level, and we do not allocate research and development, except for research, design and
development contracts as noted above, or selling, general and administrative costs against the
segments. All other items that do not specifically relate to these three segments and are not
considered in the performance of the segments are considered to be Corporate charges.
We continually evaluate ways to grow, including opportunities to expand through mergers,
acquisitions and joint ventures, which can broaden the scope of our products and services, expand
operating and market opportunities and provide the ability to enter new lines of business
synergistic with our portfolio of offerings.
On March 20, 2009, we acquired substantially all of the assets and assumed substantially all
of the liabilities of the tactical communications products business of Science Applications
International Corporation. The tactical communications products business (AMTI), located in
Virginia Beach, Virginia, designs, develops and manufactures tactical communications products
including amplifiers, man-portable systems, cables, power solutions and ancillary communications
equipment. Under the terms of the asset purchase agreement for AMTI, the purchase price consisted
of $5,717 in cash. (See Note 2 in the Notes to Condensed Consolidated Financial Statements for
additional information.)
Overview
Consolidated revenues for the three-month period ended September 26, 2010 increased by
$10,918, or 25.8%, from the three-month period ended September 27, 2009. This increase was
primarily caused by increased revenues in our Communications Systems segment as a result of
deliveries on the SATCOM-on-the-Move order received in May 2010. Gross margin increased to 27.9%
as a percentage of total revenues for the three-month period ended September 26, 2010, as opposed
to 24.5% for the three-month period ended September 27, 2009. Gross margin increased in our Battery
& Energy Products and Communications Systems operating segments, which was partially offset by the
decrease in the gross margin in our Energy Services operating segment. Gross margin as a
percentage of total revenues for our Battery & Energy Products and Communications Systems segments
during the three-months ended September 26, 2010 increased to 21.7% and 35.3%, respectively. The
primary reason for the gross margin improvement was a favorable mix of high-margin Communications
Systems revenue, including strong SATCOM-on-the-Move and AMTI amplifier revenue, and Battery &
Energy Products manufacturing efficiencies particularly in our China operations.
Operating expenses decreased to $10,156 during the three-month period ended September 26, 2010
compared to $10,768 during the three-month period ended September 27, 2009. The across the
board cost reduction and consolidation actions we commenced in the latter half of 2009 were
primarily responsible for this improvement.
Adjusted EBITDA, 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 operations, amounted to $6,861 in
the third quarter of 2010 compared to $1,368 for the third quarter of 2009. See the section
Adjusted EBITDA beginning on page 33 for a reconciliation of Adjusted EBITDA to net income (loss)
attributable to Ultralife.
27
With continued cash flow generated from our operations and favorable improvements made to our
balance sheet, the outstanding balance on our new credit facility was $8,633 at September 26, 2010.
During the nine-month period ended September 26, 2010, we repaid $6,867 on the revolver portion of
our primary credit facilities. By comparison, at September 27, 2009 and at December 31, 2009, the
outstanding revolver balance under our previous credit facility was $26,550 and $15,500,
respectively.
Outlook
Our current 2010 forecast calls for us to generate revenue in the range of $177,000 to
$182,000 and operating income of approximately $7,000. Management cautions that the timing of
orders and shipments may cause some variability in quarterly results. Management further cautions
that its operating income forecast for 2010 assumes that no impairment of goodwill and intangible
assets will occur during 2010. If any such impairment occurs during 2010, as further described in
Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q, it could have a significant
negative impact on our operating income for the fiscal year ended December 31, 2010.
Results of Operations
Three-month periods ended September 26, 2010 and September 27, 2009
Revenues. Consolidated revenues for the three-month period ended September 26, 2010 amounted
to $53,281, an increase of $10,918, or 25.8%, from the $42,363 reported in the same quarter in the
prior year.
Battery & Energy Products sales decreased $4,177, or 16.8%, from $24,809 during the third
quarter last year to $20,632 during the third quarter this year. Revenues for Battery & Energy
Products were negatively impacted by the lack of orders for our BA-5390 military batteries from the
Defense Logistics Agency (U.S. Department of Defense) in 2010 as compared to shipments of almost
$9,200 in the third quarter of 2009. However, revenues from all other products in this segment,
most notably rechargeable batteries, increased over $5,000 or 32% over the prior year third
quarter.
Communications Systems revenues increased $17,952, or 146.8%, from $12,228 during the third
quarter last year to $30,180 during the third quarter this year, mainly due to deliveries on the
SATCOM-on-the-Move communications systems order we received in May 2010. We do not expect this
level of SATCOM deliveries to continue in future quarters unless new SATCOM orders are obtained
with comparable magnitude.
Energy Services revenues decreased $2,857, or 53.6%, from $5,326 during the third quarter last
year to $2,469 during the third quarter this year, reflecting continued customer delays in capital
expenditures for backup stationary power, primarily attributable to larger capital projects.
Cost of Products Sold. Cost of products sold totaled $38,409 for the quarter ended September
26, 2010, an increase of $6,410, or 20.0%, from the $31,999 reported for the same three-month
period a year ago. Consolidated cost of products sold as a percentage of total revenue decreased
from 75.5% for the three-month period ended September 27, 2009 to 72.1% for the three-month period
ended September 26, 2010. Correspondingly, consolidated gross margin was 27.9% for the three-month
period ended September 26, 2010, compared with 24.5% for the three-month period ended September 27,
2009, primarily attributable to the margin improvements in the Battery & Energy Products and
Communications Systems business segments. The gross margin for the 2009 period includes the
recognition of a gain on litigation settlement totaling $1,256.
28
In our Battery & Energy Products segment, the cost of products sold decreased $3,402, from
$19,553 during the three-month period ended September 27, 2009 to $16,151 during the three-month
period
ended September 26, 2010. Battery & Energy Products gross margin for the second quarter of
2010 was $4,481, or 21.7% of revenues, a decrease of $775 from gross margin of $5,256, or 21.2% of
revenues, for the third quarter of 2009. Battery & Energy Products gross margin as a percentage of
revenues increased for the three-month period ended September 26, 2010, primarily as a result of
manufacturing efficiencies, higher selling prices realized for some of our products and favorable
performance from our China operations, in comparison to the three-month period ended September 27,
2009.
In our Communications Systems segment, the cost of products sold increased $11,581, from
$7,955 during the three-month period ended September 27, 2009 to $19,536 during the third quarter
of 2010. Communications Systems gross margin for the third quarter of 2010 was $10,644, or 35.3%
of revenues, an increase of $6,371 from gross margin of $4,273, or 34.9% of revenues, for the third
quarter of 2009. The increase in both the gross margin and the gross margin percentage for
Communications Systems benefitted from favorable product mix, including deliveries on the
SATCOM-on-the-Move communications systems order we received in May 2010, and continued strong
performance from our AMTI amplifier business. The 2009 gross margin for this segment includes the
gain on litigation settlement totaling $1,256.
In our Energy Services segment, the cost of sales decreased $1,769, from $4,491 during the
three-month period ended September 27, 2009 to $2,722 during the three-month period ended September
26, 2010. Energy Services gross margin for the third quarter of 2010 was $(253), or (10.2)% of
revenues, a decrease of $1,088 from gross margin of $835, or 15.7% of revenues, for the third
quarter of 2009. Gross margin in this segment decreased mainly due to lower sales caused by
continued delays of large capital projects and ongoing pricing pressures in the standby power
industry.
Operating Expenses. Total operating expenses for the three-month period ended September 26,
2010 totaled $10,156, a decrease of $612 from $10,768 for the three-month period ended September
27, 2009. Overall, operating expenses as a percentage of revenues decreased to 19.1% during the
third quarter of 2010 from 25.4% reported in the third quarter of 2009, due to increased revenues
and the across the board cost reduction and consolidation actions we commenced in the latter half
of 2009 which have now been realized. These actions more than offset the increased expenses we
have incurred from our acquisitions of US Energy in November 2008 and AMTI in March 2009.
Amortization expense associated with intangible assets related to our acquisitions was $378 for the
third quarter of 2010 ($262 in selling, general and administrative expenses and $116 in research
and development costs), compared with $449 for the third quarter of 2009 ($310 in selling, general,
and administrative expenses and $139 in research and development costs). Research and development
costs were $2,611 in the third quarter of 2010, a decrease of $137, or 5.0%, from the $2,748
reported in the third quarter of 2009, due to the timing of development projects relating primarily
to advanced battery systems. Selling, general, and administrative expenses decreased $475, or
5.9%, to $7,545 during the third quarter of 2010 as compared to the third quarter of 2009. This
decrease represents the results of our broad actions to reduce our overall spending base in
non-revenue producing functions.
Other Income (Expense). Other income (expense) totaled $196 for the third quarter of 2010,
compared to $(104) for the third quarter of 2009. Interest expense, net of interest income,
decreased $201, to $253 for the third quarter of 2010 from $454 for the comparable period in 2009,
mainly as a result of lower average borrowings under our revolving credit facilities.
Miscellaneous income/expense amounted to income of $449 for the third quarter of 2010 compared with
income of $350 for the third quarter of 2009. The income in the third quarters of 2010 and 2009 was
primarily due to transactions impacted by changes in foreign currencies relative to the U.S.
dollar.
29
Income Taxes. We reflected a tax provision of $414 for the third quarter of 2010 compared
with $105 during the third quarter of 2009. The effective tax rate for the total consolidated
company for the three-month periods ended September 26, 2010 and September 27, 2009 was:
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
Income (Loss) before Incomes Taxes (a) |
|
$ |
4,912 |
|
|
$ |
(508 |
) |
|
|
|
|
|
|
|
|
|
Total Income Tax Provision (b) |
|
$ |
414 |
|
|
$ |
105 |
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate (b/a) |
|
|
8.4 |
% |
|
|
20.7 |
% |
See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional
information.
We have determined that a change in ownership, as defined under Internal Revenue Code
Section 382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to
an annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused
portion of the annual limitation can be carried forward to subsequent periods. Our ability to
utilize NOL carryforwards due to successive ownership changes is currently limited to a minimum of
approximately $12,000 annually, plus the carryover from unused portions of the annual limitations.
We believe such limitation will not impact our ability to realize the deferred tax asset.
In addition, 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. We incurred $109 in
alternative minimum tax for the three-month period ended September 26, 2010. However, the
alternative minimum tax did not have an impact on income taxes determined for the third quarter of
2009. 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. For further discussion, see Item 1A, Risk Factors in our Annual Report on Form
10-K for the year ended December 31, 2009.
Net Income (Loss) Attributable to Ultralife. Net income attributable to Ultralife and income
attributable to Ultralife common shareholders per diluted share was $4,526 and $0.26, respectively,
for the three months ended September 26, 2010, compared to a net loss attributable to Ultralife and
loss attributable to Ultralife common shareholders per diluted share of $605 and $0.04,
respectively, for the third quarter of 2009, primarily as a result of the reasons described above.
Average common shares outstanding used to compute diluted earnings per share increased from
16,921,000 in the third quarter of 2009 to 17,449,000 in the third quarter of 2010, mainly due to
the issuance of 200,000 shares of our common stock to the former principals of U.S. Energy under
the Amended Purchase Agreement in April 2010, and potentially dilutive shares from the convertible
note.
Nine-month periods ended September 26, 2010 and September 27, 2009
Revenues. Consolidated revenues for the nine-month period ended September 26, 2010 amounted
to $128,812, an increase of $7,053, or 5.8%, from the $121,759 reported in the same period in the
prior year.
Battery & Energy Products sales decreased $6,995, or 9.5%, from $73,435 during the first nine
months last year to $66,440 during the first nine months this year. The decrease in Battery &
Energy Products revenues was primarily attributable to lower battery sales to the U.S. Department
of Defense, which was partially offset by higher demand for our automotive telematics batteries
resulting from favorable improvements in the automobile industry.
30
Communications Systems revenues increased $20,638, or 61.0%, from $33,850 during the first
nine months last year to $54,488 during the first nine months this year, mainly due to deliveries
on the SATCOM-on-the-Move communications systems order we received in May 2010 and the inclusion of
amplifier sales resulting from our acquisition of AMTI on March 20, 2009 and continued
favorable demand for these products.
Energy Services revenues decreased $6,590, or 45.5%, from $14,474 during the first nine months
last year to $7,884 during the first nine months this year, reflecting continued customer delays in
capital expenditures for backup stationary power, primarily attributable to larger capital
projects.
Cost of Products Sold. Cost of products sold totaled $94,762 for the nine-month period ended
September 26, 2010, a decrease of $2,072, or 2.1%, from the $96,834 reported for the same
nine-month period a year ago. Consolidated cost of products sold as a percentage of total revenue
decreased from 79.5% for the nine-month period ended September 27, 2009 to 73.6% for the nine-month
period ended September 26, 2010. Correspondingly, consolidated gross margin was 26.4% for the
nine-month period ended September 26, 2010, compared with 20.5% for the nine-month period ended
June 28, 2009, primarily attributable to the margin improvements in the Battery & Energy Products
and Communications Systems business segments.
In our Battery & Energy Products segment, the cost of products sold decreased $8,125, from
$60,083 during the nine-month period ended September 27, 2009 to $51,958 during the nine-month
period ended September 26, 2010. Battery & Energy Products gross margin for the nine-month period
ended September 26, 2010 was $14,482, or 21.8% of revenues, an increase of $1,130 from gross margin
of $13,352, or 18.2% of revenues, for the first nine months of 2009. Battery & Energy Products
gross margin and gross margin as a percentage of revenues both increased for the nine-month period
ended September 26, 2010, primarily as a result of manufacturing efficiencies and higher selling
prices realized for some of our products, in comparison to the nine-month period ended September
27, 2009.
In our Communications Systems segment, the cost of products sold increased $11,360, from
$23,640 during the nine-month period ended September 27, 2009 to $35,000 during the first nine
months of 2010. Communications Systems gross margin for the first nine months of 2010 was $19,488,
or 35.8% of revenues, an increase of $9,278 from gross margin of $10,210, or 30.2% of revenues, for
the first nine months of 2009. The increase in both the gross margin and the gross margin
percentage for Communications Systems resulted from deliveries on the SATCOM-on-the-Move
communications systems order we received in May 2010 and from our acquisition of the AMTI amplifier
business and its higher margin products.
In our Energy Services segment, the cost of sales decreased $5,307, from $13,111 during the
nine-month period ended September 27, 2009 to $7,804 during the nine-month period ended September
26, 2010. Energy Services gross margin for the first nine months of 2010 was $80, or 1.0% of
revenues, a decrease of $1,283 from gross margin of $1,363, or 9.4% of revenues, for the first nine
months of 2009. Gross margin and the gross margin percentage in this particular segment both
decreased mainly due to lower sales caused by project delays and ongoing pricing pressures in this
industry.
Operating Expenses. Total operating expenses for the nine-month period ended September 26,
2010 totaled $28,069, a decrease of $5,842 from the prior years $33,911. Overall, operating
expenses as a percentage of sales decreased to 21.8% during the first nine months of 2010 from
27.9% reported in the first nine months of 2009, due to increased revenues and the across the
board cost reduction and consolidation actions we commenced in the latter half of 2009 which have
now been realized. These actions more than offset the increased expenses we have incurred from our
acquisitions of US Energy in November 2008 and AMTI in March 2009. Amortization expense associated
with intangible assets related to our acquisitions was $1,251 for the first nine months of 2010
($875 in selling, general and administrative expenses and $376 in research and development costs),
compared with $1,256 for the first nine months of 2009 ($859 in selling, general, and
administrative expenses and $397 in research and development costs). Research and development
costs were $6,242 in the first nine months of 2010, a decrease of $1,000, or 13.8%, from the $7,242
reported in the first nine months of 2009, due to the timing of development projects relating
primarily to advanced battery systems. Selling, general, and administrative expenses
decreased $4,842, or 18.2%, to $21,827 during the first nine months of 2010 as compared to the
first nine months of 2009. This decrease represents the results of our broad actions to reduce our
overall spending base in non-revenue producing functions, as well as approximately $1,200 of
non-recurring expenses that were recorded in the second quarter of 2009 associated with staff
reductions and legal expenses relating to a litigation matter that was successfully resolved.
31
Other Income (Expense). Other income (expense) totaled $(600) for the first nine months of
2010, compared to $(830) for the first nine months of 2009. Interest expense, net of interest
income, decreased $12, to $970 for the first nine months of 2010 from $982 for the comparable
period in 2009, mainly as a result of expenses related to the termination of our previous credit
facility with JP Morgan Chase Bank, N.A. and Manufacturers and Traders Trust Company earlier this
year, primarily offset by lower average borrowings under our revolving credit facilities.
Miscellaneous income/expense amounted to income of $370 for the first nine months of 2010 compared
with income of $152 for the first nine months of 2009. The income in the first nine months of 2010
and 2009 was primarily due to transactions impacted by changes in foreign currencies relative to
the U.S. dollar.
Income Taxes. We reflected a tax provision of $570 for the first nine months of 2010 compared
with $291 during the first nine months of 2009. The effective tax rate for the total consolidated
company for the nine-month periods ended September 26, 2010 and September 27, 2009 was:
|
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|
|
|
|
|
|
|
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
Income (Loss) before Incomes Taxes (a) |
|
$ |
5,381 |
|
|
$ |
(9,816 |
) |
|
|
|
|
|
|
|
|
|
Total Income Tax Provision (b) |
|
$ |
570 |
|
|
$ |
291 |
|
|
|
|
|
|
|
|
|
|
Effective Tax Rate (b/a) |
|
|
10.6 |
% |
|
|
3.0 |
% |
See Note 8 in the Notes to Condensed Consolidated Financial Statements for additional
information.
We have determined that a change in ownership, as defined under Internal Revenue Code
Section 382, occurred in 2005 and 2006. As such, the domestic NOL carryforward will be subject to
an annual limitation estimated to be in the range of approximately $12,000 to $14,500. The unused
portion of the annual limitation can be carried forward to subsequent periods. Our ability to
utilize NOL carryforwards due to successive ownership changes is currently limited to a minimum of
approximately $12,000 annually, plus the carryover from unused portions of the annual limitations.
We believe such limitation will not impact our ability to realize the deferred tax asset.
In addition, 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
have an impact of $142 on income taxes determined for the first nine months of 2010. However, this
limitation did not have an impact on income taxes determined for the first nine months of 2009.
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. For
further discussion, see Item 1A, Risk Factors in our Annual Report on Form 10-K for the year
ended December 31, 2009.
Net Income (Loss) Attributable to Ultralife. Net income attributable to Ultralife and income
attributable to Ultralife common shareholders per diluted share was $4,833 and $0.28, respectively,
for the nine months ended September 26, 2010, compared to a net loss attributable to Ultralife and
loss attributable to Ultralife common shareholders per diluted share of $10,081 and $0.59,
respectively, for the first nine months of 2009, primarily as a result of the reasons described
above. Average common shares outstanding used to compute diluted earnings per share increased from
16,996,000 in the first nine months
of 2009 to 17,136,000 in the first nine months of 2010, mainly due to the issuance of 200,000
shares of our common stock to the former principals of U.S. Energy under the Amended Purchase
Agreement in April 2010.
32
Adjusted EBITDA
In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure,
as a supplemental measure of our operating performance. We define Adjusted EBITDA 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 operations. We use Adjusted EBITDA 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 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-cash, non-operating expenses or income. We also present Adjusted EBITDA 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 to net income (loss) attributable
to Ultralife, the most comparable financial measure under U.S. generally accepted accounting
principles (U.S. GAAP).
We use Adjusted EBITDA 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 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 provide information relating to our Adjusted EBITDA
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 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 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 has limitations as an analytical tool, and when assessing our operating performance,
Adjusted EBITDA 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 (1) does not reflect our cash expenditures or future requirements
for capital expenditures or contractual commitments; (2) does not reflect changes in,
or cash requirements for, our working capital needs; (3) does not reflect the
interest expense, or the cash requirements necessary to service interest or principal
payments, on our debt; (4) does not reflect income taxes or the cash requirements for
any tax payments; and (5) does not reflect all of the costs associated with operating
our business; |
|
|
|
although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future, and Adjusted
EBITDA does not reflect any cash requirements for such replacements; |
33
|
|
|
while stock-based compensation is a component of cost of products sold and
operating expenses, the impact on our consolidated financial statements compared to
other companies can vary significantly due to such factors as assumed life of the
stock-based awards and assumed volatility of our common stock; and |
|
|
|
other companies may calculate Adjusted EBITDA differently than we do, limiting its
usefulness as a comparative measure. |
We compensate for these limitations by relying primarily on our U.S. GAAP results and using
Adjusted EBITDA only supplementally. Adjusted EBITDA is calculated as follows for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended |
|
|
Nine-Month Periods Ended |
|
|
|
September 26, |
|
|
September 27, |
|
|
September 26, |
|
|
September 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income (loss) attributable
to Ultralife |
|
$ |
4,526 |
|
|
$ |
(605 |
) |
|
$ |
4,833 |
|
|
$ |
(10,081 |
) |
Add: interest expense, net |
|
|
253 |
|
|
|
454 |
|
|
|
970 |
|
|
|
982 |
|
Add: income tax provision |
|
|
414 |
|
|
|
105 |
|
|
|
570 |
|
|
|
291 |
|
Add: depreciation expense |
|
|
1,012 |
|
|
|
1,047 |
|
|
|
2,952 |
|
|
|
2,986 |
|
Add: amortization expense |
|
|
378 |
|
|
|
449 |
|
|
|
1,251 |
|
|
|
1,256 |
|
Add: stock-based compensation
expense |
|
|
278 |
|
|
|
(82 |
) |
|
|
835 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
6,861 |
|
|
$ |
1,368 |
|
|
$ |
11,411 |
|
|
$ |
(3,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
As of September 26, 2010, cash and cash equivalents totaled $7,093, an increase of $999 from
December 31, 2009. During the nine-month period ended September 26, 2010, we generated $8,842 of
cash from operating activities as compared to the use of $15,058 for the nine-month period ended
September 27, 2009. The generation of cash from operating activities in 2010 resulted mainly from
decreased working capital requirements, including lower balances of accounts receivables and
accounts payable, partially offset by a higher balance in inventories, as well as our favorable
operating results.
We used $1,049 in cash for investing activities during the first nine months of 2010 compared
with $8,209 in cash used for investing activities in the same period in 2009. In the first nine
months of 2010, we spent $901 to purchase plant, property and equipment, $475 was used to establish
a restricted cash fund in connection with our U.K. operations, and $137 was used in connection with
the contingent purchase price payout related to RPS Power Systems, Inc. (RPS). In addition, we
received $464 in cash proceeds from dispositions of property, plant and equipment. In the first
nine months of 2009, we spent $1,443 to purchase plant, property and equipment, and $6,766 was used
in connection with the acquisition of AMTI, as well as contingent purchase price payouts related to
RedBlack and RPS.
During the nine-month period ended September 26, 2010, we used $7,155 in funds from financing
activities compared to the generation of $22,817 in funds in the same period of 2009. The
financing activities in the first nine months of 2010 included a $6,867 outflow from repayments on
the revolver portion of our primary credit facilities, and an outflow of $288 for principal
payments on debt and capital lease obligations. The financing activities in the first nine months
of 2009 included a $26,550 inflow from drawdowns on the revolver portion of our primary credit
facility, an inflow of $751 for proceeds from the issuance of debt, and an inflow of cash from
stock option and warrant exercises of $310, offset by an outflow of $1,468 for principal payments
on term debt under our primary credit facility
and capital lease obligations, and an outflow of $3,326 for the purchase of treasury shares
related to our share repurchase program.
34
Inventory turnover for the first nine months of 2010 was an annualized rate of approximately
3.2 turns per year, an increase from the 2.7 turns for the full year of 2009. The increase in this
metric is mainly due to our conscious efforts to more closely align our inventory purchases with
our orders. Our Days Sales Outstanding (DSOs) as of September 26, 2010, was 62 days, a decrease
from the 69 days at year-end December 31, 2009, mainly due to our greater overall focus on asset
management.
As of September 26, 2010, we had made commitments to purchase approximately $460 of production
machinery and equipment, which we expect to fund through operating cash flows or the use of debt.
Debt Commitments
On February 17, 2010, we entered into a new senior secured asset based revolving credit
facility (Credit Facility) of up to $35,000 with RBS Business Capital, a division of RBS Asset
Finance, Inc. (RBS). The proceeds from the Credit Facility can be used for general working
capital purposes, general corporate purposes, and letter of credit foreign exchange support. The
Credit Facility has a maturity date of February 17, 2013 (Maturity Date). The Credit Facility is
secured by substantially all of our assets. In connection with the closing of the Credit Facility,
we paid RBS a facility fee of $263.
On February 18, 2010, we drew down $9,870 from the Credit Facility to repay all outstanding
amounts due under the Amended and Restated Credit Agreement with JP Morgan Chase Bank, N.A. and
Manufacturers and Traders Trust Company, with JP Morgan Chase Bank acting as the administrative
agent. Our available borrowing under the Credit Facility fluctuates from time to time based upon
amounts of eligible accounts receivable and eligible inventory. Available borrowings under the
Credit Facility equals the lesser of (1) $35,000 or (2) 85% of eligible accounts receivable plus
the lesser of (a) up to 70% of the book value of our eligible inventory or (b) 85% of the appraised
net orderly liquidation value of our eligible inventory. The borrowing base under the Credit
Facility is further reduced by (1) the face amount of any letters of credit outstanding, (2) any
liabilities of ours under hedging contracts with RBS and (3) the value of any reserves as deemed
appropriate by RBS. We are required to have at least $3,000 available under the Credit Facility at
all times.
Interest currently accrues on outstanding indebtedness under the Credit Facility at LIBOR plus
4.50%. We have the ability, in certain circumstances, to fix the interest rate for up to 90 days
from the date of borrowing. Upon delivery of our audited financial statements for the fiscal year
ended December 31, 2010 to RBS, and assuming no events of default exist at such time, the rate of
interest under the Credit Facility can fluctuate based on the available borrowings remaining under
the Credit Facility as set forth in the following table:
|
|
|
|
|
Excess Availability |
|
LIBOR Rate Plus |
|
|
|
|
|
|
Greater than $10,000 |
|
|
4.00 |
% |
|
|
|
|
|
Greater than $7,500 but less than or equal to $10,000 |
|
|
4.25 |
% |
|
|
|
|
|
Greater than $5,000 but less than or equal to $7,500 |
|
|
4.50 |
% |
|
|
|
|
|
Greater than $3,000 but less than or equal to $5,000 |
|
|
4.75 |
% |
35
In addition to paying interest on the outstanding principal under the Credit Facility, we are
required to pay an unused line fee of 0.50% on the unused portion of the $35,000 Credit
Facility. We
must also pay customary letter of credit fees equal to the LIBOR rate and the applicable
margin and any other customary fees or expenses of the issuing bank. Interest that accrues under
the Credit Facility is to be paid monthly with all outstanding principal, interest and applicable
fees due on the Maturity Date.
We are required to maintain a fixed charge coverage ratio of 1.20 to 1.00 or greater at all
times as of and after March 28, 2010. As of September 26, 2010, our fixed coverage ratio was 3.72
to 1.00. Accordingly, we were in compliance with the financial covenants of the Credit Facility.
All borrowings under the Credit Facility are subject to the satisfaction of customary conditions,
including the absence of an event of default and accuracy of our representations and
warranties. The Credit Facility also includes customary representations and warranties,
affirmative covenants and events of default. If an event default occurs, RBS would be entitled to
take various actions, including accelerating the amount due under the Credit Facility, and all
actions permitted to be taken by a secured creditor.
As of September 26, 2010, we had $8,633 outstanding under the Credit Facility. At September
26, 2010, the interest rate on the asset based revolver component of the Credit Facility was 4.76%.
As of September 26, 2010, the revolver arrangement provided for up to $35,000 of borrowing
capacity, including outstanding letters of credit. At September 26, 2010, we had $-0- of
outstanding letters of credit related to this facility, leaving up to $26,367 of additional
borrowing capacity.
On November 16, 2007, under the terms of the stock purchase agreement for Stationary Power
Services, Inc. (SPS), we issued a $4,000 subordinated convertible promissory note to be held by
the previous owner of SPS for partial consideration of the purchase price. The $4,000 subordinated
convertible promissory note carries a three-year term, bears interest at the rate of 5% per year
and is convertible at $15.00 per share into 266,667 shares of our common stock, with a forced
conversion feature at $17.00 per share. We have evaluated the terms of the conversion feature
under applicable accounting literature, including FASBs guidance in accounting for derivative
instruments and hedging activities and accounting for derivative financial instruments indexed to,
and potentially settled in, a companys own stock, and concluded that this feature should not be
separately accounted for as a derivative. Effective March 28, 2009, we entered into Amended and
Restated Subordinated Convertible Promissory Note (Amended Note) with William Maher, the former
owner of SPS. The Amended Note reduced the principal amount under the original subordinated
convertible promissory note (Original Note), as issued in connection with the SPS acquisition in
November 2007, by an amount equal to $580. This reduction was an offset of amounts owed to SPS
from WMSP Holdings, LLC (an entity wholly owned by William Maher). There were no other revisions
to any of the other terms of the Original Note. In February 2010, in connection with the closing
on the new credit facility with RBS, we made a prepayment of $129 on the outstanding principal
balance of the Amended Note. In April 2010, we changed the name of Stationary Power Services, Inc.
to Ultralife Energy Services Corporation (Energy Services). As of September 26, 2010, the
outstanding balance on the Amended Note was $3,291. The Amended Note matures on November 16, 2010,
with principal and accrued interest due in full, totaling $3,312. We expect to pay the $3,312
amount primarily from cash on hand and cash generated from operations, in addition to borrowing
from our credit facility, as necessary.
Equity Transactions
On April 27, 2010, we entered into an agreement (the Amendment Agreement) with Ken Cotton,
Shawn OConnell, Simon Baitler and Tim Jacobs (together, the Share Recipients). The Amendment
Agreement amends the terms of the asset purchase agreement dated October 31, 2008 whereby we
acquired substantially all of the assets of U.S. Energy Systems, Inc. (the Asset Purchase
Agreement).
Under the terms of the Asset Purchase Agreement, on the achievement of certain annual
post-acquisition financial milestones during the period ending December 31, 2012, we were to issue
up to an aggregate of 200,000 unregistered shares of our common stock to Ken Cotton, Shawn
OConnell and Simon Baitler (together, the Selling Shareholders). At the time the Amendment
Agreement was entered
into, we had not issued any shares of our common stock to the Selling Shareholders because
none of the financial milestones had been achieved.
36
Under the terms of the Amendment Agreement, we agreed to issue the Share Recipients an
aggregate of 200,000 shares of our unregistered common stock, valued at approximately $858, in full
satisfaction of our outstanding obligations to the Selling Shareholders under the Asset Purchase
Agreement. Under the terms of the Amendment Agreement, the Selling Shareholders agreed to release
us from any past or present claims relating to the purchase price provisions of the Asset Purchase
Agreement.
We elected to enter into the Amendment Agreement because our consolidation plan and the
reorganization of our reporting units involved reorganizing the operations of the business
purchased in the Asset Purchase Agreement. The post-acquisition financial milestones in the Asset
Purchase Agreement did not support our current consolidation and reorganization plans and it was
determined that it would be in our best interests to satisfy our obligations under the Asset
Purchase Agreement. The Amendment Agreement did not change our original assessment that the
contingent payout of shares of common stock was related to the acquisition of the assets of U.S.
Energy Systems, Inc. Accordingly, we reflected the payment as additional purchase price.
In October 2008, the Board of Directors authorized a share repurchase program of up to $10,000
to be implemented over the course of a six-month period. Repurchases were made from time to time
at managements discretion, either in the open market or through privately negotiated transactions.
The repurchases were made in compliance with Securities and Exchange Commission guidelines and
were subject to market conditions, applicable legal requirements, and other factors. We had no
obligation under the program to repurchase shares and the program could have been suspended or
discontinued at any time without prior notice. We funded the purchase price for shares acquired
primarily with current cash on hand and cash generated from operations, in addition to borrowing
from our credit facility, as necessary. We spent $5,141 to repurchase 628,413 shares of common
stock, at an average price of approximately $8.15 per share, under this share repurchase program.
During the first quarter of 2009, we repurchased 416,305 shares of common stock at an average price
of approximately $7.99 per share under this share repurchase program. All other share repurchases
were made in the fourth quarter of 2008. In April 2009, this share repurchase program expired.
See Note 7 in the Notes to Condensed Consolidated Financial Statements for additional
information regarding stock-based compensation.
Other Matters
We continually explore various sources of liquidity to ensure financing flexibility, including
leasing alternatives, issuing new or refinancing existing debt, and raising equity through private
or public offerings. Although we stay abreast of such financing alternatives, we believe we have
the ability during the next 12 months to finance our operations primarily through internally
generated funds or through the use of additional financing that currently is available to us. In
the event that we are unable to finance our operations with the internally generated funds or
through the use of additional financing that currently is available to us, we may need to seek
additional credit or access capital markets for additional funds. We can provide no assurance that
we would be successful in this regard.
If we are unable to achieve our plans or unforeseen events occur, we may need to implement
alternative plans, in addition to plans that we have already initiated. While we believe we can
complete our original plans or alternative plans, if necessary, there can be no assurance that such
alternatives would be available on acceptable terms and conditions or that we would be successful
in our implementation of such plans.
37
As described in Part II, Item 1, Legal Proceedings of this report, we are involved in
certain environmental matters with respect to our facility in Newark, New York. Although we have
reserved for expenses related to this potential exposure, there can be no assurance that such
reserve will be adequate. The ultimate resolution of this matter may have a significant adverse
impact on the results of operations in the period in which it is resolved.
With respect to our battery products, we typically offer warranties against any defects due to
product malfunction or workmanship for a period up to one year from the date of purchase. With
respect to our communications accessory products, we typically offer a four-year warranty. We also
offer a 10-year warranty on our 9-volt batteries that are used in ionization-type smoke detector
applications. We provide for a reserve for these potential warranty expenses, which is based on an
analysis of historical warranty issues. There is no assurance that future warranty claims will be
consistent with past history, and in the event we experience a significant increase in warranty
claims, there is no assurance that our reserves will be sufficient. This could have a material
adverse effect on our business, financial condition and results of operations.
Recent Accounting Pronouncements and Developments
In April 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-17, Revenue
Recognition Milestone Method (Topic 605): Milestone Method of Revenue Recognition a consensus
of the FASB Emerging Issues Task Force (EITF). ASU No. 2010-17 is limited to research or
development arrangements and requires that this ASU be met for an entity to apply the milestone
method (record the milestone payment in its entirety in the period received) of recognizing
revenue. However, the FASB clarified that, even if the requirements in this ASU are met, entities
would not be precluded from making an accounting policy election to apply another appropriate
policy that results in the deferral of some portion of the arrangement consideration. The guidance
in this ASU will apply to milestones in both single-deliverable and multiple-deliverable
arrangements involving research or development transactions. ASU No. 2010-17 will be effective
prospectively for milestones achieved in fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the
impact that ASU No. 2010-17 will have on our financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements, which provides additional
guidance to improve disclosures regarding fair value measurements. ASU No. 2010-06 amends
Accounting Standards Codification (ASC) 820-10 to add two new disclosures: (1) transfers in and
out of Level 1 and 2 measurements and the reasons for the transfers, and (2) a gross presentation
of activity within the Level 3 roll forward. ASU 2010-06 also includes clarifications to existing
disclosure requirements on the level of disaggregation and disclosures regarding inputs and
valuation techniques. ASU 2010-06 applies to all entities required to make disclosures about
recurring and nonrecurring fair value measurements. ASU No. 2010-06 will be effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value
measurements, which is effective for fiscal years beginning after December 15, 2010. The partial
adoption of ASU 2010-06 did not have a material impact on our financial statements. We are
currently evaluating the impact of the deferred portions of ASU No. 2010-06 will have on our
financial statements; however, we do not expect the adoption of the deferred portions of ASU
2010-06 to have a material impact on our financial statements, except for the additional
disclosures that will be required.
38
In January 2010, the FASB issued ASU No. 2010-02, Consolidation (Topic 810): Accounting and
Reporting for Decreases in Ownership of a Subsidiary a Scope Clarification, to address
implementation issues related to the changes in ownership provisions in ASC 810-10. ASU No.
2010-02 amends ASC 810-10 and related guidance to clarify that the scope of the decrease in
ownership provisions applies to the following: a subsidiary or group of assets that is a business
or nonprofit activity; a subsidiary that is a business or nonprofit activity that is transferred to
an equity method investee or joint
venture; or an exchange of a group of assets that constitutes a business or nonprofit activity
for a noncontrolling interest in an entity, including an equity method investee or joint venture.
The amendments also clarify that the decrease in ownership provisions does not apply to the
following transactions even if they involve businesses: sales of real estate; and conveyances of
oil and gas mineral rights. If a decrease in ownership occurs in a subsidiary that is not a
business or nonprofit activity, entities first need to consider whether the substance of the
transaction is addressed in other U.S. GAAP, such as transfers of financial assets, revenue
recognition, etc., and apply that guidance. If no other guidance exists, an entity should apply
ASC 810-10. Lastly, ASU No. 2010-02 expands existing disclosure requirements for transactions
within the scope of ASC 810-10, and adds several new ones that address fair value measurements and
related techniques, the nature of any continuing involvement after the transaction, and whether
related parties are involved. ASU No. 2010-02 is effective beginning in the period that an entity
adopts ASC 810-10. If an entity had previously adopted ASC 810-10, the amendments are effective
beginning in the first interim or annual reporting period ending on or after December 15, 2009.
The amendments must be applied retrospectively to the date ASC 810-10 was adopted. The adoption of
ASU No. 2010-02, with retrospective application to January 1, 2009, did not have a significant
impact on our financial statements.
In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements a consensus of the FASB EITF. ASU No. 2009-13
eliminates the residual method of accounting for revenue on undelivered products and instead
requires companies to allocate revenue to each of the deliverable products based on their relative
selling price. In addition, this ASU expands the disclosure requirements surrounding
multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements
entered into for fiscal years beginning on or after June 15, 2010. We are currently evaluating the
impact that ASU No. 2009-13 will have on our financial statements.
In June 2009, the FASB issued amended guidance for the accounting for transfers of financial
assets. The amended guidance removes the concept of a qualifying special-purpose entity. The
amended guidance is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2009. Earlier application is prohibited. The adoption of this
pronouncement did not have a significant impact on our financial statements.
In June 2009, the FASB issued amended guidance for the accounting for variable interest
entities. The amendments include: (1) the elimination of the exemption for qualifying special
purpose entities, (2) a new approach for determining who should consolidate a variable-interest
entity, and (3) changes to when it is necessary to reassess who should consolidate a
variable-interest entity. The amended guidance is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2009. Earlier adoption is
prohibited. The adoption of this pronouncement did not have a significant impact on our financial
statements.
Critical Accounting Policies
Management exercises judgment in making important decisions pertaining to choosing and
applying accounting policies and methodologies in many areas. Not only are these decisions
necessary to comply with U.S. generally accepted accounting principles, but they also reflect
managements view of the most appropriate manner in which to record and report our overall
financial performance. All accounting policies are important, and all policies described in Note 1
(Summary of Operations and Significant Accounting Policies) in our Annual Report on Form 10-K
should be reviewed for a greater understanding of how our financial performance is recorded and
reported.
During the first nine months of 2010, there were no significant changes in the manner in which
our significant accounting policies were applied or in which related assumptions and estimates were
developed.
39
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the three months ended September 26, 2010, there were no material changes to our
quantitative and qualitative disclosures about market risk as presented in Item 7A of Part II of
our Annual Report on Form 10-K for the year ended December 31, 2009.
Item 4. CONTROLS AND PROCEDURES
Evaluation Of Disclosure Controls And Procedures
Our president and chief executive officer (principal executive officer) and our chief
financial officer and treasurer (principal financial officer) have evaluated our disclosure
controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) or 15d-15(e)) as of
the end of the period covered by this quarterly report. Based on this evaluation, our president
and chief executive officer and chief financial officer and treasurer concluded that our disclosure
controls and procedures were effective as of such date.
Changes In Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in
Securities Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter covered by this
quarterly report that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
40
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to legal proceedings and claims that arise in the normal course of business.
We believe that the final disposition of such matters will not have a material adverse effect on
our financial position, results of operations or cash flows.
In conjunction with our purchase/lease of our Newark, New York facility in 1998, we entered
into a payment-in-lieu of tax agreement, which provided us with real estate tax concessions upon
meeting certain conditions. In connection with this agreement, a consulting firm performed a Phase
I and II Environmental Site Assessment, which revealed the existence of contaminated soil and
ground water around one of the buildings. We retained an engineering firm, which estimated that
the cost of remediation should be in the range of $230. In February 1998, we entered into an
agreement with a third party which provides that we and this third party will retain an
environmental consulting firm to conduct a supplemental Phase II investigation to verify the
existence of the contaminants and further delineate the nature of the environmental concern. The
third party agreed to reimburse us for fifty percent (50%) of the cost of correcting the
environmental concern on the Newark property. We have fully reserved for our portion of the
estimated liability. Test sampling was completed in the spring of 2001, and the engineering report
was submitted to the New York State Department of Environmental Conservation (NYSDEC) for review.
The NYSDEC reviewed the report and, in January 2002, recommended additional testing. We responded
by submitting a work plan to the NYSDEC, which was approved in April 2002. We sought proposals
from engineering firms to complete the remedial work contained in the work plan. A firm was
selected to undertake the remediation and in December 2003 the remediation was completed, and was
overseen by the NYSDEC. The report detailing the remediation project, which included the test
results, was forwarded to the NYSDEC and to the New York State Department of Health (NYSDOH).
The NYSDEC, with input from the NYSDOH, requested that we perform additional sampling. A work plan
for this portion of the project was written and delivered to the NYSDEC and approved. In November
2005, additional soil, sediment and surface water samples were taken from the area outlined in the
work plan, as well as groundwater samples from the monitoring wells. We received the laboratory
analysis and met with the NYSDEC in March 2006 to discuss the results. On June 30, 2006, the Final
Investigation Report was delivered to the NYSDEC by our outside environmental consulting firm. In
November 2006, the NYSDEC completed its review of the Final Investigation Report and requested
additional groundwater, soil and sediment sampling. A work plan to address the additional
investigation was submitted to the NYSDEC in January 2007 and was approved in April 2007.
Additional investigation work was performed in May 2007. A preliminary report of results was
prepared by our outside environmental consulting firm in August 2007 and a meeting with the NYSDEC
and NYSDOH took place in September 2007. As a result of this meeting, the NYSDEC and NYSDOH
requested additional investigation work. A work plan to address this additional investigation was
submitted to and approved by the NYSDEC in November 2007. Additional investigation work was
performed in December 2007. Our environmental consulting firm prepared and submitted a Final
Investigation Report in January 2009 to the NYSDEC for review. The NYSDEC reviewed and approved
the Final Investigation Report in June 2009 and requested the development of a Remedial Action
Plan. Our environmental consulting firm developed and submitted the requested plan for review and
approval by the NYSDEC. In October 2009, we received comments back from the NYSDEC regarding the
content of the remediation work plan. Our environmental consulting firm incorporated the requested
changes and submitted a revised work plan to the NYSDEC in January 2010 for review and approval.
The NYSDEC approved the revised work plan and the remediation activities outlined in the work plan
were completed in July 2010. Our environmental consulting firm has prepared a Final Engineering
Report which was submitted to the NYSDEC for review and approval in October 2010. Through
September 26, 2010, total costs incurred have amounted to approximately $313, none of which has
been capitalized. At September 26, 2010 and December 31, 2009, we had $34 and $49, respectively,
reserved for this matter.
41
Item 1A. Risk Factors
We have updated, amended and restated certain of the risk factors that were included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Each of the risk factors set forth below, as well as those set forth in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 could materially adversely affect our
business, operating results and financial condition, as well as the value of an investment in our
common stock.
Additional risks and uncertainties not presently known to us, or those we currently deem
immaterial, may also materially harm our business, operating results and financial condition.
Updated Risk Factor
Any impairment of goodwill and indefinite-lived intangible assets, and other intangible assets,
could negatively impact our results of operations.
Our goodwill and indefinite-lived intangible assets are subject to an impairment test on an
annual basis and are also tested whenever events and circumstances indicate that goodwill and/or
indefinite-lived intangible assets may be impaired. Any excess goodwill and/or indefinite-lived
intangible assets value resulting from the impairment test must be written off in the period of
determination. Intangible assets (other than goodwill and indefinite-lived intangible assets) are
generally amortized over the useful life of such assets. In addition, from time to time, we may
acquire or make an investment in a business which will require us to record goodwill based on the
purchase price and the value of the acquired tangible and intangible assets. We may subsequently
experience unforeseen issues with such business which adversely affect the anticipated returns of
the business or value of the intangible assets and triggers an evaluation of the recoverability of
the recorded goodwill and intangible assets for such business. Future determinations of
significant write-offs of goodwill or intangible assets as a result of an impairment test or any
accelerated amortization of other intangible assets could have a negative impact on our results of
operations and financial condition.
We are in the process of completing our annual impairment analysis for goodwill and
indefinite-lived intangible assets, as well as evaluating our amortizable intangible assets, in
accordance with the applicable accounting guidance, to determine if we do have any impairment of
goodwill and intangible assets for the year ended December 31, 2010. Due to the narrow margin of
passing the Step 1 goodwill impairment testing for 2009 in the Energy Services reporting unit,
there was potential for a partial or full impairment of the goodwill value in the Energy Services
reporting unit in 2010 if our projected operational results were not achieved. One of the key
assumptions for achieving the projected operational results included revenue growth in the standby
power and wireless services markets, which has not been achieved to date in 2010. As of September
26, 2010, the Energy Services reporting unit had a goodwill and intangible assets net book value of
$7,977 and $5,550, respectively. If a partial or full impairment of the goodwill and/or intangible
assets values in the Energy Services reporting unit occurs in 2010, it could have a significant
negative impact on our operating income, net income and earnings per share for the fiscal year
ended December 31, 2010
Item 6. Exhibits
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Exhibit |
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Index |
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Description of Document |
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Incorporated By Reference from: |
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31.1 |
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Rule 13a-14(a) / 15d-14(a) CEO Certifications
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Filed herewith |
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31.2 |
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Rule 13a-14(a) / 15d-14(a) CFO Certifications
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Filed herewith |
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32 |
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Section 1350 Certifications
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Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ULTRALIFE CORPORATION
(Registrant)
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Date: November 3, 2010 |
By: |
/s/ John D. Kavazanjian
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John D. Kavazanjian |
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President and Chief Executive Officer
(Principal Executive Officer) |
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Date: November 3, 2010 |
By: |
/s/ Philip A. Fain
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Philip A. Fain |
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Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer) |
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Index to Exhibits
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31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
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32 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
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