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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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(Mark One)

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended June 26, 2016

OR

[  ]         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 0-27460

 

ULTRALIFE CORPORATION

 

 

(Exact name of registrant as specified in its charter) 

 

Delaware (State or other jurisdiction of incorporation)   2000 Technology Parkway  Newark, New York (Address of principal executive offices)

16-1387013 (I.R.S. Employer Identification No.)   14513 (Zip Code)

___________________

 

Registrant's telephone number, including area code: (315) 332-7100

_________________________________

 

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 [ X ] No [  ]

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer: Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [ X ]

 

The number of shares outstanding of the registrant's common stock was 15,199,892, net of 4,009,564 treasury shares, as of July 28, 2016.

 

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ULTRALIFE CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

PART I.          FINANCIAL INFORMATION

 

		Page
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets as of June 26, 2016 (unaudited) and December 31, 2015	3
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Month Periods Ended June 26, 2016 and June 28, 2015 (unaudited)	4
	Consolidated Statements of Cash Flows for the Six Month Periods Ended June 26, 2016 and June 28, 2015 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 6.	Exhibits	30
	Signatures	31
	Index to Exhibits	32

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

(unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

  

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND

COMPREHENSIVE INCOME

(In Thousands except per share amounts)

(unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ULTRALIFE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(unaudited)

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

ULTRALIFE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands – except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2. MANAGEMENT’S 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, our reliance on a certain key customer; potential costs because of the warranties we supply with our products and services; our ability to comply with changes to the regulations for the shipment of our products; our efforts to develop new commercial applications for our products; the unique risks associated with our China operations; possible future declines in demand for the products that use our batteries or communications systems; reduced U.S. and foreign military spending including the uncertainty associated with government budget approvals; possible impairments of our goodwill and other intangible assets; possible breaches in security and other disruptions; variability in our quarterly and annual results and the price of our common stock; safety risks, including the risk of fire; negative publicity of lithium-ion batteries; the risk that we are unable to protect our proprietary and intellectual property; our resources being overwhelmed by our growth prospects; our ability to retain top management and key personnel; potential disruptions in our supply of raw materials and components; our exposure to foreign currency fluctuations; our customers’ demand falling short of volume expectations in our supply agreements; rules and procedures regarding contracting with the U.S. and foreign governments; exposure to possible violations of the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act or other anti-corruption laws; our ability to utilize our net operating loss carryforwards; our ability to comply with government regulations regarding the use of “conflict minerals”; possible audits of our contracts by the U.S. and foreign governments and their respective defense agencies; known and unknown environmental matters; technological innovations in the non-rechargeable and rechargeable battery industries; and other risks and uncertainties, certain of which are beyond our control. 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 in this report, the words “anticipate”, “believe”, “estimate” or “expect” or words of similar import are intended to identify forward-looking statements. For further discussion of certain of the matters described above and other risks and uncertainties, see Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Undue reliance should not be placed on our forward-looking statements. Except as required by law, we disclaim any obligation to update any risk 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 or our Annual Report on Form 10-K for the year ended December 31, 2015 to reflect new information or risks, future events or other developments.

 

The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q and the Risk Factors and our Consolidated Financial Statements and Notes thereto contained in our Form 10-K for the year ended December 31, 2015.

 

The financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is presented in thousands of dollars, except for share and per share amounts. All figures presented below represent results from continuing operations, unless otherwise specified.

 

 

General

 

We offer products and services ranging from 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, charging systems, communications and electronics systems and accessories, and custom engineered systems. We continually evaluate ways to grow and broaden the scope of our products and services, including the design, development and sale of new products, expansion of our sales force to penetrate new markets and geographies, as well as seeking opportunities to expand through acquisitions. We sell our products worldwide through a variety of trade channels, including original equipment manufacturers (“OEMs”), industrial and defense supply distributors and directly to U.S. and international defense departments.

 

We report our results in two operating segments: Battery & Energy Products and Communications Systems. The Battery & Energy Products segment includes: lithium 9-volt, cylindrical and other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories. The Communications Systems segment includes: RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems, integrated communication systems for fixed or vehicle applications and communications and electronics systems design. We believe that reporting performance at the gross profit level is the best indicator of segment performance.  As such, we report segment performance at the gross profit level and operating expenses as corporate charges. (See Note 12 in the Notes to Consolidated Financial Statements.)

 

 

 

Overview

 

Consolidated revenues of $20,371 for the three-month period ended June 26, 2016, increased by $1,416 or 7.5%, from $18,955 during the three-month period ended June 28, 2015, reflecting the Company’s acquisition of Accutronics in January 2016 and higher revenues from our Communications Systems business driven by shipments of Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”) systems.

 

Gross profit for the three-month period ended June 26, 2016 was $5,900, or 29.0% of revenues, compared to $5,859, or 30.9% of revenues, for the same quarter a year ago. The 190 basis point reduction in gross margin resulted from the sales mix of products for our Communications Systems business which offset an increase in gross margin for our Battery & Energy Products business.

 

Operating expenses increased to $5,401 during the three-month period ended June 26, 2016, compared to $5,042 during the three-month period ended June 28, 2015. The increase of $359 or 7.1% was fully attributable to Accutronics which contributed $740 of operating expenses in the second quarter. Excluding Accutronics, operating expenses decreased $381 or 7.6% due primarily to strict control over discretionary spending while focusing on the development of new products and revenue growth.

 

Operating income for the three-month period ended June 26, 2016 was $499 or 2.4% of revenues, compared to $817 or 4.3% for the year-earlier period. The year-over-year decrease in operating income primarily reflects the impact of the 190 basis point decline in gross margin in the 2016 period.

 

Net income attributable to Ultralife was $446 or $0.03 per share, for the three-month period ended June 26, 2016, compared to $788 or $0.05 per share for the three-month period ended June 28, 2015.

 

Adjusted EBITDA, defined as net income (loss) attributable to Ultralife before net interest expense, provision (benefit) for income taxes, depreciation and amortization, stock-based compensation expenses, plus/minus expenses/income that we do not consider reflective of our ongoing operations, amounted to $1,457 in the second quarter of 2016 compared to $1,725 in the second quarter of 2015. See the section “Adjusted EBITDA” beginning on Page 25 for a reconciliation of Adjusted EBITDA to net income attributable to Ultralife.

 

 

Primarily as a result of our acquisition of Accutronics on January 13, 2016, together with the purchase of shares under the Company’s share repurchase program, an increase in accounts receivable due to the timing of second quarter sales and an increase in inventory to fulfill backorders, we utilized $11,273 of cash and cash equivalents for the six month period ended June 26, 2016. Accordingly, cash and cash equivalents decreased from $14,393 at December 31, 2015 to $3,120 at June 26, 2016.

 

Despite some economic uncertainties weighing on customer’s buying decisions, we still have our sights set on delivering profitable growth for 2016. Our gross margins and liquidity give us the flexibility to continue to invest in new product development in support of our long-term global diversification strategy.

 

 

Results of Operations

 

Three-month periods ended June 26, 2016 and June 28, 2015

 

Revenues. Consolidated revenues for the three-month period ended June 26, 2016 amounted to $20,371, an increase of $1,416 or 7.5%, from the $18,955 reported for the three-month period ended June 28, 2015.

 

Battery & Energy Products revenues decreased $213 or 1.3%, to $15,759 for the three-month period ended June 26, 2016 from $15,972 for the three-month period ended June 28, 2015. Commercial revenues for the second quarter of 2016 increased 5.3% over the prior year period, reflecting Accutronics sales, which partially offset the year earlier sales demand for our 9-Volt batteries from large global smoke detector OEM’s to comply with legislation and trends in certain European Union countries for products lasting ten years and large shipments of batteries to service the metering and toll pass industries in China. Sales to medical customers in the 2016 period increased by 4.7% over 2015 when excluding Accutronics and more than doubled when including Accutronics. Government and defense sales decreased 10.4% from the 2015 period due primarily to the shipment of a large order to a defense supplier in 2015 for use in multifunctional information distribution systems and lower shipments of primary batteries to the U.S. Department of Defense, which was partially offset by higher charger shipments to international customers.

 

Communications Systems revenues increased $1,629 or 54.6%, from $2,983 during the three-month period ended June 28, 2015 to $4,612 for the three-month period ended June 26, 2016. This increase is attributable to shipments of VIPER systems which more than offset a decrease in core product sales due to closing and funding delays associated with some orders which are expected to ship in subsequent quarters.

 

Cost of Products Sold. Cost of products sold totaled $14,471 for the quarter ended June 26, 2016, an increase of $1,375, or 10.5%, from the $13,096 reported for the same quarter a year ago. Consolidated cost of products sold as a percentage of total revenue increased to 71.0% for the three-month period ended June 26, 2016 from 69.1% for the three-month period ended June 28, 2015. Correspondingly, consolidated gross margin was 29.0% for the three-month period ended June 26, 2016, compared with 30.9% for the three-month period ended June 28, 2015, reflecting the mix of products sold associated with the Communications Systems business which offset an increase in gross margin for our Battery & Energy Products business.

 

  

In our Battery & Energy Products segment, the cost of products sold decreased $335, to $11,095 for the three-month period ended June 26, 2016 from $11,430 during the three-month period ended June 28, 2015. Battery & Energy Products’ gross profit for the second quarter of 2016 was $4,664 or 29.6% of revenues, an increase of $122 or 2.7%, from gross profit of $4,542 or 28.4% of revenues for the second quarter of 2015. Battery & Energy Products’ gross margin as a percentage of revenues increased for the three-month period ended June 26, 2016 by 120 basis points, reflecting favorable product mix including the higher margins recognized for Accutronics products.

 

In our Communications Systems segment, the cost of products sold increased by $1,710 or 102.6% from $1,666 during the three-month period ended June 28, 2015 to $3,376 during the three-month period ended June 26, 2016 due to higher sales in 2016. Communications Systems’ gross profit for the second quarter of 2016 was $1,236 or 26.8% of revenues, a decrease of $81 or 6.2%, from gross profit of $1,317 or 44.2% of revenues, for the second quarter of 2015. The 1,740 basis points decrease in gross margin as a percentage of revenue during 2016 is driven by the mix of products sold.

 

Operating Expenses. Operating expenses for the three-month period ended June 26, 2016 totaled $5,401, an increase of $359 or 7.1% from the $5,042 recorded during the three-month period ended June 28, 2015. The increase was fully attributable to the acquisition of Accutronics, which contributed operating expenses of $740 in the second quarter, including $92 of intangible asset amortization. Excluding Accutronics results, operating expenses decreased $381 or 7.6% due primarily to strict control over discretionary spending while focusing on the development of new products and revenue growth.

 

Overall, operating expenses as a percentage of revenues were 26.5% for the quarter ended June 26, 2016 compared to 26.6% for the quarter ended June 28, 2015. Amortization expense associated with intangible assets related to our acquisitions was $137, including $92 for Accutronics, for the second quarter of 2016 ($85 in selling, general and administrative expenses and $52 in research and development costs), compared with $59 for the second quarter of 2015 ($26 in selling, general, and administrative expenses and $33 in research and development costs). Research and development costs were $1,425 for the three-month period ended June 26, 2016, an increase of $91 or 6.8%, from $1,334 for the three-months ended June 28, 2015. The increase is attributable to $159 of research and development costs (including intangible asset amortization of $28) incurred by Accutronics. Selling, general, and administrative expenses increased $268 or 7.2% to $3,976 during the second quarter of 2016 from $3,708 during the second quarter of 2015. The increase is fully attributable to the inclusion of Accutronics results which contributed $581 (including intangible asset amortization of $64) of selling, general and administrative expenses for the second quarter, partially offset by continued actions in the core businesses to reduce discretionary expenses.

 

Other Income (Expense). Other income (expense) totaled ($24) for the three-month period ended June 26, 2016 compared to $28 for the three-month period ended June 28, 2015. Interest and financing expense was $62 for the second quarter of 2016 compared to $64 for the 2015 period. Miscellaneous income (expense) amounted to $38 for the second quarter of 2016 compared with $92 for the second quarter of 2015, primarily due to transactions impacted by foreign currency fluctuations between the U.S. dollar relative to Pounds Sterling and the Euro.

 

Income Taxes. We reflected a tax provision of $33 for the second quarter of 2016 compared to $71 for the second quarter of 2015, a decrease of $38. The decrease results from the increased international mix of our sales and operations.

 

See Note 9 in the Notes to Consolidated Financial Statements in this Form 10-Q for additional information regarding our income taxes.

 

Net Income Attributable to Ultralife. Net income attributable to Ultralife and net income attributable to Ultralife common shareholders per diluted share was $446 and $0.03, respectively, for the three months ended June 26, 2016, compared to $788 and $0.05, respectively, for the three months ended June 28, 2015. Average common shares outstanding used to compute diluted earnings per share decreased from 16,597,000 in the second quarter of 2015 to 15,419,000 in the second quarter of 2016 due to the repurchase of shares under the Company’s share repurchase program.

 

 

Six-month periods ended June 26, 2016 and June 28, 2015

 

Revenues. Consolidated revenues for the six-month period ended June 26, 2016 amounted to $41,204, an increase of $3,072 or 8.1%, from the $38,132 reported for the six-month period ended June 28, 2015.

 

Battery & Energy Products revenues decreased $49, or 0.2%, from $32,248 for the six-month period ended June 28, 2015 to $32,199 for the six-month period ended June 26, 2016. Commercial revenues of this business increased 11.9% over the 2015 six-month period and now comprise 58.6% of total segment sales versus 52.3% last year. The year-over-year increase resulted from the inclusion of Accutronics sales, which offset the year-earlier demand for our 9-Volt batteries from large global smoke detector OEM’s to comply with legislation and trends in certain European Union countries for products lasting ten years and large shipments of batteries to service the metering and toll pass industries in China. Government and defense sales of this business decreased 13.4% from the 2015 six-month period and now comprise 41.4% of total segment sales versus 47.7% last year. The year-over-year decline was due to the shipment of a large charger order to an international prime defense supplier and a large battery shipment for use in multifunctional information distribution systems in 2015.

 

Communications Systems revenues increased $3,121, or 53.0%, from $5,884 during the six-month period ended June 28, 2015 to $9,005 for the six-month period ended June 26, 2016, reflecting shipments of VIPER systems which more than offset a decrease in core product sales due to closing and funding delays associated with some orders which are expected to ship in subsequent quarters.

 

Cost of Products Sold. Cost of products sold totaled $28,899 for the six-month period ended June 26, 2016, an increase of $2,633 or 10.0%, from the $26,266 reported for the same six-month period a year ago. Consolidated cost of products sold as a percentage of total revenue increased from 68.9% for the six-month period ended June 28, 2015 to 70.1% for the six-month period ended June 26, 2016. Correspondingly, consolidated gross margin was 29.9% for the six-month period ended June 26, 2016, compared with 31.1% for the six-month period ended June 28, 2015, due primarily to product mix impacting the Communications Systems segment and a one-time adjustment to increase the opening inventory of Accutronics to fair market value in accordance with purchase.

 

For our Battery & Energy Products segment, the cost of products sold decreased $604 or 2.6%, from $22,922 during the six-month period ended June 28, 2015 to $22,318 during the six-month period ended June 26, 2016. Battery & Energy Products’ gross profit for the 2016 six-month period was $9,881 or 30.7% of revenues, an increase of $555 or 6.0% from gross profit of $9,326, or 28.9% of revenues, for the 2015 six-month period. As a result, Battery & Energy Products’ gross margin as a percentage of revenues increased for the six-month period ended June 28, 2015 by 180 basis points, reflecting favorable product mix including the higher overall gross margins recognized for Accutronics products.

 

For our Communications Systems segment, the cost of products sold increased by $3,237 or 96.8% from $3,344 during the six-month period ended June 28, 2015 to $6,581 during the six-month period ended June 26, 2016. Communications Systems’ gross profit for the first six months of 2016 was $2,424 or 26.9% of revenues, a decrease of $116 or 4.6% from gross profit of $2,540 or 43.2% of revenues, for the second quarter of 2015. The 1,630 basis points decrease in gross margin as a percentage of revenue during 2016 is due to unfavorable sales product mix.

 

Operating Expenses. Total operating expenses for the six-month period ended June 26, 2016 totaled $11,324, an increase of $1,097 or 10.7% from the $10,227 recorded during the six-month period ended June 28, 2015. This increase was fully attributable to the acquisition of Accutronics on January 13, 2016, which contributed operating expenses of $1,745 in 2016, including $203 of one-time direct acquisition costs and $184 of intangible asset amortization. Excluding Accutronics results, operating expenses decreased $648 or 6.3% due primarily to strict control over discretionary spending.

 

 

Overall, operating expenses as a percentage of revenues were 27.5% for the six-month period ended June 26, 2016 compared to 26.8% for the comparable 2015 period. Amortization expense associated with intangible assets related to our acquisitions was $274, including $184 for Accutronics, for the first six months of 2016 ($171 in selling, general and administrative expenses and $103 in research and development costs), compared with $119 for the first six months of 2015 ($54 in selling, general, and administrative expenses and $65 in research and development costs). Research and development costs were $3,081 for the six-month period ended June 26, 2016, an increase of $388, or 14.4%, from $2,693 for the six-months ended June 28, 2015. The increase is comprised of $343 of research and development costs (including intangible asset amortization of $56) incurred by Accutronics and an increase of $45 due to the higher level of new product development spending in the 2016 period in response to a heightened level of requests for proposals. Selling, general, and administrative expenses increased $709 or 9.4%, from $7,534 during the first six months of 2015 to $8,243 during the first six months of 2016. The increase is fully attributable to the inclusion of Accutronics results and the one-time direct acquisition costs which contributed $1,402 (including intangible asset amortization of $127) of selling, general and administrative expenses for the 2016 period, partially offset by continued actions in the core businesses to reduce discretionary expenses.

 

Other Income (Expense). Other (expense) totaled $(137) for the six-month period ended June 26, 2016 compared to $(160) for the six-month period ended June 28, 2015. Interest and financing expense increased $33 to $163 for the 2016 period from $130 for the comparable period in 2015, as a result of one-time costs of $48 associated with the acquisition of Accutronics. Miscellaneous income (expense) amounted to $26 for the first six months of 2016 compared with ($30) for the first six months of 2015, primarily due to the Company’s actions in 2016 to mitigate the impact of foreign currency fluctuation between the U. S. dollar relative to Pounds Sterling and the Euro.

 

Income Taxes. We reflected a tax provision of $121 for the first two quarters of 2016 compared with a tax provision of $182 for the first two quarters of 2015. The decrease of $61 or 33.5% was due to the amounts and geographic mix of earnings as well as the tax benefit associated with the acquisition costs related to Accutronics. The effective consolidated tax rates for the six-month periods ended June 26, 2016 and June 28, 2015 were:

 

 

		Six-month periods ended
		June 26,				June 28,
		2016				2015
Income Before Income Taxes (a)		$	844			$	1,479
Income Tax Provision (b)			121				182
Effective Income Tax Rate (b/a)			14.3	%			12.3	%

 

See Note 9 in the Notes to Consolidated Financial Statements for additional information regarding our income taxes.

 

 

Net Income Attributable to Ultralife. Net income attributable to Ultralife and income attributable to Ultralife common shareholders per diluted share was $745 and $0.05, respectively, for the six months ended June 26, 2016, compared to $1,321 and $0.08, respectively, for the six months ended June 28, 2015. The 2016 period was impacted by the purchase accounting adjustments and non-recurring costs totaling $343 related to the acquisition of Accutronics, equivalent to $0.02 per share. Average common shares outstanding used to compute diluted earnings per share decreased from 16,977,000 in the 2015 period to 15,545,000 in the 2016 period, mainly due to the repurchase of shares under the Company’s share repurchase plan.

 

 

Adjusted EBITDA from Continuing Operations

 

In evaluating our business, we consider and use Adjusted EBITDA, a non-GAAP financial measure, as a supplemental measure to review and assess 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 continuing operations. We also 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 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-operating expenses or income. We also present Adjusted EBITDA from operations 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 believe that by limiting Adjusted EBITDA, we assist investors in gaining a better understanding of our business on a going forward basis. 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 does not reflect (1) our cash expenditures or future requirements for capital expenditures or contractual commitments; (2) changes in, or cash requirements for, our working capital needs; (3) the interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; (4) income taxes or the cash requirements for any tax payments; and (5) 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 from continuing operations does not reflect any cash requirements for such replacements;

 

●

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								Six-month periods ended
		June 26,				June 28,				June 26,				June 28,
		2016				2015				2016				2015
Net Income Attributable to Ultralife		$	446			$	788			$	745			$	1,321
Add:
Interest and Financing Expense, Net			61				65				163				132
Income Tax Provision			33				71				121				182
Depreciation Expense			576				582				1,165				1,178
Amortization of Intangible Assets & Financing Fees			155				59				311				119
Stock-Based Compensation Expense			169				160				350				304
Non-Cash Purchase Accounting adjustments			5				-				96				-
Other			12				-				12				36
Adjusted EBITDA		$	1,457			$	1,725			$	2,963			$	3,272

 

 

Liquidity and Capital Resources

 

As of June 26, 2016, cash and cash equivalents totaled $3,120, a decrease of $11,273 from the beginning of the year primarily attributable to the Company’s acquisition of Accutronics. During the six-month period ended June 28, 2016, we utilized $802 of cash from our operating activities as compared to cash generated totaling $4,745 during the six-month period ended June 28, 2015, a decrease of $5,547. Cash utilized by operations in 2016 consisted of cash provided from net income attributable to Ultralife of $723 and non-cash expenses (depreciation, amortization and stock-based compensation) totaling $1,826, offset by a $1,053 increase in accounts receivables due primarily to the timing of sales during the second quarter of 2016, and an increase in inventory of $762 due primarily to service backlog including VIPER systems, and a net decrease in accounts payable and other working capital items of $1,536 due in large part to payment of the inventory procured associated with servicing backlog. Cash generated from operations in 2015 included our net income of $1,297 plus non-cash expenses (depreciation, amortization and stock-based compensation) totaling $1,655, and cash provided by a $2,331 decrease in inventories, offset partially by a decrease in accounts payable and other liabilities of $863.

 

We used $10,745 in cash for investing activities during the first six months of 2016. The Company acquired Accutronics in the 2016 period utilizing cash of $11,161, which was partially offset by the cash acquired from Accutronics of $1,304. Cash paid for capital expenditures totaled $888 and $884 in the first six months of 2016 and 2015, respectively. Cash utilized to repurchase shares under the Company’s share repurchase program during the 2016 six-month period was $607.

 

  

As of June 26, 2016, we had made commitments to purchase approximately $662 of production machinery and equipment, which we expect to fund through operating cash flows or debt borrowings.

 

On April 28, 2014, the Company’s Board of Directors approved a share repurchase program which became effective on May 1, 2014, under which the Company was authorized to repurchase up to 1.8 million shares of its outstanding common stock over a period not to exceed twelve months. The Share Repurchase Program was extended through June 2, 2016, and the maximum number of shares authorized to be repurchased under the program was increased to 3.4 million shares.

 

During the three and six month period ended June 26, 2016, the Company repurchased 149,904 shares under this program for a total cost (excluding fees and commissions) of $603. During the six month period ended June 28, 2015, the Company repurchased 1,476,855 shares under this program for a total cost (excluding fees and commissions) of $5,805.

 

From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480.

 

 

Debt Commitments

 

We have financing through our Credit Facility with PNC Bank, which provides a $20,000 secured asset-based revolving credit facility that includes a $1,000 letter of credit sub-facility. As of June 26, 2016, we had approximately $11,021 of borrowing capacity under our $20,000 Credit Facility with PNC Bank, and we had borrowings of $831 under the Credit Facility.

 

Our available borrowing limit under the Credit Facility is based on a borrowing base formula equal to a percentage of accounts receivable, inventory and eligible foreign in-transit inventory. Interest is payable quarterly and accrues on outstanding indebtedness under the Credit Agreement at either a LIBOR-based rate or an alternate base rate, as defined in the Credit Agreement. The applicable interest rate was 2.45% at June 26, 2016. We pay a quarterly fee on the Credit Facility’s unused availability at 0.375% per annum.

 

The Company currently believes that the cash flow generated from operations and when necessary, available borrowing from our Credit Facility, will be sufficient to meet its current and long-term funding requirements for the foreseeable future.

 

 

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. GAAP, but they also reflect management’s 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”) to our Consolidated Financial Statements in our 2015 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 six months of 2016, 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.

 

 

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)) 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.

 

 

PART II OTHER INFORMATION

 

ITEM 1.     LEGAL PROCEEDINGS

 

Dreamliner Litigation

 

In July 2013, an unoccupied Boeing 787 Dreamliner aircraft operated by Ethiopian Airlines was damaged by a fire while parked at London Heathrow Airport. We participated in and provided technical assistance in support of an investigation of this incident conducted by U.K. and U.S. regulatory authorities as well as by the manufacturer of the aircraft, as we are one of many downstream suppliers to that manufacturer.  A final report was issued by the Air Accidents Investigative Branch - - UK Civil Aviation regulatory authority, with findings indicating that the fire was primarily caused by circumstances related to the plane’s emergency locator transmitter (“ELT”) manufactured and installed by another company.  

 

A component of the ELT is a battery pack which incorporates Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D-cell. Ultralife has had this cell in production since 2001, with millions of units produced and this cell is widely-used for global defense and commercial applications. This battery product has gone through rigorous safety and qualification testing, including United Nations Transport of Dangerous Goods, Manual of Tests and Criteria, and is authorized for use in aerospace applications under Technical Standard Order C142.

 

On May 4, 2015, we were notified of a lawsuit in which we were named, along with other suppliers to the aircraft manufacturer, concerning that 2013 fire. The suit was filed by Ethiopian Airlines Enterprise in the Commercial Court, Queen’s Bench Division of the High Court of Justice, London. The suit seeks as damages $42,000 plus other unspecified amounts, including those for loss of use and diminution in value of the aircraft. We maintain liability and products liability insurance through reputable providers, and in accordance with our corporate practices, immediately advised and referred this matter to our insurers. We are working with those insurers and their counsel to respond to and actively defend against this action, which is ongoing.

 

At this time, we believe that there is not a reasonable possibility that this incident will result in a material financial exposure to the Company.

 

 

Arista Power Litigation

 

Since September 2011, we have been pursuing legal action against Arista Power, Inc. (“Arista”) and our former employee, David Modeen, for, among other things, alleged breach of certain agreements, duties and obligations, including misappropriation of our confidential information and trade secrets, tortious interference, and breach of contract.  On January 12, 2016, Arista filed for liquidation under Chapter 7 of the bankruptcy laws of the United States, without accurately identifying our ongoing lawsuit against them. Although we have not withdrawn our lawsuit, nor has it been dismissed, the Company does not intend to submit a Proof of Claim in connection with Arista’s bankruptcy filing, or otherwise continue pursuing its claims against Arista.

 

 

 

 

 

 

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

2(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers 

 

The following table sets forth information regarding second quarter 2016 purchases of common stock under the Company’s stock repurchase program. Under the repurchase program, the Board of Directors authorized the repurchase of up to 1.8 million shares of the Company’s Common Stock through April 30, 2015. The Board of Directors extended the program through June 2, 2016 and expanded the maximum number of shares authorized to be repurchased from 1.8 million shares to 3.4 million shares. The Share Repurchase Program expired on June 2, 2016 and did not obligate the Company to repurchase any specific number of shares.

 

 

From the inception of the Share Repurchase Program on May 1, 2014 through its expiration on June 2, 2016, the Company repurchased 2,592,095 shares for an aggregate cost (excluding fees and commissions) of $10,480.

 

 

 

		Total Number of Shares Purchased				Average Price Paid Per Share(1)				Total Number of Shares Purchased as Part of Publicly Announced Program				Maximum Number of Shares That May Yet Be Purchased Under the Program
March 28 – April 24			-				-				-				957,809
April 25 – May 22			139,150			$	4.01				139,150				818,659
May 23 – June 2			10,754			$	4.14				10,754				-
Total			149,904			$	4.02				149,904				-

 

 

⁽¹⁾Average Price Paid Per Share excludes fees and commissions related to such repurchases. Including these costs, the average price paid per share for all purchases under the Share Repurchase Program for the period March 28, 2016 through June 2, 2016 is $4.05.

 

  

ITEM 6.     EXHIBITS

 

Exhibit Index	Description of Document		Incorporated By Reference from:
31.1	Rule 13a-14(a) / 15d-14(a) CEO Certifications		Filed herewith
31.2	Rule 13a-14(a) / 15d-14(a) CFO Certifications		Filed herewith
32	Section 1350 Certifications		Filed herewith
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
101.DEF	XBRL Taxonomy Definition Document

 

  

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.

 

 

	ULTRALIFE CORPORATION
	(Registrant)
Date: July 28, 2016	By:	/s/ Michael D. Popielec
		Michael D. Popielec
		President and Chief Executive Officer
		(Principal Executive Officer)

 

 

Date: July 28, 2016	By:	/s/ Philip A. Fain
		Philip A. Fain
		Chief Financial Officer and Treasurer
		(Principal Financial Officer and
		Principal Accounting Officer)

 

 

Index to Exhibits

 

31.1

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

31.2

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

32

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE

XBRL Taxonomy Presentation Linkbase Document

101.DEF

XBRL Taxonomy Definition Document

 

 

32

 

Exhibit 31.1

 

I, Michael D. Popielec, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Ultralife Corporation;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: July 28, 2016		By: /s/ Michael D. Popielec
		Michael D. Popielec
		President and Chief Executive Officer

 

Exhibit 31.2

 

I, Philip A. Fain, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Ultralife Corporation;

 

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.     The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.     The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: July 28, 2016		By: /s/ Philip A. Fain
		Philip A. Fain
		Chief Financial  Officer and Treasurer

 

 

  

Exhibit 32

 

 

Section 1350 Certification

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), Michael D. Popielec and Philip A. Fain, the President and Chief Executive Officer and Chief Financial Officer and Treasurer, respectively, of Ultralife Corporation, certify that (i) the Quarterly Report on Form 10-Q for the quarter ended June 26, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Ultralife Corporation.

 

A signed original of this written statement required by Section 906 has been provided to Ultralife Corporation and will be retained by Ultralife Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

Date: July 28, 2016	By: /s/ Michael D. Popielec
	Michael D. Popielec
	President and Chief Executive Officer
Date: July 28, 2016	By: /s/ Philip A. Fain
	Philip A. Fain
	Chief Financial Officer and Treasurer