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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________
FORM 10-K
_______________________
[ X ] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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
 |
Incorporated pursuant to the Laws of the State of Delaware
Internal Revenue Service – Employer Identification No. 16-1387013
2000 Technology Parkway, Newark, New York 14513
(315) 332-7100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $0.10 per share | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐ No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes☐ No☒
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☒ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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☒ No☐
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. Large accelerated filer☐ Accelerated filer☐ Non-accelerated filer☐ Smaller reporting company☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes☐ No☒
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the close of business on June 26, 2015 was approximately $42,741,000, based on the closing price of the registrant’s common stock on the NASDAQ Global Market on that date.
As of March 1, 2016, the registrant had 15,323,922 shares of common stock outstanding, net of 3,859,660 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s definitive proxy statement relating to the June 1, 2016 Annual Meeting of Shareholders are specifically incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K, except for the equity plan information required by Item 12 as set forth herein.
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PART I
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 inability 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.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity and the development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial condition and liquidity and the development of the industries in which we operate are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statements that we make herein speak only as of the date of those statements, and we undertake no obligation to update those statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. 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 “Risk Factors” in Item 1A of this Annual Report on Form 10-K.
As used in this annual report, unless otherwise indicated, the terms “we”, “our” and “us” refer to Ultralife Corporation (“Ultralife”) and includes our wholly-owned subsidiaries, Ultralife Batteries (UK) Ltd.; ABLE New Energy Co.; Limited and its wholly-owned subsidiary ABLE New Energy Co., Ltd; Ultralife UK Limited and its wholly-owned subsidiary, Accutronics Limited; and our majority-owned joint venture Ultralife Batteries India Private Limited.
Dollar amounts throughout this Form 10-K Annual Report are presented in thousands of dollars, except for per share amounts.
General
We offer products and services ranging from power solutions to communications and electronics systems to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design and manufacture 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, 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.
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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 enjoy strong name recognition in our markets under our Ultralife® Batteries, Lithium Power®, McDowell Research®, AMTITM, and ABLETM brands. We have sales, operations and product development facilities in North America and Asia.
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 13 in the Notes to Consolidated Financial Statements.)
Our website address is www.ultralifecorp.com. We make available free of charge via a hyperlink on our website (see Investor Relations link) our annual report on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports and statements as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). We will provide copies of these reports upon written request to the attention of Philip A. Fain, CFO, Treasurer and Secretary, Ultralife Corporation, 2000 Technology Parkway, Newark, New York, 14513. Our filings with the SEC are also available through the SEC website at www.sec.gov or at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or by calling 1-800-SEC-0330.
Battery & Energy Products
We manufacture and/or market a family of lithium manganese dioxide (Li-MnO2), lithium manganese dioxide carbon monofluoride (Li-CFx/MnO2) hybrid and lithium thionyl chloride (Li-SOCl2) non-rechargeable batteries including 9-volt, HiRate® cylindrical, ThinCell®, and other form factors. Applications for our 9-volt batteries include: smoke alarms, wireless security systems and intensive care monitors, among many other devices. Our HiRate® and ThinCell® lithium non-rechargeable batteries are sold primarily to the military and to OEMs in industrial markets for use in a variety of applications including radios, emergency radio beacons, search and rescue transponders, pipeline inspection gauges, portable medical devices and other specialty instruments and applications. Military applications for our non-rechargeable HiRate® batteries include: man-pack and survival radios, night vision devices, targeting devices, chemical agent monitors and thermal imaging equipment. Our lithium thionyl chloride batteries, sold under our ABLE and Ultralife brands as well as a private label brand, are used in a variety of applications including utility meters, wireless security devices, electronic meters, automotive electronics and geothermal devices. We believe that the chemistry of lithium batteries provides significant advantages over other currently available non-rechargeable battery technologies. These advantages include: higher energy density, lighter weight, longer operating time, longer shelf life and a wider operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stable power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in decreasing power output during discharge. While the price of our lithium batteries is generally higher than alkaline batteries, the increased energy per unit of weight and volume of our lithium batteries allow for longer operating times and less frequent battery replacements for our targeted applications.
We believe that our ability to design and produce lightweight, high-energy lithium ion rechargeable batteries and charging systems in a variety of custom sizes, shapes, and thicknesses offers substantial benefits to our customers. We market lithium ion rechargeable batteries comprising cells manufactured by qualified cell manufacturers. Our rechargeable products can be used in a wide variety of applications including communications, medical and other portable electronic devices. Our Multi-Kilowatt Module lithium ion battery system is a large format battery utilizable for energy storage, battery back-up, and remote power applications. We believe that the chemistry of our lithium ion batteries provides significant advantages over other currently available rechargeable batteries. These advantages include: higher energy density, lighter weight, longer operating time, longer time between charges and a wider operating temperature range. Conventional rechargeable batteries such as nickel metal hydride and nickel cadmium are heavier, have lower energy and require more frequent charging.
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Within this segment, we also seek to fund the development of new products that we hope will advance our technologies through contracts with both government agencies and private sector third parties.
We continue to obtain development contracts for intellectual property that we believe will enhance our efforts to commercialize new products that we develop. Revenues in this segment that pertain to technology contracts may vary widely each year, depending upon the quantity and size of contracts obtained.
Revenues for this segment for the year ended December 31, 2015 were $65,272 and segment contribution (gross profit) was $18,698.
Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems and accessories to support military communications systems, including RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated communication systems for fixed or vehicle applications such as vehicle adapters and SATCOM systems. All systems are packaged to meet specific customer needs in rugged enclosures to allow for their use in extreme environments. We market these products to all branches of the U.S. military and approved foreign defense organizations, as well as, U.S. and international prime defense contractors.
Revenues for this segment for the year ended December 31, 2015 were $11,155 and segment contribution (gross profit) was $4,618.
Corporate
We allocate revenues and cost of sales between the above operating segments. The balance of income and expense, including but not limited to research and development expenses, and selling, general and administrative expenses, are reported as Corporate expenses.
There were no revenues for this category for the year ended December 31, 2015 and our corporate operating expenses were $19,986.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the 2015 Consolidated Financial Statements and Notes thereto contained in this Annual Report on Form 10-K for additional information on the expenses referred to above. For information relating to total assets by segment, revenues for the last two years by segment, and contribution by segment for the last two years, see Note 13 in the Notes to Consolidated Financial Statements.
History
Ultralife was formed as a Delaware corporation in December 1990. In March 1991, we acquired certain technology and assets from Eastman Kodak Company ("Kodak") relating to its 9-volt lithium manganese dioxide non-rechargeable battery. In December 1992, we completed our initial public offering and became listed on NASDAQ.
In May 2006, we acquired ABLE New Energy Co., Ltd. (“ABLE”), an established manufacturer of lithium batteries located in Shenzhen, China, which broadened our product offering, including a wide range of lithium-thionyl chloride and lithium-manganese batteries, and provided additional exposure to new consumer markets.
In July 2006, we finalized the acquisition of substantially all the assets of McDowell Research, Ltd. (“McDowell”), a manufacturer of military communications accessories located originally in Waco, Texas. We relocated its operations to our Newark, New York facility during the second half of 2007, which enhanced our channels into the military communications area and strengthened our presence in global defense markets. In January 2012, we relocated these operations to our Virginia Beach, Virginia facility in order to gain operational efficiencies.
In March 2008, we formed a joint venture, named Ultralife Batteries India Private Limited (“India JV”), with our distributor partner in India. The India JV assembles Ultralife power solution products and manages local sales and marketing activities, serving commercial, government and defense customers throughout India. We have invested cash into the India JV, as consideration for our 51% ownership stake in the India JV.
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In March 2009, we acquired the tactical communications products business of Science Applications International Corporation. The tactical communications products business (“AMTI”) designs, develops and manufactures tactical communications products including: amplifiers, man-portable systems, cables, power solutions and ancillary communications equipment, which are sold by Ultralife under the brand name AMTI. The acquisition strengthened our communications systems business and provided us with direct entry into the handheld radio/amplifier market, complementing Ultralife’s communications systems offerings.
In January 2016, we acquired Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., a leading independent designer and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices. With a portfolio encompassing custom battery design, development and manufacturing for OEM’s; standard smart batteries, chargers and accessories; and pre-engineered batteries and power solutions for specific applications, Accutronics primarily serves the portable medical device market throughout Europe. Medical applications include digital imaging, ventilators, anesthesia, endoscopy, patient monitoring, cardio pulmonary care, oxygen concentration and aspiration. We acquired Accutronics to advance our strategy of commercial revenue diversification, to expand our geographical penetration, and to achieve revenue growth from new product development. We expect substantial sales synergies between Accutronics and our existing commercial battery business as we cross-sell our existing products and acquired Accutronics’ products to our respective customer bases.
Products, Services and Technology
Battery & Energy Products
A non-rechargeable battery is used until discharged and then replaced. The principal competing non-rechargeable battery technologies are carbon zinc, alkaline and lithium. We manufacture a range of non-rechargeable battery products based on lithium manganese dioxide, lithium manganese carbon mono-fluoride hybrid, and lithium thionyl chloride technologies.
We believe that the chemistry of lithium batteries provides significant advantages over currently available non-rechargeable battery technologies, which include: lighter weight, longer operating time, longer shelf life, and a wider operating temperature range. Our non-rechargeable batteries also have relatively flat voltage profiles, which provide stable power. Conventional non-rechargeable batteries, such as alkaline batteries, have sloping voltage profiles that result in decreasing power during discharge. While the prices for our lithium batteries are generally higher than commercially available alkaline batteries produced by others, we believe that the increased energy per unit of weight and volume of our batteries will allow longer operating time and less frequent battery replacements for our targeted applications. As a result, we believe that our non-rechargeable batteries are priced competitively with other battery technologies on a price per unit of energy or volume basis.
Our non-rechargeable products include the following product configurations:
9-Volt Lithium Battery. Our 9-volt lithium battery delivers a unique combination of the highest available energy density and stable voltage, which results in a longer operating life for the battery and, accordingly, fewer battery replacements. While our 9-volt battery price is generally higher than conventional 9-volt carbon zinc and alkaline batteries, we believe the enhanced operating performance and decreased costs associated with battery replacement make our 9-volt battery more cost effective than conventional batteries on a cost per unit of energy or volume basis when used in a variety of applications.
We market our 9-volt lithium batteries to OEM, distributor and retail markets including industrial electronics, safety and security, and medical. Typical applications include: smoke alarms, wireless alarm systems, bone growth stimulators, telemetry devices, blood analyzers, ambulatory infusion pumps and parking meters. A significant portion of the sales of our 9-volt battery is to major smoke alarm OEMs for use in their long-life smoke alarms. We also manufacture our 9-volt lithium battery under private label for a variety of companies. Additionally, we sell our 9-volt battery to the broader consumer market through national and regional retail chains and Internet retailers.
Our current 9-volt battery manufacturing capacity is adequate to meet forecasted customer demand over the next three years.
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Cylindrical Batteries. Featuring high energy, wide temperature range, long shelf life and operating life, our cylindrical cells and batteries, based on lithium manganese dioxide, lithium manganese dioxide carbon monoflouride hybrid and lithium thionyl chloride technologies, represent some of the most advanced lithium power sources currently available. We market a wide range of cylindrical non-rechargeable lithium cells and batteries in various sizes under both the Ultralife HiRate and ABLE brands. These include: D, C, 5/4 C, 1/2 AA, 2/3 A and other sizes, which are sold individually as well as packaged into multi-cell battery packs, including our leading BA-5390 military battery, an alternative to the competing Li-SO2 BA-5590 battery, and one of the most widely used battery types in the U.S. armed forces for portable applications. Our BA-5390 battery provides 50% to 100% more energy (mission time) than the BA-5590, and it is used in approximately 60 military applications. With the introduction of our lithium carbon mono-fluoride hybrid chemistry, we now offer a D-cell that has 100% more energy than the competing Li-SO2 D-cell.
We market our line of lithium cells and batteries to the OEM market for commercial, defense, medical, asset tracking and search and rescue applications, among others. Significant commercial applications include pipeline inspection equipment, automatic reclosers and oceanographic devices. Asset tracking applications include RFID (Radio Frequency Identification) systems. Among the defense uses are manpack radios, night vision goggles, chemical agent monitors and thermal imaging equipment. Medical applications include: AED’s (Automated External Defibrillators), infusion pumps and telemetry systems. Search and rescue applications include: ELT’s (Emergency Locator Transmitters) for aircraft and EPIRB’s (Emergency Position Indicating Radio Beacons) for ships.
Thin Cell Batteries. We manufacture a range of thin lithium manganese dioxide batteries under the Thin Cell® brand. Thin Cell batteries are flat, lightweight batteries providing a unique combination of high energy, long shelf life, wide operating temperature range and very low profile. We are currently marketing these batteries to OEMs for applications such as displays, wearable medical devices, toll passes, theft detection systems, and RFID devices.
In contrast to non-rechargeable batteries, after a rechargeable battery is discharged, it can be recharged and reused many times. Generally, discharge and recharge cycles can be repeated hundreds or thousands of times in rechargeable batteries, but the achievable number of cycles (cycle life) varies among technologies and is an important competitive factor. All rechargeable batteries experience a small, but measurable, loss in energy with each cycle. The industry commonly reports cycle life in the number of cycles a battery can achieve until 80% of the battery's initial energy capacity remains. In the rechargeable battery market, the principal competing technologies are nickel cadmium, nickel metal hydride and lithium ion (including lithium polymer) batteries. Rechargeable batteries are used in many applications, such as military radios, laptop computers, mobile telephones, portable medical devices, wearable devices and many other commercial, defense and consumer products.
Three important performance characteristics of a rechargeable battery are design flexibility, energy density and cycle life. Design flexibility refers to the ability of rechargeable batteries to be designed to fit a variety of shapes and sizes of battery compartments. Thin profile batteries with prismatic geometry provide the design flexibility to fit the battery compartments of today's electronic devices. Energy density refers to the total amount of electrical energy stored in a battery divided by the battery’s weight and volume as measured in watt-hours per kilogram and watt-hours per liter, respectively. High energy density batteries generally are longer lasting power sources providing longer operating time and necessitating fewer battery recharges. High energy density and long achievable cycle life are important characteristics for comparing rechargeable battery technologies. Greater energy density will permit the use of batteries of a given weight or volume for a longer time period. Accordingly, greater energy density will enable the use of smaller and lighter batteries with energy comparable to those currently marketed. Lithium ion batteries, by the nature of their electrochemical properties, are capable of providing higher energy density than comparably sized batteries that utilize other chemistries and, therefore, tend to consume less volume and weight for a given energy content. Long achievable cycle life, particularly in combination with high energy density, is suitable for applications requiring frequent battery recharges, such as cellular telephones and laptop computers, and allows the user to charge and recharge many times before noticing a difference in performance. We believe that our lithium ion batteries generally have some of the highest energy density and longest cycle life available.
Lithium Ion Cells and Batteries.We market a variety of lithium ion cells and rechargeable batteries comprising cells manufactured by qualified cell manufacturers. These products are used in a wide variety of applications including communications, medical and other portable electronic devices.
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Battery Charging Systems and Accessories. To provide our customers with complete power system solutions, we offer a wide range of rugged military and commercial battery charging systems and accessories including smart chargers, multi-bay charging systems and a variety of cables.
Multi-Kilowatt Module. Our Multi-Kilowatt Module lithium ion battery system is a large format battery utilizable for energy storage, battery back-up, and remote power applications. This product is a direct replacement of 2.5 kWh and greater lead acid batteries in 24V or 48V applications. It can be connected in multiples to obtain higher-voltages and is capable of over 3,000 cycles while maintaining 80% of its capacity.
Technology Contracts. Our technology contract activities involve the development of new products or the enhancement of existing products through contracts with both government agencies and other private sector third parties.
Communications Systems
Under our McDowell Research and AMTI brands, we design and manufacture a line of communications systems and accessories to support military communications systems, including RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, case equipment, man-portable systems and integrated communication systems for fixed or vehicle applications such as vehicle adapters and SATCOM systems. We package all systems to meet specific customer needs in rugged enclosures to allow their use in extreme environments.
We offer a wide range of military communications systems and accessories designed to enhance and extend the operation of communications equipment such as vehicle-mounted, manpack and handheld transceivers. Our communications products include the following product configurations:
RF Amplifiers. Our RF amplifiers include: 20, 50 and 75-watt amplifiers and 20-watt accessories and kits. These amplifiers are used to extend the range of manpack and handheld tactical transceivers and can be used on mobile or fixed site applications.
Integrated Systems. Our integrated systems include: vehicle mounted systems; SATCOM systems; rugged, deployable case systems; multiband transceiver kits; enroute communications cases; and radio cases. These systems give communications operators everything that is needed to provide reliable links to support C4ISR (Command, Control, Communications, Computers and Information, Surveillance and Reconnaissance).
Power Systems. Our power systems include: universal AC/DC power supplies with battery backup for tactical manpack and handheld transceivers; ROVER™ power supplies; interoperable power adapters and chargers; portable power systems; tactical combat and AC to DC power supplies, among many others. We can provide power supplies for virtually all tactical communications devices.
Communications and Electronics. Our communications and electronics services include the design, integration, and fielding of portable, mobile and fixed-site communications systems.
Sales and Marketing
We employ a staff of sales and marketing personnel in North America, Europe and Asia. We sell our products and services directly to commercial customers, including OEMs, as well as government and defense agencies in the U.S. and abroad and have contractual arrangements with sales agents who market our products on a commission basis in defined territories. While OEM agreements and contracts contain volume-based pricing based on expected volumes, industry practices dictate that pricing is rarely adjusted retroactively when contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but the ability to adjust prices is generally based on market conditions.
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We also distribute some of our products through domestic and international distributors and retailers. Our sales are generated primarily from customer purchase orders. We have several long-term contracts with the U.S. government and other customers. These contracts do not commit the customers to specific purchase volumes, nor to specific timing of purchase order releases, and they include fixed price agreements over various periods of time. In general we do not believe our sales are seasonal, although we may sometimes experience seasonality for some of our military products based on the timing of government fiscal budget expenditures.
A significant portion of our business comes from sales of products and services to the U.S. and foreign governments through various contracts. These contracts are subject to procurement laws and regulations that specify policies and procedures for acquiring goods and services. The regulations also contain guidelines for managing contracts after they are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrative proceedings involving fines, penalties, suspension of payments, or suspension or debarment from government contracting or subcontracting for a period of time.
During the years ended December 31, 2015 and 2014, we had one major customer, a large defense primary contractor, which comprised 24% and 18% of our revenues, respectively, in each year. There were no other customers that comprised greater than 10% of our total revenues during these years.
In 2015, sales to U.S. and non-U.S. customers were approximately $46,700 and $ 29,700, respectively. In 2014, sales to U.S. and non-U.S. customers were approximately $39,400 and $27,100, respectively. For more information relating to revenues by country for the last two fiscal years and long-lived assets for the last two fiscal years by country of origin, see Note 13 in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Battery & Energy Products
We target sales of our non-rechargeable products to manufacturers of security and safety equipment, medical devices, search and rescue equipment, specialty instruments, point of sale equipment and metering applications, as well as users of military equipment. Our strategy is to develop sales and marketing alliances with OEMs and governmental agencies that utilize our batteries in their products, commit to cooperative research and development or marketing programs, and recommend our products for design-in or replacement use in their products. We are addressing these markets through direct contact by our sales and technical personnel, use of sales agents and stocking distributors, manufacturing under private label and promotional activities.
We seek to capture a significant market share for our products within our targeted OEM markets, which we believe, if successful will result in increased product awareness and sales at the end-user or consumer level. We are also selling our 9-volt battery to the consumer market through retail distribution through a number of national retailers. Most military procurements are done directly by the specific government organizations requiring products, based on a competitive bidding process. For those military procurements that are not bid, the procurements are typically subject to an audit of the product’s underlying cost structure and associated profitability. Additionally, we are typically required to successfully meet contractual specifications and to pass various qualifications testing for the products under contract by the military. An inability by us to pass these tests for our new products in a timely fashion could have a material adverse effect on future growth prospects. When a government contract is awarded, there is a government procedure that allows for unsuccessful companies to formally protest the award if they believe they were unjustly treated in the government’s bid evaluation process. A prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a protest, could have a material adverse effect on our business, financial condition and results of operations.
We market our products to defense organizations in the U.S. and other countries. These efforts have resulted in us winning significant contracts. In September 2010, we were awarded a production contract by the Defense Logistics Agency for up to five years, with a maximum total potential of $42,100, to provide our BA-5390 non-rechargeable lithium manganese dioxide batteries to the U.S. military. Production deliveries began in the first quarter of 2011. Through the completion of the contract in September 2015, we shipped BA-5390 batteries totaling $10,000. Subsequent to the completion of the contract, we continued to receive orders for BA-5390 batteries from the Defense Logistics Agency that we shipped in 2015 and that are planned for shipment in 2016.
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We target sales of our lithium ion rechargeable batteries and charging systems to OEM customers, as well as distributors and resellers focused on our target markets. We respond to RFPs to design products for OEMs, and believe that our design capabilities, product characteristics and solution integration will drive OEMs to incorporate our batteries into their product offerings, resulting in revenue growth opportunities for us.
We continue to expand our marketing activities as part of our strategic plan to increase sales of our rechargeable products for commercial, standby, defense and communications applications, as well as hand-held devices, wearable devices and other electronic portable equipment. A key part of this expansion includes increasing our design and assembly capabilities as well as building our network of distributors and value added distributors throughout the world.
At December 31, 2015 and 2014, our backlog related to Battery & Energy Products was approximately $18,500 and $14,100, respectively. The increase in our backlog related to Battery & Energy Products is primarily due to higher demand batteries from OEM’s for our batteries for medical applications, primary batteries from the U.S. Department of Defense, chargers from an international large defense prime contractor and our new products in other commercial markets. A large majority of the 2015 backlog is related to orders that are expected to ship throughout 2016.
Communications Systems
We target sales of our communications systems, which include power solutions and accessories to support communications systems such as RF amplifiers, power supplies, power cables, connector assemblies, amplified speakers, equipment mounts, case equipment and integrated communication systems, to military OEMs and U.S. and allied foreign militaries. We sell our products directly and through authorized distributors to OEMs and to defense organizations in the U.S. and internationally. We market our products to defense organizations and OEMs in the U.S. and internationally.
At December 31, 2015 and 2014, our backlog related to Communications Systems orders was approximately $8,400 and $700, respectively. The increase in our backlog related to Communications Systems orders is driven primarily by the award of an $8,200 order through an OEM for the U.S. Army for our new McDowell Research Corporation (“MRC”) product – Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”), as well as integrated systems supporting OEMs. The 2015 backlog is related to orders that are expected to ship throughout 2016.
Patents, Trade Secrets and Trademarks
We rely on licenses of technology as well as our patented and unpatented proprietary information, know-how and trade secrets to maintain and develop our competitive position. Despite our efforts to protect our proprietary information, there can be no assurance that others will neither develop the same or similar information independently nor obtain access to our proprietary information. In addition, there can be no assurance that we would prevail if we asserted our intellectual property rights against third parties, or that third parties will not successfully assert infringement claims against us in the future. We believe, however, that our success depends more on the knowledge, ability, experience and technological expertise of our employees, than on the legal protection that our patents and other proprietary rights may or will afford.
We hold seven patents issued in the U.S. and two patents issued in Mexico. We believe our patents protect technology that makes automated production more cost-effective and protects important competitive features of our products. However, we do not consider our business to be dependent on patent protection.
As part of our employment commencement process, our employees are required to enter into agreements providing for confidentiality of certain information and the assignment of rights to inventions made by them while employed by us. These agreements also contain certain noncompetition and nonsolicitation provisions effective during the employment term and for varying periods thereafter depending on position and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the course of their employment. Nevertheless, the enforceability of such agreements is subject to public policy limitations that vary from state to state so we cannot be assured that they will be enforceable in accordance with their terms if at all.
Trademarks are an important aspect of our business. We sell our products under a number of trademarks, which we own or use under license. The following are registered trademarks of ours: Ultralifeâ, Ultralife Thin Cellâ, Ultralife HiRateâ, The New Power GenerationÒ, LithiumPowerÒ, SmartCircuitÒ, We Are PowerÒ, AMTIÒ, ABLEÔ, McDowell Research®, and Max Juice For More Gigs®.
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Manufacturing and Raw Materials
We manufacture our products from raw materials and component parts that we purchase. Our manufacturing facilities in Newark, New York are ISO 9001:2008, ISO 14001, and ISO 13485 certified. Our manufacturing facilities in Shenzhen, China are ISO 9001:2008, ISO 14001and ISO 13485 certified. Our manufacturing facilities in Virginia Beach, Virginia are ISO 9001:2008 certified.
We expect our future raw material purchases to fluctuate based on our knowledge regarding the timing of customer orders, the related need to build inventory in anticipation of orders and actual shipment dates.
Battery & Energy Products
Our Newark, New York and Shenzhen, China facilities have the capacity to produce cylindrical cells, 9-volt batteries, and thin cells. Capacity, however, is also related to individual operations, and product mix changes can produce bottlenecks in an individual operation, constraining overall capacity. We have acquired new machinery and equipment in areas where production bottlenecks have resulted in the past and we believe that we have sufficient capacity in these areas. We continually evaluate our requirements for additional capital equipment, and we believe that the planned increases will be adequate to meet foreseeable customer demand.
Certain materials used in our products are available only from a single source or a limited number of sources. Additionally, we may elect to develop relationships with a single or limited number of sources for materials that are otherwise generally available. Although we believe that alternative sources are available to supply materials that could replace materials we use and that, if necessary, we would be able to redesign our products to make use of an alternative product, any interruption in our supply from any supplier that serves currently as our sole source could delay product shipments and adversely affect our financial performance and relationships with our customers. Although we have experienced interruptions of product deliveries by sole source suppliers, which have not had a material adverse effect on us, we cannot assure that they would not in the future. All other raw materials utilized by us are readily available from many sources.
We use various utilities to provide heat, light and power to our facilities. We continue to seek ways to reduce utility costs and will initiate energy-saving projects at times to assist in this effort. It is possible, however, that rising energy costs may have an adverse effect on our financial results.
We believe that the raw materials and components utilized for our rechargeable batteries are readily available from many sources. Although we believe that alternative sources are available to supply materials and components that could replace materials or components we use, any interruption in our supply from any supplier that serves currently as our sole source could delay product shipments and adversely affect our financial performance and relationships with our customers.
Our Newark, New York facility has the capacity to produce significant volumes of rechargeable batteries, as this operation generally assembles battery packs and chargers and is limited only by physical space and is not constrained by manufacturing equipment capacity.
The total carrying value of our Battery & Energy Products inventory, including raw materials, work in process and finished goods, amounted to approximately $12,534 and $14,718 as of December 31, 2015 and 2014, respectively.
Communications Systems
In general, we believe that the raw materials and components utilized by us for our communications accessories and systems, including RF amplifiers, power supplies, cables, repeaters and integration kits, are available from many sources. Although we believe that alternative sources are available to supply materials and components that could replace materials or components we use, any interruption in our supply from any supplier that serves currently as our sole source could delay product shipments and adversely affect our financial performance and relationships with our customers.
Our Virginia Beach, Virginia facility has the capacity to produce communications products and systems. This operation generally assembles products and is limited only by physical space and is not constrained by manufacturing equipment capacity.
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The total carrying value of our Communications Systems inventory, including raw materials, work in process and finished goods, amounted to approximately $11,280 and $11,368 as of December 31, 2015 and 2014, respectively.
Research and Development
We concentrate significant resources on research and development activities to improve our technological capabilities and to design new products for customers’ applications. We conduct our research and development in Newark, New York; Virginia Beach, Virginia; Tallahassee, Florida and Shenzhen, China. During 2015 and 2014, we expended $6,112 and $5,648, respectively, on research and development, including $509 and $315, respectively, on customer sponsored research and development activities, which are included in cost of goods sold. Research and development expense was $5,603 and $5,333 in 2015 and 2014, respectively. We expect that research and development expenditures in the future will be fairly consistent with those in 2015, as we anticipate that new product development initiatives will drive our growth. As in the past, we will continue to make funding decisions for our research and development efforts based upon strategic demand for customer applications.
Battery & Energy Products
We continue to internally develop non-rechargeable cells and batteries with the goal of broadening our product offering to our customers.
We continue to internally develop our rechargeable product portfolio, including batteries, battery management systems, cables and charging systems, as our customers’ needs for portable power continue to grow and new technologies become available.
The U.S. government sponsors research and development programs designed to improve the performance and safety of existing battery systems and to develop new battery systems.
Communications Systems
We continue to internally develop a variety of communications accessories and systems for the global defense market to meet the ever-changing demands of our customers.
Safety; Regulatory Matters; Environmental Considerations
Certain of the materials utilized in our batteries may pose safety problems if improperly used, stored, or handled. We have designed our batteries to minimize safety hazards both in manufacturing and use.
The transportation of non-rechargeable and rechargeable lithium batteries is regulated in the U.S. by the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”), and internationally by the International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport Association (“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (“IMDG”), and other country specific regulations. These regulations are based on the United Nations Recommendations on the Transport of Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship our products pursuant to PHMSA, ICAO, IATA, IMDG and other country specific hazardous goods regulations. The regulations require companies to meet certain testing, packaging, labeling, marking and shipping paper specifications for safety reasons. We have not incurred, and do not expect to incur, any significant costs in order to comply with these regulations. We believe we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect to comply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations. However, if we are unable to comply with any such new regulations, or if regulations are introduced that limit our or our customers’ ability to transport our products in a cost-effective manner, this could have a material adverse effect on our business, financial condition and results of operations.
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The European Union’s Restriction of Hazardous Substances Directive (“the EU RoHS Directive”) places restrictions on the use of certain hazardous substances in electrical and electronic equipment. All applicable products sold in the European Union market must pass RoHS compliance. While this directive does not apply to batteries and does not currently affect our defense products, should any changes occur in the directive that would affect our products, we intend and expect to comply with any new regulations that are imposed. However, we cannot assure that the cost of complying with such new regulations would not have a material adverse effect on us. Our commercial chargers are substantially in compliance with the EU RoHS Directive.
The European Union’s Battery Directive "on batteries and accumulators and waste batteries and accumulators" (the “EU Battery Directive”) is intended to cover all types of batteries regardless of their shape, volume, weight, material composition or use. It is aimed at reducing mercury, cadmium, lead and other metals in the environment by minimizing the use of these substances in batteries and by treating and re-using old batteries. The EU Battery Directive applies to all types of batteries except those used to protect European Member States' security, for military purposes, or sent into space. To achieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing hazardous substances. It establishes schemes aimed at high level of collection and recycling of batteries with quantified collection and recycling targets. The EU Battery Directive sets out minimum rules for producer responsibility and provisions with regard to labeling of batteries and their removability from equipment. The EU Battery Directive requires product markings for batteries and accumulators to provide information on capacity and to facilitate reuse and safe disposal. We currently ship our products pursuant to the requirements of the EU Battery Directive.
This EU Battery Directive requires that producers or importers of particular classes of electrical goods are financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. This directive assigns levels of responsibility to companies doing business in European Union markets based on their relative market share. This directive calls on each European Union member state to enact enabling legislation to implement the directive. As additional European Union member states pass enabling legislation our compliance system should be sufficient to meet such requirements. Our current estimated costs associated with our compliance with these directives based on our current market share are not significant. However, we continue to evaluate the impact of these directives as European Union member states implement guidance, and actual costs could differ from our current estimates.
China’s “Management Methods for Controlling Pollution Caused by Electronic Information Products Regulation” (“China RoHS”) provides a two-step, broad regulatory framework including hazardous substance restrictions similar to those imposed by the EU RoHS Directive. China RoHS applies to methods for the control and reduction of pollution and other public hazards to the environment caused during the production, sale, and import of electronic information products (“EIP”) in China. Currently, only the first step of the regulatory framework of China RoHS, which details marking and labeling requirements under Standard SJT11364-2006 (“Marking Standard”), is in effect. However, the methods under China RoHS only apply to EIP placed in the marketplace in China. Additionally, the Marking Standard does not apply to components sold to OEMs for use in other EIPs. Our sales in China are limited to sales to OEMs and to distributors who supply to OEMs. Should our sales strategy change to include direct sales to end-users, we believe our compliance system is sufficient to meet our requirements under China RoHS. Our current estimated costs associated with our compliance with this regulation based on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and actual costs could differ from our current estimates.
National, state and local laws impose various environmental controls on the manufacture, transportation, storage, use and disposal of batteries and of certain chemicals used in the manufacture of batteries. Although we believe that our operations are in material compliance with current environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. There can be no assurance that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be imposed or that such regulations will not have a material adverse effect on our business, financial condition and results of operations. In 2015 and 2014, we spent approximately $155 and $45, respectively, on environmental compliance, including costs to properly dispose of potentially hazardous waste.
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Since non-rechargeable and rechargeable lithium battery chemistries react adversely with water and water vapor, certain of our manufacturing processes must be performed in a controlled environment with low relative humidity. Our Newark, New York and Shenzhen, China facilities contain dry rooms or glove box equipment, as well as specialized air-drying equipment.
In addition to the environmental regulations previously described, our products are subject to U.S. and international laws and regulations governing international trade and exports including but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries.
The ITAR is a set of United States government regulations that control the export and import of defense-related articles and services on the United States Munitions List. These regulations implement the provisions of the Arms Export Control Act, and are described in the Code of Federal Regulations. The Department of State Directorate of Defense Trade Controls interprets and enforces ITAR. Its goal is to safeguard U.S. national security and further U.S. foreign policy objectives.
The related EAR are enforced and interpreted by the Bureau of Industry and Security in the Commerce Department. The Department of Defense is also involved in the review and approval process. Inspections in support of import and export laws are performed at border crossings is performed by Customs and Border Protection, an agency of the Department of Homeland Security.
Products and services developed and manufactured in our foreign locations are subject to the export and import controls of the nation in which the foreign location operates.
We believe we are in material compliance with these domestic and international export regulations. However, failure of compliance could have a material adverse effect on our business through possible fines, denial of export privileges, or loss of customers. Further, while we are not aware of any proposed changes to these regulations, any change in the scope or enforcement of export or import regulations or related legislation could have a material adverse affect on our business through increased costs of compliance or reduction in the international growth prospects available to us.
Our future estimated costs associated with our compliance with ITAR, EAR, and the foreign export and import controls we are subject to based on our current sales volumes are not significant. However, we continue to evaluate the impact of these regulations, and actual costs could differ from our current estimates.
Battery & Energy Products
Our non-rechargeable battery products incorporate lithium metal, which reacts with water and may cause fires if not handled properly. In the past, we have experienced fires that have temporarily interrupted certain manufacturing operations. We believe that we have adequate fire suppression systems and insurance, including business interruption insurance, to protect against the occurrence of fires and fire losses in our facilities.
Our 9-volt battery, among other sizes, is designed to conform to the dimensional and electrical standards of the American National Standards Institute. Several of our products are recognized by authorized certification bodies such as Underwriters Laboratories, Intertek and SGS.
Communications Systems
We are not currently aware of any regulatory requirements regarding the disposal of communications products.
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Corporate
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 1502 (the “Dodd-Frank Act”) requires public companies to disclose whether tantalum, tin, gold and tungsten, commonly known as “conflict minerals,” are necessary to the functionality or production of a product manufactured by a public company and if those elements originated from armed groups in the Democratic Republic of Congo or adjoining countries. To comply with the Dodd-Frank Act, as implemented by SEC rules, we are required to perform due diligence inquiries of our suppliers to determine whether or not our products contain such minerals and from which countries and source (smelter) the minerals were obtained. Our annual report on Form SD was filed by the statutory due date of June 1, 2015 for the 2014 calendar year and we continue to implement appropriate measures with our suppliers in order to better ascertain the origin of the conflict minerals in our products.
Competition
Competition in both the battery and communications systems markets is, and is expected to remain, intense. The competition ranges from development stage companies to major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. We compete against companies producing batteries as well as companies producing communications systems. We compete on the basis of design flexibility, performance, price, reliability and customer support. There can be no assurance that our technologies and products will not be rendered obsolete by developments in competing technologies or services that are currently under development or that may be developed in the future or that our competitors will not market competing products and services that obtain market acceptance more rapidly than ours.
Historically, although other entities may attempt to take advantage of the growth of the battery market, the lithium battery cell industry has certain technological and economic barriers to entry. The development of technology, equipment and manufacturing techniques and the operation of a facility for the automated production of lithium battery cells require large capital expenditures, which may deter new entrants from commencing production. Through our experience in battery cell manufacturing, we have also developed significant expertise in the non-rechargeable battery market, which we believe would be difficult to reproduce without substantial time and expense.
Employees
As of December 31, 2015, we employed a total of 691 permanent and temporary employees: 35 in research and development, 586 in production and 70 in sales and administration. None of our employees are represented by a labor union.
Our business faces many risks. As such, prospective investors and shareholders should carefully consider and evaluate all of the risk factors described below as well as other factors discussed in this Annual Report on Form 10-K and in our other filings with the SEC. Any of these factors could adversely affect our business, financial condition and results of operations. Additional risks and uncertainties that are not currently known to us or that are not currently believed by us to be material may also harm our business operations and financial results. These risk factors may change from time to time and may be amended, supplemented, or superseded by updates to the risk factors contained in periodic reports on Form 10-Q and Form 10-K that we file with the SEC in the future.
A significant portion of our revenues is derived from a certain key customer.
During the years ended December 31, 2015 and 2014, we had one major customer, a large defense primary contractor, which comprised 24% and 18% of our revenues, respectively in each year. There were no other customers that comprised greater than 10% of our total revenues during these years. While we consider our relationship with this prime contractor to be good, the reduction, delay or cancellation of orders from this customer or this customer’s insolvency / inability to pay, for any reason, would reduce our revenue and operating income and could materially and adversely affect our business, operating results and financial condition in other ways.
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We may incur significant costs because of the warranties we supply with our products and services.
With respect to our battery products, we typically offer warranties against any defects in manufacture or workmanship for a period up to one year from the date of purchase. With respect to our communications systems products, we now offer up to a three-year warranty. 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.
Any inability to comply with changes to the regulations for the shipment of our products could limit our ability to transport our products to customers in a cost-effective manner and reduce our operating income and margins.
The transportation of lithium batteries is regulated by the International Civil Aviation Organization (“ICAO”) and corresponding International Air Transport Association (“IATA”) Dangerous Goods Regulations and the International Maritime Dangerous Goods Code (“IMDG”) and in the U.S. by the Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (“PHMSA”). These regulations are based on the United Nations Recommendations on the Transport of Dangerous Goods Model Regulations and the United Nations Manual of Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. These regulations require companies to meet certain testing, packaging, labeling and shipping specifications for safety reasons. We have not incurred, and do not expect to incur, any significant costs in order to comply with these regulations. We believe we comply with all current U.S. and international regulations for the shipment of our products, and we intend and expect to comply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations. If we are unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to transport our products to customers in a cost-effective manner, this could reduce our operating income and margins, and have other material adverse effects on our business, financial condition and results of operations.
Our efforts to develop new commercial applications for our products could be prolonged or could fail.
Although we develop certain products for new commercial applications, we cannot assure that our products will be accepted due to the highly competitive nature of the business. There are many new product and technology entrants into the marketplace, and we must continually reassess the market segments in which our products can be successful and seek to engage customers in those segments that will adopt our products for use in their products. In addition, these companies must be successful with their products in their markets for us to gain increased business. Increased competition, failure to gain customer acceptance of products, the introduction of competitive technologies or failure of our customers in their markets could have a further adverse effect on our business and reduce our revenue and operating income.
Our operations in China are subject to unique risks and uncertainties.
Our operating facility in China presents risks including, but not limited to, changes in local regulatory requirements, changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses, compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to application and interpretation of local laws and enforcement of contract and intellectual property rights, currency restrictions, currency exchange controls, fluctuations of currency, and currency revaluations, eminent domain claims, civil unrest, power outages, water shortages, labor shortages, labor disputes, increase in labor costs, rapid changes in government, economic and political policies, political or civil unrest, acts of terrorism, or the threat of boycotts, and other civil disturbances that are outside of our control. Any such disruptions could depress our earnings and have other material adverse effects on our business, financial condition and results of operations.
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For example, during 2014 the landlord for our China facility informed us that the local village government in Shenzhen was exercising its right of eminent domain and that the lease for our facility would not be extended past its expiration in October 2014 due to zoning changes. Accordingly, we developed and executed a plan which we completed in 2015 to find a replacement facility, entered into a five-year lease, negotiated compensation from the local government for our forfeited leasehold improvements and move expenses, refurbished the replacement facility to meet our operational needs and relocated all of our operations and employees to the new facility. While this situation was handled on time, on plan and with no known disruption to our business, there can be no assurances that other situations posing risks to the business will be successfully remediated to the same extent.
A decline in demand for products using our batteries or communications systems could reduce demand for our products and/or our products could become obsolete.
A substantial portion of our business depends on the continued demand for products using our batteries and communications systems sold by our customers, including original equipment manufacturers. Our success depends significantly upon the success of those customers’ products in the marketplace. We are subject to many risks beyond our control that influence the success or failure of a particular product or service offered by a customer, including:
| · | competition faced by the customer in its particular industry, |
| · | market acceptance of the customer’s product or service, |
| · | the engineering, sales, marketing and management capabilities of the customer, |
| · | technical challenges unrelated to our technology or products faced by the customer in developing its products or services, and |
| · | the financial and other resources of the customer. |
The market for our products is characterized by changing technology and evolving industry standards, often resulting in product obsolescence or short product lifecycles. Although we believe that our products are comprised of state-of-the-art technology, there can be no assurance that competitors will not develop technologies or products that would render our technologies and products obsolete or less marketable. Many of the companies with which we compete have substantially greater resources than we do, and some have the capacity and volume of business to be able to produce their products more efficiently than we can. In addition, these companies are developing or have developed products using a variety of technologies that are expected to compete with our technologies. If these companies successfully market their products in a manner that renders our technologies obsolete, this would reduce our revenue and operating income and could have other material adverse effects on our business, financial condition and results of operations.
Reductions in U.S. and foreign military spending could continue to have a material adverse effect on our business, financial condition and results of operations.
A significant portion of our revenues is derived from contracts with the U.S. and foreign militaries or OEMs that supply the U.S. and foreign militaries. In the years ended December 31, 2015 and 2014, approximately $42,717 or 56% and $36,412 or 55%, respectively, of our revenues were comprised of sales made directly or indirectly to the U.S. and foreign militaries.
While significant gains have been made in commercial markets with our Battery & Energy Products business, we are still highly dependent on sales to U.S. Government customers. The amounts and percentages of our net revenue that was derived from sales to U.S. Government customers, including the Department of Defense, whether directly or through prime contractors, was approximately $36,700 or 48% in 2015 and $27,100 or 41% in 2014. Therefore, any significant disruption or deterioration of our relationship with the U.S. Government or any prime defense contractor could still significantly reduce our revenue. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and will continue these efforts in the future, and the U.S. Government may choose to use other contractors.
Budget and appropriations decisions made by the U.S. Government, including possible future sequestration periods or other similar formulaic reductions in federal expenditures, are outside of our control and have long-term consequences for our business. A continued decline in U.S. military expenditures could result in a reduction in the military’s demand for our products, which could have a material adverse effect on our business, financial condition and results of operations.
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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 results of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. There is a possibility that our goodwill and other intangible assets, particularly in our Communications Systems business, could be impaired should there be a significant change in our internal forecasts and other assumptions we use in our impairment analysis. 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, although not affecting cash, on our results of operations and financial condition.
We have completed our annual impairment analysis for goodwill and indefinite-lived intangible assets, in accordance with the applicable accounting guidance, and have concluded that we do not have any impairment of goodwill, but have recorded a non-cash impairment amounting to $150 of our McDowell Research Corporation trademark in our Communications Systems business at December 31, 2015. Our impairment analysis was primarily focused on the goodwill and intangible assets pertaining to our Communications Systems business. The non-cash impairment charge was caused by time delays in the awarding by government and defense customers in recent years of certain large projects in our pipeline. The goodwill and net book value of intangible assets amounts to $17,915 for the segment at December 31, 2015. Our testing took into account our large opportunity pipeline for Communications Systems products as well as the maturity of the opportunities, and assumed the future award and estimated timing of certain major projects based on our knowledge of the status of these projects and the probability of award at the current time. Until an award is actually consummated and resulting purchase orders are issued, there are no guarantees that the underlying projects will contribute to revenues and operating income to justify the level of goodwill and intangible assets on our balance sheet. Accordingly, we will continue our practice of updating our analysis as warranted on an ongoing basis.
Breaches in security and other disruptions, could diminish our ability to generate revenues or contain costs and negatively impact our business in other ways.
We face certain security threats, including threats to our information technology infrastructure, attempts to gain access to our proprietary or classified information, and threats to physical and cyber security. Our information technology networks and related systems are critical to the operation of our business and essential to our ability to successfully perform day-to-day operations. The risks of a security breach, cyber attack, cyber intrusion, or disruption, particularly through actions taken by computer hackers, foreign governments and cyber terrorists, have increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Although we have acquired and developed systems and processes designed to protect our proprietary or classified information, they may not be sufficient and the failure to prevent these types of events could disrupt our operations, require significant management attention and resources, and could negatively impact our reputation among our customers and the public, which could have a negative impact on our financial condition, and weaken our results of operations and liquidity.
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Our quarterly and annual results and the price of our common stock could fluctuate significantly.
Our future operating results may vary significantly from quarter-to-quarter and from year-to-year depending on factors such as the timing and shipment of significant orders, new product introductions, major project wins, U.S. and foreign government demand, delays in customer releases of purchase orders, delays in receiving raw materials from vendors, the mix of distribution channels through which we sell our products and services and general economic conditions. Frequently, a substantial portion of our revenue in each quarter is generated from orders booked and fulfilled during that quarter. As a result, revenue levels are difficult to predict for each quarter. If revenue results are below expectations, operating results will be adversely affected as we have a sizeable base of fixed overhead costs that do not fluctuate much with the changes in revenue. Due to such variances in operating results, we have sometimes failed to meet, and in the future may not meet, market expectations regarding our future operating results.
In addition to the uncertainties of quarterly and annual operating results, future announcements concerning us or our competitors, including technological innovations or commercial products, litigation or public concerns as to the safety or commercial value of one or more of our products may cause the market price of our common stock to fluctuate substantially for reasons which may be unrelated to our operating results.
We are subject to certain safety risks, including the risk of fire, inherent in the manufacture, use and transportation of lithium batteries.
Due to the high energy inherent in lithium batteries, our lithium batteries can pose certain safety risks, including the risk of fire. We incorporate procedures in research, development, product design, manufacturing processes and the transportation of lithium batteries that are intended to minimize safety risks, but we cannot assure that accidents will not occur or that our products will not be subject to recall for safety concerns. Although we currently carry insurance policies which cover loss of the plant and machinery, leasehold improvements, inventory and business interruption, any accident, whether at the manufacturing facilities or from the use of the products, may result in significant production delays or claims for damages resulting from injuries or death. While we maintain what we believe to be sufficient casualty liability coverage to protect against such occurrences, these types of losses could reduce our operating income and have other material adverse effects on our business, financial condition and results of operation.
Negative publicity of lithium-ion batteries may negatively impact the industries or markets we operate in.
We are unable to predict the impact, severity or duration of negative publicity related to fire / mishandling of lithium-ion batteries or the environmental impact of their disposal, and how it may impact the industries or markets we serve. Ongoing negative attention being given to lithium ion batteries that are integrated into the power systems of new commercial aircraft and electric motor vehicles may have an impact on the lithium ion battery industry as a whole, regardless of the designed usage of those batteries. The residual effects of such events could have an adverse effect on our business, financial condition, and results of operations.
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A finding that our proprietary and intellectual property rights are not enforceable or invalid could allow our competitors and others to produce competing products based on our proprietary and intellectual property or limit our ability to continue to manufacture and market our products.
We believe our success depends more on the knowledge, ability, experience and technological expertise of our employees than on the legal protection of patents and other proprietary rights. However, we claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We cannot guarantee the degree of protection these various claims may or will afford, or that competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technology. We protect our proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements with certain employees, customers, consultants and strategic partners. There can be no assurance as to the degree of protection these contractual measures may or will afford. We have had patents issued and have patent applications pending in the U.S. and elsewhere. We cannot assure (1) that patents will be issued from any of these pending applications, or that the claims allowed under any issued patents will be sufficiently broad to protect our technology, (2) that any patents issued to us will not be challenged, invalidated or circumvented, or (3) as to the degree or adequacy of protection any patents or patent applications may or will afford. Further, if we are found to be infringing third party patents, we cannot assure that we will not be subjected to significant damages or will be able to obtain licenses with respect to such patents on acceptable terms, if at all. The failure to obtain necessary licenses could delay product shipments or the introduction of new products, and costly attempts to design around such patents could foreclose the development, manufacture or sale of products.
Our growth and expansion strategy could strain or overwhelm our resources.
Rapid growth of our business could significantly strain management, operations and technical resources. If we are successful in obtaining rapid market growth of our products, we will likely be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost. For example, demand for our new or existing products combined with our ability to penetrate new markets and geographies or secure a major project award, could strain the current capacity of our manufacturing facilities and require additional resources, equipment and time to meet the required demand. We cannot assure, however, that our business will grow rapidly or that our efforts to expand manufacturing and quality control activities will be successful or that we will be able to satisfy commercial scale production requirements on a timely and cost-effective basis.
We also may be required to continue to improve our operations, management and financial systems and controls in order to remain competitive. The failure to manage growth and expansion effectively could have an adverse effect on our business, financial condition, and results of operations.
The loss of top management and key personnel could significantly harm our business, and our ability to put in place a succession plan and recruit experienced, competent management is critical to the success of the business.
The loss of top management and key personnel could significantly harm our business, and our ability to put in place a succession plan and recruit experienced, competent management is critical to the success of our business. The continuity of our officers and executive team is vital to the successful implementation of our business model and growth strategy designed to deliver sustainable, consistent profitability. A top management priority has been the development and implementation of a formal succession plan to mitigate the risks associated with the loss of senior executives. There is no guarantee that we will be successful in our efforts to effectively implement our succession plan.
Because of the specialized, technical nature of our business, we are highly dependent on certain members of our management, sales, engineering and technical staffs. The loss of these employees could have a material adverse effect on our business, financial condition and results of operations. Our ability to effectively pursue our business strategy will depend upon, among other factors, the successful retention of our key personnel, recruitment of additional highly skilled and experienced managerial, sales, engineering and technical personnel, and the integration of such personnel obtained through business acquisitions. We cannot assure that we will be able to retain or recruit this type of personnel. An inability to hire sufficient numbers of people or to find people with the desired skills could result in greater demands being placed on limited management resources which could delay or impede the execution of our business plans and have other material adverse effects on our business, financial condition and results of operations.
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Our supply of raw materials and components could be disrupted.
Certain materials and components used in our products are available only from a single or a limited number of suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for materials and components that are otherwise generally available. Due to our involvement with supplying defense products to the U.S. government, we could receive a government preference to continue to obtain critical supplies to meet military production needs. However, if the government did not provide us with a government preference in such circumstances, the difficulty in obtaining supplies could have a material adverse effect on our business, financial condition and results of operations. We believe that alternative suppliers are available to supply materials and components that could replace materials and components currently used and that, if necessary, we would be able to redesign our products to make use of such alternatives. However, any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition and results of operations. We have experienced interruptions of product deliveries by sole source suppliers in the past, and we cannot guarantee that we will not experience a material interruption of deliveries from sole source suppliers in the future. Additionally, we could face increasing pricing pressure from our suppliers dependent upon volume due to rising costs by these suppliers that could be passed on to us in higher prices for our raw materials, which could increase our cost of business, lower our margins and have other materially adverse effects on our business, financial condition and results of operations.
We are subject to foreign currency fluctuations.
We maintain manufacturing operations in North America and China, and we export products to various countries. We purchase materials and sell our products in foreign currencies, and therefore currency fluctuations may impact our pricing of products sold and materials purchased. While the percentage of our business with customers outside of the U.S. slightly declined in 2015, sales to such customers still makes up a significant percentage of our total revenues. For example, in 2015, 39% our sales were to customers outside of the U.S. as compared to 41% in 2014. The recent strengthening of the U.S. Dollar relative to our customers' currencies makes our products relatively more expensive to them, and may adversely affect our sales levels and currencies makes our products relatively more expensive to them, and may adversely affect our sales levels and profitability. In addition, our China subsidiary maintains its books in local currency and the translation of the subsidiary financial statements into U.S. dollars for our consolidated financial statements could have an adverse effect on our consolidated financial results due to changes in local currency relative to the U.S. dollar. Accordingly, currency fluctuations could have a material adverse effect on our business, financial condition and results of operations by increasing our expenses and reducing our income. Finally, we maintain certain domestic U.S. cash balances denominated in foreign currencies, and the U.S. dollar equivalent of these balances fluctuates with changes in the foreign exchange rates between these currencies and the U.S. dollar.
Our customers may not meet the volume expectations in our supply agreements.
We sell most of our products and services through supply agreements and contracts. While supply agreements and contracts contain volume-based pricing based on expected volumes, we cannot assure that adjustments to reflect volume shortfalls will be made under current industry practices because pricing is rarely adjusted retroactively when contract volumes are not achieved. Every effort is made to adjust future prices accordingly, but our ability to adjust prices is generally based on market conditions and we may not be able to adjust prices in various circumstances.
We are subject to the contract rules and procedures of the U.S. and foreign governments. These rules and procedures create significant risks and uncertainties for us that are not usually present in contracts with private parties.
We continue to develop battery products and communications systems to meet the needs of the U.S. and foreign governments. We compete in solicitations for awards of contracts. The receipt of an award, however, does not always result in the immediate release of an order and does not guarantee in any way any given volume of orders. Any delay of solicitations or anticipated purchase orders by, or future failure of, the U.S. or foreign governments to purchase products manufactured by us could have a material adverse effect on our business, financial condition and results of operations. In these scenarios we are also typically required to successfully meet contractual specifications and to pass various qualification-testing for the products under contract. Our inability to pass these tests in a timely fashion, as well as meet delivery schedules for orders released under contract, could have a material adverse effect on our business, financial condition and results of operations.
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Additionally, when a U.S. government contract is awarded, there is a government procedure that permits unsuccessful companies to formally protest such award if they believe they were unjustly treated in the evaluation process. As a result of these protests, the government is precluded from proceeding under these contracts until the protests are resolved. A prolonged delay in the resolution of a protest, or a reversal of an award resulting from such a protest could have material adverse effects on our business, financial condition and results of operations.
We could be adversely affected by violations of the US Foreign Corrupt Practices Act (“FCPA”), the U.K. Bribery Act or other anti-corruption laws.
The FCPA, U.K. Bribery Act and other anti-corruption laws generally prohibit companies and their intermediaries from making improper payments (to foreign officials and otherwise) and require companies to keep accurate books and records and maintain appropriate internal controls. Our training program and policies mandate compliance with such laws. We operate in some parts of the world that have experienced governmental corruption to some degree, and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. If we are found to be liable for violations of anti-corruption laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others, including employees of our third party partners or agents), we could suffer from civil and criminal penalties or other sanctions, incur significant internal investigation costs and suffer reputational harm.
Our ability to use our net operating loss carryforwards in the future may be limited, which could increase our tax liabilities and reduce our net income.
At December 31, 2015, we had approximately $87 million of U.S. and U.K. net operating loss carryforwards (“NOLs”) and approximately $1.6 million of U.S. tax credit carryforwards available to offset future taxable income. We continually assess the carrying value of this asset based on the relevant accounting standards. As of December 31, 2015, we reflected a full valuation allowance against our deferred tax asset to the extent the asset is not able to be offset by future reversing temporary differences. As we continue to assess the realizability of our deferred tax assets, the amount of the valuation allowance could be reduced. 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. Achieving our business plan targets, particularly those relating to revenue and profitability, is integral to our assessment regarding the recoverability of our net deferred tax asset.
Compliance with government regulations regarding the use of "conflict minerals" may result in increased costs and risks to the company.
As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Act"), the SEC has promulgated disclosure requirements regarding the use of certain minerals, which are mined from the Democratic Republic of Congo and adjoining countries, known as conflict minerals. The disclosure rules were effective in May 2014. We are required to perform due diligence inquiries of our supply chain and publicly disclose whether we manufacture (as defined in the Act) any products that contain conflict minerals and could incur significant costs related to implementing a process that will meet the mandates of the Act. Additionally, customers typically rely on us to provide critical data regarding the parts they purchase, including conflict mineral information. Our material sourcing is broad-based and multi-tiered, and we may not be able to easily verify the origins for conflict minerals used in the products we sell. We have many suppliers and each provides conflict mineral information in a different manner, if at all. Accordingly, because the supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of conflict minerals used in our products. Additionally, customers may demand that the products they purchase be free of conflict minerals. This may limit the number of suppliers that can provide products in sufficient quantities to meet customer demand or at competitive prices.
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The U.S. and foreign governments can audit our contracts with their respective defense and government agencies and, under certain circumstances, can adjust the economic terms of those contracts.
A portion of our business comes from sales of products and services to the U.S. and foreign governments through various contracts. These contracts are subject to procurement laws and regulations that lay out policies and procedures for acquiring goods and services. The regulations also contain guidelines for managing contracts after they are awarded, including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for default. Failure to comply with the procurement laws or regulations can result in civil, criminal or administrative proceedings involving fines, penalties, suspension of payments, or suspension or disbarment from government contracting or subcontracting for a period of time.
We may incur significant costs because of known and unknown environmental matters.
National, state and local laws impose various environmental controls on the manufacture, transportation, storage, use and disposal of batteries and of certain chemicals used in the manufacture of batteries. We use and generate a variety of chemicals and other hazardous by-products in our manufacturing operations. These environmental laws govern, among other things, air emissions, wastewater discharges and the handling, storage and release of wastes and hazardous substances. Such laws and regulations can be complex and are subject to change. Although we believe that our operations are in substantial compliance with current environmental regulations and that, except as noted below, there are no environmental conditions that will require material expenditures for clean-up at our present or former facilities or at facilities to which we have sent waste for disposal, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. There can be no assurance that additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our batteries or restricting disposal of batteries will not be imposed, or as to how these regulations will affect us or our customers. Such changes in regulations could reduce our operating income and margins and have other material adverse effects on our business, financial condition and results of operations. We could incur substantial costs as a result of violations of environmental laws, including clean-up costs, fines and sanctions and third-party property damage or personal injury claims. Failure to comply with environmental requirements could also result in enforcement actions that materially limit or otherwise affect the operations of the facilities involved. Under certain environmental laws, a current or previous owner or operator of an environmentally contaminated site may be held liable for the entire cost of investigation, removal or remediation of hazardous materials at such property. This liability could result whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials.
The EU RoHS Directive places restrictions on the use of certain hazardous substances in electrical and electronic equipment. All applicable products sold in the European Union market after July 1, 2006 must comply with EU RoHS Directive. While this directive does not apply to batteries and does not currently affect our defense products, should any changes occur in the directive that would affect our products, we intend and expect to comply with any new regulations that are imposed. Our commercial chargers are in compliance with this directive. Additional European Union directives, entitled the Waste Electrical and Electronic Equipment (“WEEE”) Directive and the Directive "on batteries and accumulators and waste batteries and accumulators", impose regulations affecting our non-defense products. These directives require that producers or importers of particular classes of electrical goods are financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. These directives assign levels of responsibility to companies doing business in European Union markets based on their relative market share. These directives call on each European Union member state to enact enabling legislation to implement the directive. As additional European Union member states pass enabling legislation our compliance system should be sufficient to meet such requirements. Our current estimated costs associated with our compliance with these directives based on our current market share are not significant. However, we continue to evaluate the impact of these directives as European Union member states implement guidance, and actual costs could differ from our current estimates.
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The EU Battery Directive is intended to cover all types of batteries regardless of their shape, volume, weight, material composition or use. It is aimed at reducing mercury, cadmium, lead and other metals in the environment by minimizing the use of these substances in batteries and by treating and re-using old batteries. This directive applies to all types of batteries except those used to protect European Member States' security, for military purposes, or sent into space. To achieve these objectives, the EU Battery Directive prohibits the marketing of some batteries containing hazardous substances. It establishes processes aimed at high levels of collection and recycling of batteries with quantified collection and recycling targets. The directive sets out minimum rules for producer responsibility and provisions with regard to labeling of batteries and their removability from equipment. Product markings are required for batteries and accumulators to provide information on capacity and to facilitate reuse and safe disposal. We currently ship our products pursuant to the requirements of the directive. Our current estimated costs associated with our compliance with these directives based on our current market share are not significant. However, we continue to evaluate the impact of these directives as European Union member states implement guidance, and actual costs could differ from our current estimates.
The China RoHS directive provides a two-step, broad regulatory framework, including similar hazardous substance restrictions as are imposed by the EU RoHS Directive, and applies to methods for the control and reduction of pollution and other public hazards to the environment caused during the production, sale, and import of EIP in China affecting a broad range of electronic products and parts. Currently, only the first step of the regulatory framework of China RoHS, which details marking and labeling requirements under the Marking Standard, is in effect. However, the methods under China RoHS only apply to EIP placed in the marketplace in China. Additionally, the Marking Standard does not apply to components sold to OEMs for use in other EIPs. Our sales in China are limited to sales to OEMs and to distributors who supply to OEMs. Should our sales strategy change to include direct sales to end-users, we believe our compliance system is sufficient to meet our requirements under China RoHS. Our current estimated costs associated with our compliance with this regulation based on our current market share are not significant. However, we continue to evaluate the impact of this regulation, and actual costs could differ from our current estimates.
A number of domestic and international communities are prohibiting the landfill disposal of batteries and requiring companies to make provisions for product recycling. Of particular note are the EU Batteries Directive and the New York State Rechargeable Battery Recycling Law. We are committed to responsible product stewardship and ongoing compliance with these and future statutes and regulations. The compliance costs associated with current recycling statutes and regulations are not expected to be significant at this time. However, we continue to evaluate the impact of these regulations, and actual costs could differ from our current estimates and additional laws could be enacted by these and other states which entail greater costs of compliance.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2015, we own two buildings in Newark, New York comprising approximately 250,000 square feet, which serve operations primarily in the Battery & Energy Products operating segment. Our corporate headquarters are located in our Newark, New York facility. We also lease approximately 97,000 square feet in two buildings on one campus in Shenzhen, China, which serve operations in the Battery & Energy Products operating segment. The Shenzhen, China campus location includes a dormitory facility. See Note 2 to our Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion on the status of our China facility. We lease approximately 32,500 square feet in a facility in Virginia Beach, Virginia, which serves operations in the Communications Systems operating segment. We also lease sales and administrative offices, as well as manufacturing and production facilities, in India, which serve operations in the Battery & Energy Products operating segment. Our research and development efforts for our Battery & Energy Products are conducted at our Newark, New York and Shenzhen, China facilities, while our research and development efforts for our Communications Systems products are conducted in Tallahassee, Florida and at our facility in Virginia Beach, Virginia. On occasion, we rent additional warehouse space to store inventory and non-operational equipment. We believe that our facilities are adequate and suitable for our current needs. However, we may require additional manufacturing and administrative space if demand for our products and services grows.
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ITEM 3. 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.
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 USD 42 million 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 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Ultralife’s common stock is listed on the NASDAQ Global Market under the symbol “ULBI.”
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The following table sets forth the quarterly high and low closing sales prices of our common stock during 2014 and 2015:
| Closing Sales Prices | ||
| High | Low | |
| 2014: | ||
| Quarter ended March 30, 2014 | $4.56 | $3.34 |
| Quarter ended June 29, 2014 | 4.25 | 3.60 |
| Quarter ended September 28, 2014 | 3.85 | 3.08 |
| Quarter ended December 31, 2014 | 3.55 | 2.87 |
| 2015: | ||
| Quarter ended March 29, 2015 | $3.99 | $3.00 |
| Quarter ended June 28, 2015 | 4.40 | 3.56 |
| Quarter ended September 27, 2015 | 5.45 | 3.90 |
| Quarter ended December 31, 2015 | 7.49 | 5.28 |
Holders
As of February 25, 2016, there were approximately 2,800 registered holders of record of our common stock.
Purchases of Equity Securities by the Issuer
On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “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 has been extended through June 2, 2016, and the maximum number of shares authorized to be repurchased under the program has been increased to 3.4 million shares.
Share repurchases under this program are made in accordance with SEC Rule 10b-18 using a variety of methods, which may include open market purchases, privately negotiated transactions and block trades, or any combination of such methods, in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under a 10b5-1 Plan, the timing, manner, price and amount of any repurchase are determined at the Company’s discretion. The Share Repurchase Program may be suspended, terminated or modified by the Company at any time and for any reason. The Share Repurchase Program does not obligate the Company to repurchase any specific number of shares.
In 2015, we repurchased a total of 2,258,929 shares of our common stock for an aggregate consideration of $9,388, of which 2,225,437 shares were repurchased under the Share Repurchase Program for an aggregate amount of $9,162 (excluding fees and commissions).
For the year ended December 31, 2014, we repurchased a total of 227,974 shares of our common stock for an aggregate consideration of $762, of which 216,754 shares we repurchased under the Share Repurchase Program for an aggregate amount of $716 (excluding fees and commissions).
From the inception of the Share Repurchase Program on May 1, 2014 through December 31, 2015, the Company has repurchased 2,442,191 shares for an aggregate cost (excluding fees and commissions) of $9,877. The total remaining balance of shares authorized for repurchase under the Share Repurchase Program is 957,809 shares as of December 31, 2015.
The following table sets forth information regarding purchases of our 2015 common stock under this program:
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| Total Number of Shares Purchased | Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Program |
Maximum Number of Shares That May Yet Be Purchased Under the Program | ||||||
| Fourth quarter total | - | - | - | 957,809 | |||||
| Total for 2015 | 2,225,437 | $4.12 | 2,225,437 | 957,809 | |||||
Dividends
We have never declared or paid any cash dividends on our capital stock. Pursuant to our current credit facility, we are precluded from paying any dividends. We intend to retain earnings, if any, to finance future operations and expansion and, therefore, do not anticipate paying any cash dividends in the foreseeable future. Any future payment of dividends will depend upon our financial condition, capital requirements and earnings, as well as upon other factors that our Board of Directors may deem relevant.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide this information.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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-K.
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 to customers across the globe in the government, defense and commercial sectors. With an emphasis on strong engineering and a collaborative approach to problem solving, we design, manufacture, install and maintain power and communications systems including rechargeable and non-rechargeable batteries, communications and electronics systems and accessories and custom engineered systems. 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 various other non-rechargeable batteries, in addition to rechargeable batteries, uninterruptable power supplies, charging systems and accessories, such as cables. The Communications Systems segment includes RF amplifiers, power supplies, cable and connector assemblies, amplified speakers, equipment mounts, case equipment, integrated communication system kits 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.
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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.
During 2014, we elected to terminate our lease for our U.K. service office and repair facility which was to have expired in May 2018. The termination of this lease was effective as of January 31, 2015.
Also in 2012, we sold 100% of our ownership interest in RedBlack Communications, Inc. (“RedBlack”). During 2015 and 2014, we recognized $0 and $61 in expense, respectively, in discontinued operations arising from customary post-closing working capital adjustments relating to that sale.
Currently, we do not experience significant seasonal sales trends in any of our operating segments, although sales to the U.S. Defense Department and other international defense organizations can be sporadic based on the needs of those particular customers.
Consolidated revenues increased by $9,933 or 14.9% to $76,427 for the year ended December 31, 2015 compared to $66,494 for the year ended December 31, 2014. During 2015, we experienced revenue growth of 15.0% for our Battery & Energy Products business and 14.7% for our Communications Systems business. This performance reflected a $6,306 or 17.3% increase in sales to our government and defense customers and a $3,627 or 12.1% increase in sales to our commercial customers. The higher government and defense sales primarily resulted from increased demand from a large, global defense prime contractor for our batteries, chargers and integrated communications systems, and the increased commercial sales reflected our continued penetration of the medical device market with our rechargeable batteries and chargers and an increased demand for our 9-Volt batteries from global OEMs for their smoke detectors. Gross margin increased to 30.5% for the year ended December 31, 2015, as compared to 29.1% for the year ended December 31, 2014, due primarily to increased sales of high value proposition commercial products and new products, higher production volume in our factories and productivity improvements resulting from our “lean” initiatives.
Operating expenses decreased by $807 or 3.9% to $19,986 during the year ended December 31, 2015, compared to $20,793 during the year ended December 31, 2014. The 2015 expense level primarily reflects higher research and development spending resulting from intensified new product development activities in response to a marked increase in quoting requests and a $150 non-cash impairment charge related to our McDowell Research Corporation trademark to reflect government and defense industry timing delays in the awarding of large contracts experienced over the last few years. These expenses were more than offset by our continued efforts to reduce discretionary general administrative and selling expenses. Operating expenses as a percentage of revenues decreased from 31.3% in 2014 to 26.2% in 2015 due to the combination of higher revenues and lower expenses in 2015.
Net income from continuing operations was $2,840, or $0.18 per basic share ($0.17 per diluted share) for the year ended December 31, 2015, compared to a net loss from continuing operations of $2,070, or $0.12 per basic share, for the year ended December 31, 2014. Net loss from discontinued operations, net of tax, was $0, or $0.00 per share, for the year ended December 31, 2015, compared to $61, or $0.00 per share, for the year ended December 31, 2014.
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 continuing operations, amounted to $6,966 for the year ended December 31, 2015 compared to $2,942 for the prior period. See the section “Adjusted EBITDA” beginning on page 33 for a reconciliation of Adjusted EBITDA to net income (loss) attributable to Ultralife.
As a result of careful working capital management and cash generated from operations, our liquidity remains solid with total cash of $14,533, a decrease of $3,333 from the cash position of $17,866 as of December 31, 2014. The decrease reflects the repurchase of 2,225,437 shares under our Share Repurchase Program in the aggregate $9,162 partially offset by our operating performance and inventory reduction. We had no debt as of December 31, 2015 or December 31, 2014.
We ended 2015 in a strong position to deliver profitable growth in 2016 through continued maturation of diverse market opportunities, ongoing new product development and disciplined adherence to our business model parameters.
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Results of Operations
Year Ended December 31, 2015 Compared With the Year Ended December 31, 2014:
| Year Ended December 31, | Increase/ | |||||||||||
| 2015 | 2014 | (Decrease) | ||||||||||
| Revenues: | ||||||||||||
| Battery & Energy Products | $ | 65,272 | $ | 56,772 | $ | 8,500 | ||||||
| Communications Systems | 11,155 | 9,722 | 1,433 | |||||||||
| Total | 76,427 | 66,494 | 9,933 | |||||||||
| Cost of products sold: | ||||||||||||
| Battery & Energy Products | 46,574 | 41,256 | 5,318 | |||||||||
| Communications Systems | 6,537 | 5,888 | 649 | |||||||||
| Total | 53,111 | 47,144 | 5,967 | |||||||||
| Gross profit: | ||||||||||||
| Battery & Energy Products | 18,698 | 15,516 | 3,182 | |||||||||
| Communications Systems | 4,618 | 3,834 | 784 | |||||||||
| Total | 23,316 | 19,350 | 3,966 | |||||||||
| Operating expenses | 19,986 | 20,793 | (807 | ) | ||||||||
| Operating income (loss) | 3,330 | (1,443 | ) | 4,773 | ||||||||
| Other expense, net | (180 | ) | (359 | ) | 179 | |||||||
| Income (Loss) from continuing operations before taxes | 3,150 | (1,802 | ) | 4,952 | ||||||||
| Income tax provision | 310 | 268 | 42 | |||||||||
| Net income (loss) from continuing operations | 2,840 | (2,070 | ) | 4,910 | ||||||||
| (Loss) income from discontinued operations, net of tax | — | (61 | ) | 61 | ||||||||
| Net income ( loss) | 2,840 | (2,131 | ) | 4,971 | ||||||||
| Net income (loss) attributable to non-controlling interest | 29 | 15 | 14 | |||||||||
| Net income (loss) attributable to Ultralife | $ | 2,869 | $ | (2,116 | ) | $ | 4,985 | |||||
| Net income (loss) attributable to Ultralife common shares – basic: | ||||||||||||
| Continuing operations | $ | .18 | $ | (.12 | ) | $ | .30 | |||||
| Discontinued operations | $ | .00 | $ | (.00 | ) | .00 | ||||||
| Net income (loss) attributable to Ultralife common shares – diluted: | ||||||||||||
| Continuing operations | $ | .17 | $ | (.12 | ) | $ | .29 | |||||
| Discontinued operations | $ | .00 | $ | (.00 | ) | .00 | ||||||
| Weighted average shares outstanding – basic | 16,182,000 | 17,475,000 | (1,293,000 | ) | ||||||||
| Weighted average shares outstanding – diluted | 16,458,000 | 17,475,000 | (1,017,000 | ) | ||||||||
Revenues. Total revenues for the year ended December 31, 2015 amounted to $76,427, an increase of $9,933, or 14.9% from the $66,494 reported for the year ended December 31, 2014.
Battery & Energy Products revenues increased $8,500, or 15.0%, to $65,272 for the year ended December 31, 2015 from the $56,772 reported for the year ended December 31, 2014. Sales to government and defense customers increased $4,873 or 18.3% to $31,563 in 2015 from $26,690 in 2014 driven by higher rechargeable battery and charger shipments to a large, global defense prime contractor and primary batteries to the U.S. Governments Defense Logistics Agency. Commercial sales increased $3,627 or 12.1% to $33,709 for 2015 versus $30,082 for 2014 due primarily to increased sales of rechargeable batteries for medical devices and medical carts and 9-Volt batteries to large, global OEM’s driven by some legislative changes for smoke detectors, particularly overseas.
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Communications Systems revenues increased $1,433, or 14.7%, to $11,155 for the year ended December 31, 2015 from $9,722 for the year ended December 31, 2014. The year-over-year increase reflects broader distribution and increased order flow compared to 2014, trends towards integrated systems in line with our new product development focus and initial shipments through an OEM to the U.S. Army of the Vehicle Installed Power Enhanced Riflemen Appliqué (“VIPER”) following our September award of the $8.2 million contract.
Cost of Products Sold. Cost of products sold increased $5,967 or 12.7%, from $47,144 for the year ended December 31, 2014 to $53,111 for the year ended December 31, 2015. Consolidated cost of products sold as a percentage of total revenue decreased from 70.9% for the year ended December 31, 2014 to 69.5% for the year ended December 31, 2015. Correspondingly, consolidated gross margin was 30.5% for the year ended December 31, 2015, compared with a gross margin of 29.1% for the year ended December 31, 2014. The improvement in gross margin reflects the increased sales of high value proposition commercial products, higher mix of new products and higher production volumes, together with Lean productivity gains.
In our Battery & Energy Products segment, the cost of products sold increased $5,318 or 12.9%, from $41,256 for the year ended December 31, 2014 to $46,574 for the year ended December 31, 2015. Battery & Energy Products gross margin for 2015 was $18,698 or 28.6%, an increase of $3,182 or 20.5% from 2014’s gross margin of $15,516, or 27.3%. Battery & Energy Products gross margin increased by 130 basis points for the year ended December 31, 2015, primarily as a result of a more favorable product mix and favorable absorption of overhead costs resulting from that mix.
In our Communications Systems segment, the cost of products sold increased $649 or 11.0% from $5,888 for the year ended December 31, 2014 to $6,537 for the year ended December 31, 2015. Communications Systems gross margin for 2015 was $4,618 or 41.4%, an increase of $784 or 20.4% from 2014’s gross margin of $3,834, or 39.4%. The 200 basis point increase in gross margin year-over-year is due to more favorable product mix towards high value proposition new products and higher manufacturing volume.
Operating Expenses. Operating expenses decreased by $807, or 3.9%, from $20,793 for the year ended December 31, 2014 to $19,986 for the current year. The 2015 expense level primarily reflects higher research and development spending resulting from intensified new product development activities for both businesses in response to a marked increase in quoting requests and a $150 non-cash impairment charge related to our McDowell Research Corporation trademark to reflect government and defense industry timing delays in the awarding of large contracts experienced over the last few years. These expenses were more than offset by our continued efforts to reduce more discretionary general administrative and selling expenses. Overall, operating expenses as a percentage of revenues decreased from 31.3% in 2014 to 26.2% in 2015 due to the combination of higher revenues and lower expenses in 2015. Amortization expense associated with intangible assets related to our acquisitions was $235 for 2015 ($105 in selling, general and administrative expenses and $130 in research and development costs), compared with $305 for 2014 ($129 in selling, general, and administrative expenses and $176 in research and development costs). Research and development costs were $5,603 in 2015, an increase of $270 or 5.1%, from the $5,333 reported in 2014. Selling, general, and administrative expenses decreased $1,227, or 7.9%, to $14,233 for the year ended December 31, 2015 from $15,460 for the year ended December 31, 2014, reflecting on-going actions to reduce discretionary general and administrative expenses and a greater focus on selling expenses to align with growth opportunities. For 2015, we recorded a non-cash impairment charge of $150 to reduce the book value of our McDowell Research Corporation trademark. The trademark impairment charge is based on compliance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and resulted from taking into account timing delays in the awarding by government/defense customers in recent years of certain large projects in our Communications Systems pipeline.
Other Income (Expense). Other income (expense) totaled ($180) for the year ended December 31, 2015, compared to ($359) for the year ended December 31, 2014. Interest expense, net of interest income, increased $40 from $205 during 2014 to $245 during 2015, as a result of the cost to insure certain non-U.S. accounts receivable in the first half of 2015 in accordance with our Credit Facility with PNC. Miscellaneous income (expense) amounted to $65 for 2015 as compared to ($154) in 2014 primarily due to transactions impacted by changes in foreign currencies relative to the strengthening of the U.S. dollar and other currencies.
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Income Taxes. We recorded a tax provision of $310 for the year ended December 31, 2015 compared with a tax provision of $268 for the same period of 2014. The expense is primarily due to (a) the income reported for our China operations during the periods, (b) estimated provision for U.S. federal alternative minimum tax liability, and (c) the recognition of deferred tax liabilities generated from the amortization of goodwill and certain intangible assets for tax purposes that cannot be predicted to reverse for book purposes during our loss carryforward periods, partially offset by the tax benefit relating to our partial trademark impairment. The year-over-year increase is attributable primarily to higher income in our Chinese subsidiary. The effective consolidated tax rate for the years ended December 31, 2015 and 2014 was:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Income (Loss) before Income Taxes (a) | $ | 3,150 | $ | (1,802 | ) | |||
| Income tax provision (b) | 310 | 268 | ||||||
| Effective rate (b) / (a) | 9.8 | % | 14.9 | % | ||||
In 2015 and 2014, in the U.S. and the U.K., we continue to report a valuation allowance for our deferred tax assets that cannot be offset by reversing temporary differences. This results from the conclusion that, based on past history, it is more likely than not that we would not utilize our U.S. and U.K. net operating losses (“NOLs”) that had accumulated over time. The recognition of a valuation allowance on our deferred tax assets resulted from our evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOLs was based on a number of factors including, our history of operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate. We concluded that these historical factors represent sufficient negative evidence and have concluded that we should continue to have a full valuation allowance against our net deferred tax assets. (See Notes 1 and 11 in the Notes to Consolidated Financial Statements for additional information.)
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 not have an impact on income taxes determined for 2014, but we have included in our 2015 income tax provision an estimated amount owing for U.S. federal alternative minimum tax liability. 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.
Discontinued Operations. Income (Loss) from discontinued operations, net of tax, totaled $0 for the year ended December 31, 2015, compared to a loss of ($61) in the same period of 2014. The 2014 loss results from our final adjustments relating to the sale of RedBlack. For more information, see Note 2 to the Consolidated Financial Statements.
Net Income (Loss) Attributable to Ultralife. Net income attributable to Ultralife and net loss attributable to Ultralife common shareholders per basic share were $2,869 and $0.18, respectively, for the year ended December 31, 2015, compared to net loss attributable to Ultralife and net loss attributable to Ultralife common shareholders per share of ($2,116) and ($0.12), respectively, for the year ended December 31, 2014, primarily as a result of the reasons described above. Weighted average common shares outstanding used to compute basic earnings per share decreased from 17,475,000 in 2014 to 16,182,000 in 2015, mainly due to the effect of our Share Repurchase Program (see Note 4 to our Consolidated Financial Statements) partially offset by stock option exercises.
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Adjusted EBITDA from continuing operations
In evaluating our business, we consider and use Adjusted EBITDA from continuing operations, a non-GAAP financial measure, as a supplemental measure of our operating performance. We define Adjusted EBITDA from continuing operations 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 use Adjusted EBITDA from continuing operations 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 from continuing operations 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-operating expenses or income. We also present Adjusted EBITDA from continuing 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 from continuing operations to net income (loss) attributable to Ultralife, the most comparable financial measure under U.S. GAAP.
We use Adjusted EBITDA from continuing operations 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 from continuing operations 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 to continuing operations, we assist investors in gaining a better understanding of our business on a going forward basis. We provide information relating to our Adjusted EBITDA from continuing operations 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 from continuing operations 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 from continuing operations 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 from continuing operations has limitations as an analytical tool, and when assessing our operating performance, Adjusted EBITDA from continuing operations 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:
| a. | Adjusted EBITDA from continuing operations 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; |
| b. | 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; |
| c. | 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; |
| d. | although discontinued operations does not reflect our current business operations, discontinued operations includes the costs we incurred by divesting of our RedBlack Communications business; and |
| e. | other companies may calculate Adjusted EBITDA from continuing operations differently than we do, limiting its usefulness as a comparative measure. |
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We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA from continuing operations only supplementally. Adjusted EBITDA from continuing operations is calculated as follows for the periods presented:
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Net income (loss) attributable to Ultralife | $ | 2,869 | $ | (2,116 | ) | |||
| Add: | ||||||||
| Interest expense, net | 245 | 205 | ||||||
| Income tax provision | 310 | 268 | ||||||
| Depreciation and amortization of financing fees | 2,472 | 2,918 | ||||||
| Amortization of intangible assets | 235 | 305 | ||||||
| MRC trademark impairment | 150 | — | ||||||
| Stock-based compensation expense | 571 | 1,003 | ||||||
| Loss from discontinued operations, net of tax | — | 61 | ||||||
| Loss on asset disposal | 114 | 298 | ||||||
| Adjusted EBIDTA | $ | 6,966 | $ | 2,942 | ||||
Liquidity and Capital Resources
Cash Flows and General Business Matters
The following cash flow information is being presented net of continuing and discontinued operations.
As of December 31, 2015, cash and cash equivalents totaled $14,533 (including restricted cash of $140), a decrease of $3,333 from the beginning of the year. During the year ended December 31, 2015, we generated $8,551 of cash from operating activities as compared to generating $3,665 of cash for the year ended December 31, 2014. In 2015, the cash generated from operating activities was a result of our net income of $2,840 plus an add-back of $3,542 for non-cash expenses of depreciation, amortization, loss on disposal of equipment and improvements, and stock-based compensation. Working capital changes accounted for $2,169 of the operating cash generation, due mainly to a decrease in inventory, offset by a decline in our accounts payable and other liabilities. In 2014, the cash generated from operating activities was caused by our net loss of $2,131 plus an add-back of $4,434 for non-cash expenses of depreciation, amortization, and stock-based compensation. Working capital changes accounted for $1,301 of the operating cash generation, due mainly to an increase in accounts receivable, partially offset by a decline in our accounts payable and other liabilities.
We used $2,910 in cash for investing activities during 2015 compared with $1,385 in cash used for investing activities in 2014. In 2014, we spent $1,653 to purchase plant, property, and equipment and $268 of cash became unrestricted. In 2015, we spent $2,910 to purchase plant, property and equipment. The year-over-year increase in cash paid for capital expenditures was due primarily to the 2015 payment of equipment of pertaining to our Communications business that was installed in 2014.
We used $8,868 in cash for financing activities during 2015, compared to $751 in cash for financing activities during 2014. We spent $9,388 to repurchase treasury stock in 2015 compared to $762 in 2014, and we received $538 and $11 in 2015 and 2014, respectively, in funds from the issuance of common stock in connection with the exercise of stock options by our employees. In 2015, we used $18 for tax withholdings related to the vesting of restricted shares.
Although we carry a full reserve for our deferred tax asset as of both December 31, 2015 and 2014, we continue to have significant U.S. NOLs available to us to utilize as an offset to taxable income. As of December 31, 2015, none of our U.S. NOLs have expired. See Note 11 in our Notes to the Consolidated Financial Statements for additional information.
Inventory turnover for the year ended December 31, 2015 averaged 2.1 turns compared to 1.7 turns for 2014. The increase in this metric is due mainly to higher sales year over year and a 9% reduction in average inventory over that same period.
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Our order backlog at December 31, 2015 was approximately $26,900, an increase of approximately $12,100 over the backlog at December 31, 2014, which was $14,800. The increase is primarily due to higher demand from OEMs for our medical batteries, demand for primary batteries from the U.S. Department of Defense, chargers from an international large defense prime contractor, our new products in other commercial markets, and the award of an $8,200 order through an OEM for the U.S. Army for our new MRC product – Vehicle Installed Power Enhanced Rifleman Appliqué (“VIPER”). A large majority of the 2015 backlog is related to orders that are expected to ship throughout 2016.
As of December 31, 2015, we had made commitments to purchase approximately $511 of production machinery and equipment, which we expect to fund through operating cash flows.
In January 2016, we acquired Accutronics Limited (“Accutronics”) as disclosed in Note 3 to our Consolidated Financial Statements. The purchase price of £7,708 million (approximately $11.2 million) was funded out of our cash. Based on operating cash flows and working capital management, including further reductions of inventory, we expect that a significant portion of the cash used will be restored over the course of 2016.
Debt and Lease Commitments
On May 24, 2013, we entered into a Revolving Credit, Guaranty and Security Agreement (the “Credit Agreement”) and related security agreements with PNC Bank, National Association (“PNC”) to establish a $20 million secured asset-based revolving credit facility that includes a $1 million letter of credit subfacility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with PNC’s concurrence to $35 million prior to the last six months of the term and expires on May 24, 2017. The Credit Facility replaces the prior credit facility with RBS Business Capital, a division of RBS Asset Finance, Inc., which expired in accordance with its terms on May 15, 2013, with no debt outstanding.
Our available borrowing limit under the Credit Facility fluctuates from time to time based on a borrowing base formula equal to the sum of up to 85% of eligible accounts receivable plus the least of (a) up to 65% of the eligible inventory and eligible foreign in-transit inventory, (b) up to 85% of the appraised net orderly liquidation value of eligible inventory and eligible foreign in-transit inventory, and (c) $7.5 million, in each case subject to the definitions in the Credit Agreement and reserves required by PNC.
Interest is payable quarterly and will accrue on outstanding indebtedness under the Credit Agreement at the alternate base rate, as defined in the Credit Agreement, plus the applicable margin or at the one, two or three month LIBOR rate plus the applicable margin as selected by us from time to time and listed below.
| Quarterly Average Undrawn Borrowing Availability | Applicable Margin for Alternate Base Rate Loans | Applicable Margin for LIBOR Rate Loans | ||
| Greater than $8,000,000 | 1.00% | 2.00% | ||
| $5,000,000 up to $8,000,000 | 1.25% | 2.25% | ||
| Less than $5,000,000 | 1.50% | 2.50% |
We must pay a fee on the Credit Facility’s unused availability of 0.375% per annum and customary letter of credit fees in addition to various collateral monitoring and related fees and expenses.
In addition to customary affirmative and negative covenants, we must maintain a fixed charge coverage ratio as defined in the Credit Agreement of 1:15 to 1:00 tested quarterly for the four-quarters then ended. As of December 31, 2015, we were in compliance with all covenants. The Credit Facility is secured by substantially all our assets.
Any outstanding advances must be repaid upon expiration of the term of the Credit Facility. Payments must be made during the term to the extent outstanding advances exceed the maximum amount then permitted to be drawn as advances under the Credit Facility and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and PNC will have other customary remedies.
As of December 31, 2015, we had no amount outstanding under the Credit Facility, an applicable interest rate of 2.43%, approximately $8,927 of borrowing capacity in addition to our unrestricted cash on hand of $14,393, and no outstanding letters of credit related to the Credit Facility.
See Note 8 in the Notes to Consolidated Financial Statements for additional information.
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Other Matters
With respect to our battery products, we typically offer warranties against any defects due to product manufacture or workmanship for up to one year from the date of purchase. With respect to our communications accessory products, we typically offer a three-year warranty. 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 would be sufficient. This could have a material adverse effect on our business, financial condition and results of operations.
We participated in and provided technical assistance in support of an investigation conducted by a downstream customer and regulatory authorities with regard to a 2013 fire that damaged an unoccupied Boeing 787 Dreamliner aircraft parked at London Heathrow Airport. A final report was issued by the regulatory authorities, with findings indicating that the fire was likely caused by circumstances related to the plane’s emergency locator transmitter (ELT), manufactured by another company. A component of the ELT is a battery pack incorporating Ultralife’s industry-standard lithium manganese dioxide non-rechargeable D cell.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect amounts reported therein. The estimates and assumptions that require management’s most difficult, subjective or complex judgments are described below.
Revenue recognition:
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are recognized on date of delivery. A provision is made at the time the revenue is recognized for warranty costs expected to be incurred. Customers, including distributors, do not have a general right of return on products shipped.
Technology Contracts – We recognize revenue using the proportional method, measured by the percentage of actual costs incurred to date to the total estimated costs to complete the contract. Elements of cost include direct material, labor and overhead. If a loss on a contract is estimated, the full amount of the loss is recognized immediately. We allocate costs to all technology contracts based upon actual costs incurred including an allocation of certain research and development costs incurred.
Deferred Revenue - For each source of revenues, we defer recognition if: i) evidence of an agreement does not exist, ii) delivery or service has not occurred, iii) the selling price is not fixed or determinable, or iv) collectability is not reasonably assured.
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Valuation of Inventory:
Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”) method. Our inventory includes raw materials, work in process and finished goods. We record provisions for excess, obsolete or slow moving inventory based on changes in customer demand, technology developments or other economic factors. The factors that contribute to inventory valuation risks are our purchasing practices, material and product obsolescence, accuracy of sales and production forecasts, introduction of new products, product lifecycles, product support and foreign regulations governing hazardous materials (see Item 1A – Risk Factors for further information on foreign regulations). We manage our exposure to inventory valuation risks by maintaining safety stocks, minimum purchase lots, managing product end-of-life issues brought on by aging components or new product introductions, and by utilizing certain inventory minimization strategies such as vendor-managed inventories. We believe that the accounting estimate related to valuation of inventories is a "critical accounting estimate" because it is susceptible to changes from period-to-period due to the requirement for management to make estimates relative to each of the underlying factors ranging from purchasing, to sales, to production, to after-sale support. If actual demand, market conditions or product lifecycles are adversely different from those estimated by management, inventory adjustments to lower market values would result in a reduction to the carrying value of inventory, an increase in inventory write-offs and a decrease in gross margins.
Warranties:
We maintain provisions related to normal warranty claims by customers. We evaluate these reserves quarterly based on actual experience with warranty claims to date and our assessment of additional claims in the future. 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 would be sufficient.
Impairment of Long-Lived Assets:
We regularly assess all of our long-lived assets for impairment when events or circumstances indicate their carrying amounts may not be recoverable. This is accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either through the assistance of an independent valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our evaluation approximates our weighted average cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment charge is recognized.
Environmental Issues:
Environmental expenditures, if any, that relate to current operations are generally expensed. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated.
Goodwill and Other Intangible Assets:
The purchase price paid to effect an acquisition is allocated to the acquired tangible and intangible assets and liabilities at fair value. We do not amortize goodwill and intangible assets with indefinite lives, but instead evaluate these assets for impairment at least annually, or when events indicate that impairment exists. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being utilized over their weighted-average estimated useful life.
The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, including goodwill. This review includes, but is not limited to, an evaluation of the macroeconomic, industry or market, and cost factors relevant to the reporting unit as well as financial performance and entity or reporting unit events that may affect the value of the reporting unit. If this review leads to the determination that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, further impairment testing is not required. However, if this review cannot support a conclusion that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, or at our discretion, quantitative impairment steps are performed. Similarly, the analysis for indefinite-lived intangible assets consists of a review of various qualitative factors to determine if it is more likely than not that the indefinite-lived intangible asset is not impaired. If we conclude that it is more likely than not that we cannot support that the indefinite-lived asset is not impaired, or at our discretion, quantitative impairment steps are performed.
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The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of the reporting unit for goodwill impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles assets with indefinite lives (trademarks) through the royalty relief income valuation approach.
We conducted our annual impairment analysis for goodwill and intangible assets with indefinite lives as of December 31, 2015. For 2015, we identified three goodwill reporting units for analysis. We performed a quantitative analysis on these reporting units as of December 31, 2015. This testing indicated no impairment.
For 2015, we identified four trademarks for analysis. We performed annual quantitative tests on each of these trademarks. Based on these tests, we determined that an impairment amounting to $150 was required to reduce the carrying value of our McDowell Research Corporation trademark for our Communications Systems business to its estimated fair value.
There is a possibility that our goodwill and other intangible assets, particularly in our Communications Systems business, could be impaired should there be a significant change in our internal forecasts and other assumptions we use in our impairment analysis.
Stock-Based Compensation:
We recognize compensation cost relating to share-based payment transactions in our 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 employee’s requisite service period (generally the vesting period of the equity award). 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. If required, our market based awards are valued using a Monte Carlo simulation.
Income Taxes:
We account for income taxes using the asset and liability method. 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 may be in effect when the differences are expected to reverse.
In 2015 and 2014, in the U.S. and the U.K., we continued to report a valuation allowance for our deferred tax assets that cannot be offset by reversing temporary differences. This results from the conclusion that, based on past history, it is more likely than not that we would not be able to utilize our U.S. and U.K. net operating losses (“NOLs”) that had accumulated over time. The recognition of a valuation allowance on our deferred tax assets resulted from our evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOLs was based on a number of factors including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate. We concluded that these historical factors represent sufficient negative evidence and have concluded that we should continue to record a full valuation allowance at December 31, 2015. We currently carry a deferred tax asset in China that we have determined does not require a valuation allowance as we are more likely than not to fully utilize the NOL in China. We continually assess the carrying value of this asset based on relevant accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide this information.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in Item 15(a)(1) are included in this Report beginning on page 41.
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| Report of Independent Registered Public Accounting Firm |
To the Board of Directors and Shareholders of
Ultralife Corporation
We have audited the accompanying consolidated balance sheets of Ultralife Corporation as of December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. Ultralife Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ultralife Corporation as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
| /s/ Bonadio & Co., LLP | |
| Pittsford, New York | |
| March 2, 2016 | |
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| ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||||
CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) | ||||||||
| ASSETS | ||||||||
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 14,393 | $ | 17,711 | ||||
| Restricted cash | 140 | 155 | ||||||
| Trade accounts receivable, net of allowance for doubtful accounts of $300 and $340, respectively | 11,430 | 11,295 | ||||||
| Inventories, net | 23,814 | 26,086 | ||||||
| Prepaid expenses and other current assets | 1,900 | 1,313 | ||||||
| Due from insurance company | 177 | 184 | ||||||
| Deferred income taxes | 92 | 106 | ||||||
| Total current assets | 51,946 | 56,850 | ||||||
| Property, equipment and improvements, net | 9,038 | 9,812 | ||||||
| Goodwill | 16,283 | 16,407 | ||||||
| Other intangible assets, net | 3,946 | 4,338 | ||||||
| Security deposits and other non-current assets | 309 | 235 | ||||||
| Total assets | $ | 81,522 | $ | 87,642 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,494 | $ | 6,996 | ||||
| Accrued compensation and related benefits | 2,377 | 1,725 | ||||||
| Accrued expenses and other current liabilities | 1,749 | 2,421 | ||||||
| Income taxes payable | 227 | 69 | ||||||
| Total current liabilities | 10,847 | 11,211 | ||||||
| Deferred income taxes | 4,631 | 4,462 | ||||||
| Other non-current liabilities | 28 | 56 | ||||||
| Total liabilities | 15,506 | 15,729 | ||||||
| Commitments and contingencies (Note 9) | ||||||||
| Shareholders' equity: | ||||||||
| Preferred stock – par value $.10 per share; authorized 1,000,000 shares; none issued | — | — | ||||||
| Common stock – par value $.10 per share; authorized 40,000,000 shares; | ||||||||
| issued – 19,181,815 shares and 18,941,544 shares, respectively; | ||||||||
| outstanding – 15,322,155 shares and 17,340,813 shares, respectively | 1,918 | 1,894 | ||||||
| Capital in excess of par value | 177,007 | 175,940 | ||||||
| Accumulated deficit | (94,051 | ) | (96,920 | ) | ||||
| Accumulated other comprehensive loss | (907 | ) | (467 | ) | ||||
| Treasury stock - at cost; 3,859,660 shares and 1,600,731 shares at December 31, 2015 | ||||||||
| and 2014, respectively | (17,808 | ) | (8,420 | ) | ||||
| Total Ultralife equity | 66,159 | 72,027 | ||||||
| Noncontrolling interest | (143 | ) | (114 | ) | ||||
| Total shareholders’ equity | 66,016 | 71,913 | ||||||
| Total liabilities and shareholders' equity | $ | 81,522 | $ | 87,642 | ||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
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| ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | ||||||||
| (Dollars in Thousands, except Per Share Amounts) | ||||||||
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues | $ | 76,427 | $ | 66,494 | ||||
| Cost of products sold | 53,111 | 47,144 | ||||||
| Gross profit | 23,316 | 19,350 | ||||||
| Operating expenses: | ||||||||
| Research and development | 5,603 | 5,333 | ||||||
| Selling, general and administrative | 14,233 | 15,460 | ||||||
| Intangible asset impairment | 150 | — | ||||||
| Total operating expenses | 19,986 | 20,793 | ||||||
| Operating income (loss) | 3,330 | (1,443 | ) | |||||
| Other (expense) income: | ||||||||
| Interest income | 3 | 13 | ||||||
| Interest and financing expense | (248 | ) | (218 | ) | ||||
| Miscellaneous | 65 | (154 | ) | |||||
| Income (loss) from continuing operations before income taxes | 3,150 | (1,802 | ) | |||||
| Income tax provision | 310 | 268 | ||||||
| Net income (loss) from continuing operations | 2,840 | (2,070 | ) | |||||
| Loss from discontinued operations, net of tax | — | (61 | ) | |||||
| Net income (loss) | 2,840 | (2,131 | ) | |||||
| Net loss attributable to noncontrolling interest | 29 | 15 | ||||||
| Net income (loss) attributable to Ultralife | 2,869 | (2,116 | ) | |||||
| Other comprehensive (loss) income: | ||||||||
| Foreign currency translation adjustments | (440 | ) | 147 | |||||
| Comprehensive income (loss) attributable to Ultralife | $ | 2,429 | $ | (1,969 | ) | |||
| Net income (loss) per share attributable to Ultralife common shareholders – basic: | ||||||||
| Continuing operations | $ | .18 | $ | (.12 | ) | |||
| Discontinued operations | — | (.00 | ) | |||||
| Total | $ | .18 | $ | (.12 | ) | |||
| Net income (loss) per share attributable to Ultralife common shareholders – diluted: | ||||||||
| Continuing operations | $ | .17 | $ | (.12 | ) | |||
| Discontinued operations | — | (.00 | ) | |||||
| Total | $ | .17 | $ | (.12 | ) | |||
| Weighted average shares outstanding – basic | 16,182 | 17,475 | ||||||
| Weighted average shares outstanding – diluted | 16,458 | 17,475 | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
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| ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||
| Capital | Accumulated | |||||||||||||||||||||||||||||||
| Common Stock | in Excess | Other | Non- | |||||||||||||||||||||||||||||
| Number of | of Par | Comprehensive | Accumulated | Treasury | Controlling | |||||||||||||||||||||||||||
| Shares | Amount | Value | Income (Loss) | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||
| Balance – | ||||||||||||||||||||||||||||||||
| December 31, 2013 | 18,851,579 | $ | 1,885 | $ | 174,935 | $ | (614 | ) | $ | (94,804 | ) | $ | (7,658 | ) | $ | (99 | ) | $ | 73,645 | |||||||||||||
| Purchases of stock | (762 | ) | (762 | ) | ||||||||||||||||||||||||||||
| Shares issued to directors | 56,898 | 6 | 204 | 210 | ||||||||||||||||||||||||||||
| Vesting of restricted shares | 30,000 | 3 | (3 | ) | ||||||||||||||||||||||||||||
| Stock option exercises | 3,067 | 11 | 11 | |||||||||||||||||||||||||||||
| Stock-based compensation - | ||||||||||||||||||||||||||||||||
| Stock options | 614 | 614 | ||||||||||||||||||||||||||||||
| Restricted stock | 179 | 179 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 147 | 147 | ||||||||||||||||||||||||||||||
| Net loss | (2,116 | ) | (15 | ) | (2,131 | ) | ||||||||||||||||||||||||||
| Balance – | ||||||||||||||||||||||||||||||||
| December 31, 2014 | 18,941,544 | $ | 1,894 | $ | 175,940 | $ | (467 | ) | $ | (96,920 | ) | $ | (8,420 | ) | $ | (114 | ) | $ | 71,913 | |||||||||||||
| Purchases of stock | (9,388 | ) | (9,388 | ) | ||||||||||||||||||||||||||||
| Vesting of restricted shares | 102,334 | 10 | (28 | ) | (18 | ) | ||||||||||||||||||||||||||
| Stock option exercises | 137,937 | 14 | 524 | 538 | ||||||||||||||||||||||||||||
| Stock-based compensation - | ||||||||||||||||||||||||||||||||
| Stock options | 489 | 489 | ||||||||||||||||||||||||||||||
| Restricted stock | 82 | 82 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (440 | ) | (440 | ) | ||||||||||||||||||||||||||||
| Net income | 2,869 | (29 | ) | 2,840 | ||||||||||||||||||||||||||||
| Balance – | ||||||||||||||||||||||||||||||||
| December 31, 2015 | 19,181,815 | $ | 1,918 | $ | 177,007 | $ | (907 | ) | $ | (94,051 | ) | $ | (17,808 | ) | $ | (143 | ) | $ | 66,016 | |||||||||||||
| The accompanying notes are an integral part of these consolidated statements. | ||||||||||||||||||||||||||||||||
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| ULTRALIFE CORPORATION AND SUBSIDIARIES | ||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) | ||||||||
| (unaudited) | ||||||||
| Years ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| OPERATING ACTIVITIES: | ||||||||
| Net income (loss) | $ | 2,840 | $ | (2,131 | ) | |||
| Loss from discontinued operations, net of tax | — | 61 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization of financing fees | 2,472 | 2,828 | ||||||
| Amortization of intangible assets | 235 | 305 | ||||||
| Intangible asset impairment | 150 | — | ||||||
| Loss on other long-lived asset impairment and disposals | 114 | 298 | ||||||
| Stock-based compensation | 571 | 1,003 | ||||||
| Changes in deferred income taxes | 183 | 196 | ||||||
| Provision for allowance for doubtful accounts | (22 | ) | 52 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (217 | ) | 2,878 | |||||
| Inventories | 2,101 | (46 | ) | |||||
| Prepaid expenses and other assets | (757 | ) | 249 | |||||
| Income taxes receivable and payable | 158 | (25 | ) | |||||
| Accounts payable and other liabilities | 723 | (2,003 | ) | |||||
| Net cash provided by operating activities | 8,551 | 3,665 | ||||||
| INVESTING ACTIVITIES: | ||||||||
| Cash paid for property, equipment and improvements | (2,910 | ) | (1,653 | ) | ||||
| Change in restricted cash | — | 268 | ||||||
| Net cash used in investing activities | (2,910 | ) | (1,385 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Cash paid to repurchase treasury stock | (9,388 | ) | (762 | ) | ||||
| Proceeds from exercise of stock options | 538 | 11 | ||||||
| Vesting of restricted shares – tax withholdings | (18 | ) | — | |||||
| Net cash used in financing activities | (8,868 | ) | (751 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (91 | ) | 116 | |||||
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (3,318 | ) | 1,645 | |||||
| Cash and cash equivalents, beginning of period | 17,711 | 16,066 | ||||||
| Cash and cash equivalents, end of period | $ | 14,393 | $ | 17,711 | ||||
| NON-CASH ITEMS: | ||||||||
| Construction in process in accounts payable | $ | — | $ | 1,019 | ||||
| Income taxes paid | 52 | 60 | ||||||
| Interest paid | 150 | 76 | ||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||
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ULTRALIFE CORPORATION
Notes to Consolidated Financial Statements
(Dollars in Thousands, Except Per Share Amounts)
Note 1 - Summary of Operations and Significant Accounting Policies
a. Description of Business
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 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.
b. Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and include the accounts of Ultralife Corporation, our wholly-owned subsidiaries, Ultralife Batteries (UK) Ltd. (“Ultralife UK”), ABLE New Energy Co., Limited, and its wholly-owned subsidiary ABLE New Energy Co., Ltd. (“ABLE” collectively), and our majority-owned subsidiary Ultralife Batteries India Private Limited (“India JV”). Intercompany accounts and transactions have been eliminated in consolidation.
Final adjustments relating to the divested operations of RedBlack Communications, Inc. (“RedBlack”) are reported as discontinued operations in the 2014 statement of operations.
c. Management's Use of Judgment and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period. Key areas affected by estimates include: (a) carrying value of goodwill and intangible assets; (b) reserves for deferred tax assets, excess and obsolete inventory, warranties, and bad debts; (c) profitability on development contracts, if any; (d) various expense accruals; and (e) stock-based compensation. Our actual results could differ from these estimates.
d. Reclassifications
Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation.
e. Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, we consider all demand deposits with financial institutions and financial instruments with original maturities of three months or less to be cash equivalents. For purposes of the Consolidated Balance Sheet, the carrying value approximates fair value because of the short maturity of these instruments.
Our cash balances may at times exceed federally insured limits. We have not experienced any losses in these accounts and believe we are not exposed to any significant risk with respect to cash and cash equivalents.
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f. Accounts Receivable and Allowance for Doubtful Accounts
We extend credit to our customers in the normal course of business. We perform ongoing credit evaluations and generally do not require collateral. Trade accounts receivable are recorded at their invoiced amounts, net of allowance for doubtful accounts. We evaluate the adequacy of our allowance for doubtful accounts quarterly. Accounts outstanding longer than contractual payment terms are considered past due and are reviewed individually for collectability. We maintain reserves for potential credit losses based upon our loss history and specific receivables aging analysis. Receivable balances are written off when collection is deemed unlikely.
Changes in our allowance for doubtful accounts during the years ended December 31, 2015 and 2014 were as follows:
| 2015 | 2014 | |||||||
| Balance at beginning of year | $ | 340 | $ | 288 | ||||
| Amounts charged to expense | 31 | 52 | ||||||
| Net write-offs (recoveries) | (53 | ) | — | |||||
| Foreign currency translation | (18 | ) | — | |||||
| Total | $ | 300 | $ | 340 | ||||
g. Inventories
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. We record provisions for excess, obsolete or slow-moving inventory based on changes in customer demand, technology developments or other economic factors.
| h. | Property, Plant and Equipment |
Property, plant and equipment are stated at cost. Estimated useful lives are as follows:
Buildings 10 – 20 years
Machinery and Equipment 5 – 10 years
Furniture and Fixtures 3 – 10 years
Computer Hardware and Software 3 – 5 years
Leasehold Improvements Lesser of useful life or lease term
Depreciation and amortization are computed using the straight-line method. Betterments, renewals and extraordinary repairs that extend the life of the assets are capitalized. Other repairs and maintenance costs are expensed when incurred. When disposed, the cost and accumulated depreciation applicable to assets retired are removed from the accounts and the gain or loss on disposition is recognized in operating income (expense).
| i. | Long-Lived Assets, Goodwill and Intangibles |
We regularly assess all of our long-lived assets for impairment when events or circumstances indicate that their carrying amounts may not be recoverable. For property, plant and equipment and amortizable intangible assets, this is accomplished by comparing the expected undiscounted future cash flows of the assets with the respective carrying amount as of the date of assessment. Should aggregate future cash flows be less than the carrying value, a write-down would be required, measured as the difference between the carrying value and the fair value of the asset. Fair value is estimated either through the assistance of an independent valuation or as the present value of expected discounted future cash flows. The discount rate used by us in our evaluation approximates our weighted average cost of capital. If the expected undiscounted future cash flows exceed the respective carrying amount as of the date of assessment, no impairment is recognized. We did not record any impairments of property, plant and equipment or amortizable intangible assets in the years ended December 31, 2015 or 2014.
We do not amortize goodwill and intangible assets with indefinite lives, but instead measure these assets for impairment at least annually, or when events indicate that impairment may exist. We amortize intangible assets that have definite lives so that the economic benefits of the intangible assets are being recognized as expense over their weighted-average estimated useful lives.
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The impairment analysis of goodwill consists first of a review of various qualitative factors of the identified reporting units to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, including goodwill. This review includes, but is not limited to, an evaluation of the macroeconomic, industry or market, and cost factors relevant to the reporting unit as well as financial performance and entity or reporting unit events that may affect the value of the reporting unit. If this review leads to the determination that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, further impairment testing is not required. However, if this review cannot support such a conclusion, or at our discretion, quantitative impairment steps are performed. Similarly, the analysis for indefinite-lived intangible assets consists of review of various qualitative factors to determine if it is more likely than not that the indefinite-lived intangible asset is not impaired. If such a conclusion cannot be supported, or at our discretion, quantitative impairment steps are performed.
The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of the reporting unit for goodwill impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles assets with indefinite lives (trademarks) through the royalty relief income valuation approach.
Due to time delays in the awarding by government/defense customers in recent years of certain large projects in our Communications Systems segment, we recorded a partial impairment of our McDowell Research, Ltd. trademark in the year ended December 31, 2015. This impairment amounted to $150. No impairments of long-lived intangible assets were recorded in the year ended December 31, 2014.
Future amortization expense of amortizable intangible assets will be approximately $166, $121, $85, $62 and $49 for the fiscal years ending December 31, 2016 through 2020, respectively, and $52 thereafter.
j. Translation of Foreign Currency
The financial statements of our foreign subsidiaries are translated into U.S. dollar equivalents, with translation adjustments recorded as a component of accumulated other comprehensive income. Exchange gains and (losses) relate to foreign currency transactions and balances included in net income (loss) for the years ended December 31, 2015 and 2014 were $48 and $(235), respectively.
k. Revenue Recognition
Product Sales – In general, revenues from the sale of products are recognized when products are shipped. When products are shipped with terms that require transfer of title upon delivery at a customer’s location, revenues are recognized on the date of delivery. A provision is made at the time the revenue is recognized for warranty costs expected to be incurred. Customers, including distributors, do not have a general right of return on products shipped.
Technology Contracts – We recognize revenue using the proportional effort method based on the relationship of costs incurred to date to the total estimated cost to complete the contract. Elements of cost include direct material, labor and overhead. If a loss on a contract is estimated, the full amount of the loss is recognized immediately. We allocate costs to all technology contracts based upon actual costs incurred including an allocation of certain research and development costs incurred.
Deferred Revenue – For each source of revenues, we defer recognition if: i) evidence of an agreement does not exist, ii) delivery or service has not occurred, iii) the selling price is not fixed or determinable, or iv) collectability is not reasonably assured.
47
l. Warranty Reserves
We estimate future costs associated with expected product failure rates, material usage and service costs in the development of our warranty obligations. Warranty reserves, included in other current liabilities and other long-term liabilities as applicable on our Consolidated Balance Sheets, are based on historical experience of warranty claims. In the event the actual results of these items differ from the estimates, an adjustment to the warranty obligation would be recorded.
m. Shipping and Handling Costs
Costs incurred by us related to shipping and handling are included in cost of products sold. Amounts charged to customers pertaining to these costs are reflected as revenue.
n. Advertising Expenses
Advertising costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying Consolidated Statements of Operations. Such expenses amounted to $59 and $43 for the years ended December 31, 2015 and 2014, respectively.
o. Research and Development
Research and development expenditures are charged to operations as incurred. The majority of research and development expenses pertain to salaries and benefits, developmental supplies, depreciation and other contracted services. During 2015 and 2014, we expended $6,112 and $5,648, respectively, on research and development, including $509 and $315, respectively, on customer sponsored research and development activities, which are included in cost of goods sold. We recognized $509 and $317 of revenue relating to these activities during 2015 and 2014, respectively.
In 2011, we entered into a collaboration agreement with the New York State Energy Research and Development Authority (“NYSERDA”), to develop and demonstrate a large hybrid grid-connected energy storage system. This agreement was terminated by NYSERDA in the second quarter of 2013, per the terms of the agreement. We had planned to continue this project internally with smaller form batteries which provide greater opportunity and applicability in the markets we serve. However, we decided not to further pursue the development of this project, and recorded a write-off of capitalized costs totaling $161 in 2014 relating to this project.
p. Environmental Costs
Environmental expenditures that relate to current operations are expensed. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated.
q. Income Taxes
We account for income taxes using the asset and liability method. 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.
A valuation allowance is required when it is more likely than not that the recorded value of a deferred tax asset will not be realized. As of December 31, 2015, we continued to recognize a valuation allowance in the U.S. and U.K. on our net deferred tax assets to the extent that temporary tax differences and the U.S. and U.K. net operating loss and tax credit carryforwards resulting in the deferred tax asset are not able to be offset by future reversing temporary differences. The assessment of the realizability of the U.S. NOL was based on a number of historical factors including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of the end of 2015. We concluded that these historical factors represent sufficient negative evidence and have concluded that we should record a full valuation allowance against these net deferred tax assets. We also recorded a full valuation allowance on our net deferred tax asset for the year ended December 31, 2014.
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At December 31, 2014, we had unrecognized tax benefits related to uncertain tax positions which were recorded as a decrease in our net operating loss carryforward. We had not recorded any interest or penalty in regard to any unrecognized benefit. Interest and penalties would begin to accrue in the period in which the NOLs related to the uncertain tax positions are utilized. 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). We recorded the release of this unrecognized tax benefit amount during 2015 upon the conclusion of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carryforward.
r. Concentration Related to Customers and Suppliers
During the years ended December 31, 2015 and 2014, we had one major customer, a large defense primary contractor, which comprised 24% and 18% of our revenues, respectively. There were no other customers that comprised greater than 10% of our total revenues during these years.
We had no customers who comprised 10% or more of our trade accounts receivable at December 31, 2015. We had one customer who comprised 16% of our trade accounts receivable at December 31, 2014.
Currently, we do not experience significant seasonal trends in our revenues. Since a significant portion of our revenues are based on purchases from U.S. and allied country defense departments, the timing of our sales could be impacted by delays in the government budget process and the decisions to deploy resources to support military purchases of our products.
We generally do not distribute our products to a concentrated geographical area nor is there a significant concentration of credit risks arising from individuals or groups of customers engaged in similar activities, or who have similar economic characteristics. While direct and indirect sales to the U.S. Department of Defense have been substantial during 2015 and 2014, we do not consider this customer to be a significant credit risk. We do not normally obtain collateral on trade accounts receivable.
Certain materials and components used in our products are available only from a single or a limited number of suppliers. As such, some materials and components could become in short supply resulting in limited availability and/or increased costs. Additionally, we may elect to develop relationships with a single or limited number of suppliers for materials and components that are otherwise generally available. Although we believe that alternative suppliers are available to supply materials and components that could replace materials and components currently used and that, if necessary, we would be able to redesign our products to make use of such alternatives, any interruption in the supply from any supplier that serves as a sole source could delay product shipments and have a material adverse effect on our business, financial condition and results of operations. We have experienced interruptions of product deliveries by sole source suppliers in the past.
s. Fair Value Measurements and Disclosures
Fair value is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
| Level 1: | Quoted prices in active markets for identical assets or liabilities. |
| Level 2: | Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or that we corroborate with observable market data for substantially the full term of the related assets or liabilities. |
| Level 3: | Unobservable inputs supported by little or no market activity that are significant to the fair value of the assets or liabilities. |
The fair value of financial instruments approximated their carrying values at December 31, 2015 and 2014. The fair value of cash, trade accounts receivable, trade accounts payable, and accrued liabilities approximates carrying value due to the short-term nature of these instruments.
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t. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share calculations reflect the assumed exercise and conversion of dilutive employee stock options and unvested restricted stock, if any, applying the treasury stock method. Diluted earnings per share in 2015 include 1,312,282 outstanding in-the-money stock options which add 260,318 shares to the number of shares outstanding, and include 32,800 restricted stock units which add 15,385 shares outstanding.
Due to the net loss in 2014, diluted earnings per share was equal to basic earnings per share, as all potential shares were anti-dilutive. Diluted earnings per share calculations exclude the effect of approximately 945,687 and 2,195,222 employee stock options and restricted stock shares in 2015 and 2014, respectively, since such options have an exercise price in excess of the weighted average market price of the Company’s common stock.
u. Stock-Based Compensation
We have various stock-based employee compensation plans, which are described more fully in Note 10. The compensation cost relating to share-based payment transactions is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity award).
v. Segment Reporting
We have two operating segments – Battery & Energy Products, and Communications Systems. The basis for determining our operating segments is the manner in which financial information is used by us in monitoring our operations. Management operates and organizes itself according to business units that comprise unique products and services across geographic locations.
w. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance related to revenue from contracts with customers. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The updated standard will replace most existing revenue recognition guidance under GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The FASB has approved a one year deferral of this standard, and this pronouncement is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and is to be applied using one of two retrospective application methods, with early application permitted for annual reporting periods beginning after December 15, 2016. While we have not completed our impact analysis, we do not expect the adoption to have a material impact on our Consolidated Financial Statements. We do not anticipate early adoption of the standard.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Simplifying the Measurement of Inventory," which simplifies the subsequent measurement of inventory by using only the lower of cost and net realizable value. This update does not apply to inventory measured using last-in, first-out method. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and must be applied on a retrospective basis with early adoption permitted. The adoption is not expected to have a material impact on our Consolidated Financial Statements.
In February 2016, the Financial Accounting Standards Board issued guidance relating to accounting for leases by lessors and lessees. The guidance will require, among other things, that lessees recognize a right-to-use asset and related lease liability for all significant financing and operating leases, and specifies where in the statement of cash flows the related lease payments are to be presented. The guidance is effective for years beginning after December 15, 2018 (calendar year 2019 for us), and early adoption is permitted. The Company has not yet considered the ramifications of this new standard on either our reported financial position or results of operations, but believe they may be significant. We have not yet determined whether we will adopt the standard in advance of its required effective date.
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Note 2- Dispositions, Relocations and Exit Activities
During 2014, we were informed by local government authorities in Shenzhen, China that the lease for our facility there would not be extended, and we commenced a search for an alternate site to relocate our facility. In July 2014, our subsidiary in China entered into a lease for a replacement facility, also located in Shenzhen. During the fourth quarter of 2014, our subsidiary in China vacated its former facility premises and substantially completed a move and transition to this new facility.
The Company received compensation from the local government authorities for leasehold improvements and moving-related costs totaling $815, of which $596 was recognized as a reduction of expenses incurred during 2014, which expenses totaled $841. It is the Company’s policy to recognize this compensation as a reduction of expenses as the expenses are recognized. Additional government compensation totaling $219 was recognized as a reduction of expense in 2015. The related expenses incurred in 2015 totaled $221. The relocation payments were complete as of June 2015.
During 2014, we elected to terminate our lease for our U.K. office and repair facility which was to have expired in May 2018. The termination of this lease was effective as of January 31, 2015.
Also in 2012, we sold 100% of our ownership interest in RedBlack. During 2014, we recognized $61 of expense in discontinued operations arising from customary post-closing working capital adjustments relating to that sale.
Note 3 – Acquisition
On January 13, 2016, Ultralife UK Limited (the “Merger Subsidiary”), a U.K. corporation and the Company’s wholly-owned subsidiary, completed the acquisition of all of the outstanding stock of Accutronics Limited (“Accutronics”), a U.K. corporation based in Newcastle-under-Lyme, U.K., from Intrinsic Equity Limited, Catapult Growth Fund Limited Partnership, MJF Pension Trustees Limited, Robert Andrew Phillips and Michael Allen (collectively, the “Sellers”). There are no material relationships between the Company or Merger Subsidiary and any of the Sellers, other than pertaining to this acquisition.
Accutronics is a leading independent designer and manufacturer of smart batteries and charger systems for high-performance, feature-laden portable and handheld electronic devices. Accutronics will be included in our Battery & Energy Products Segment. We acquired Accutronics to advance our strategy of commercial revenue diversification, to expand our geographical penetration, and to achieve revenue growth from new product development. We expect substantial sales synergies between Accutronics and our existing commercial battery business as we cross-sell our existing products and acquired Accutronics’ products to our respective customer bases.
The acquisition was completed pursuant to the terms of a Share Purchase Agreement dated January 13, 2016, by and among the Merger Subsidiary and the Sellers. The Merger Subsidiary paid an aggregate purchase price of £7.708 million (approximately $11.2 million) in cash, including a net working capital/debt adjustment in the amount of £.133 million (approximately $.2 million), and in exchange the Merger Subsidiary received all of the outstanding shares of Accutronics stock. Monies to fund the purchase price were advanced to the Merger Subsidiary from the Company’s general corporate funds. The final allocation of the purchase price to the assets and liabilities acquired has not yet been completed.
Note 4 – Share Repurchase Program
On April 28, 2014, the Company’s Board of Directors approved a share repurchase program (the “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 has been extended through June 2, 2016, and the maximum number of shares authorized to be repurchased under the program has been increased to 3.4 million shares.
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Share repurchases under this program are made in accordance with SEC Rule 10b-18 using a variety of methods, which may include open market purchases, privately negotiated transactions and block trades, or any combination of such methods, in compliance with applicable insider trading and other securities laws and regulations. With the exception of repurchases made during stock trading black-out periods under a 10b5-1 Plan, the timing, manner, price and amount of any repurchases are determined at the Company’s discretion. The Share Repurchase Program may be suspended, terminated or modified by the Company at any time and for any reason. The Share Repurchase Program does not obligate the Company to repurchase any specific number of shares.
In 2015, we repurchased a total of 2,258,929 shares of our common stock for an aggregate consideration of $9,388, of which 2,225,437 shares were repurchased under the Share Repurchase Program for an aggregate amount of $9,228 (including fees and commissions). In 2014, we repurchased a total of 227,974 shares of our common stock for an aggregate consideration of $762, of which 216,754 shares were repurchased under the Share Repurchase Program for an aggregate amount of $722 (including fees and commissions).
Note 5 - Supplemental Balance Sheet Information
a. Inventory
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:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Raw materials | $ | 11,602 | $ | 15,100 | ||||
| Work in process | 1,560 | 1,489 | ||||||
| Finished products | 10,652 | 9,497 | ||||||
| Total | $ | 23,814 | $ | 26,086 | ||||
b. Property, Plant and Equipment
Major classes of property, plant and equipment consisted of the following:
| December 31, | ||||||||
| 2015 | 2014 | |||||||
| Land | $ | 123 | $ | 123 | ||||
| Buildings and leasehold improvements | 7,490 | 7,437 | ||||||
| Machinery and equipment | 49,609 | 48,054 | ||||||
| Furniture and fixtures | 1,974 | 1,811 | ||||||
| Computer hardware and software | 4,585 | 4,452 | ||||||
| Construction in progress | 745 | 1,351 | ||||||
| 64,526 | 63,228 | |||||||
| Less – Accumulated depreciation | (55,488 | ) | (53,416 | ) | ||||
| Total | $ | 9,038 | $ | 9,812 | ||||
Estimated costs to complete construction in progress as of December 31, 2015 and 2014 were approximately $180 and $586, respectively.
Depreciation expense was $2,401 and $2,757 for the years ended December 31, 2015 and 2014, respectively.
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c. Impairment of Goodwill, Intangible Assets and Long-Lived Assets
We elected to forego the qualitative assessment for our three identified reporting units (Battery & Energy Products business, Communications Systems business, and Able (which is a subset of our Battery & Energy Products business), and conducted a quantitative assessment. The fair value for our reporting units subjected to this quantitative test could not be determined using readily available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we used an income approach to estimate the fair value of the reporting units, using Level 3 inputs. To estimate the fair value of the reporting units, we used significant estimates and judgments, including an assessment of our future revenue prospects, particularly government/defense opportunities, as well as our estimates of the probabilities of the opportunities being funded, awarded, and awarded to us. Other key estimates and factors used in the valuation model included revenue growth rates and profit margins based on internal forecasts, as well as industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cash flows, and earnings multiples. As a result of the goodwill impairment tests performed during 2015 and 2014, we determined that an impairment was not required.
Similarly, for our four other indefinite-lived intangible assets (trademarks and trade names), we elected to forego the qualitative assessment and proceeded to perform quantitative assessments. The fair value for our indefinite-lived intangible assets subjected to this quantitative test could not be determined using readily available quoted Level 1 inputs or Level 2 inputs that were observable in active markets. Therefore, we used a royalty relief approach, to estimate the fair value of the indefinite-lived intangible assets, using Level 3 inputs. This method also required us to use significant estimates and judgmental factors. The key estimates and factors used in the valuation model included revenue growth rates, as well as industry and market based terminal growth rates, inputs to the weighted-average cost of capital used to discount future cash flows, and determined royalty rates. As a result of the impairment tests performed during 2015, we determined that an impairment amounting to $150 was required to reduce the carrying value of one Communications Systems business trademark to its estimated fair value. As a result of the impairment tests performed during 2014, we determined that no impairments were required.
There is a possibility that our goodwill and other intangible assets, particularly in our Communications Systems business, could be impaired should there be a significant change in our internal forecasts and other assumptions we use in our impairment analysis.
During 2015 and 2014, we also evaluated certain fixed assets for impairment utilizing valuation methods that are classified as Level 3 inputs. Based upon the results of this evaluation, no material impairment was indicated.
d. Goodwill
The following table summarizes the goodwill activity by segment for the years ended December 31, 2015 and 2014:
| Battery & Energy Products | Communi- cations Systems | Total | ||||||||||
| Balance – January 1, 2014 | $ | 4,926 | $ | 11,493 | $ | 16,419 | ||||||
| Effect of foreign currency translation | (12 | ) | — | (12 | ) | |||||||
| Balance – December 31, 2014 | 4,914 | 11,493 | 16,407 | |||||||||
| Effect of foreign currency translation | (124 | ) | — | (124 | ) | |||||||
| Balance – December 31, 2015 | $ | 4,790 | $ | 11,493 | $ | 16,283 | ||||||
e. Other Intangible Assets
The composition of intangible assets was:
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| December 31, 2015 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Trademarks | $ | 3,411 | $ | — | $ | 3,411 | ||||||
| Patents and technology | 4,482 | 4,217 | 265 | |||||||||
| Customer relationships | 3,971 | 3,716 | 255 | |||||||||
| Distributor relationships | 370 | 355 | 15 | |||||||||
| Total other intangible assets | $ | 12,234 | $ | 8,288 | $ | 3,946 | ||||||
| December 31, 2014 | ||||||||||||
| Cost | Accumulated Amortization | Net | ||||||||||
| Trademarks | $ | 3,567 | $ | — | $ | 3,567 | ||||||
| Patents and technology | 4,509 | 4,114 | 395 | |||||||||
| Customer relationships | 4,029 | 3,679 | 350 | |||||||||
| Distributor relationships | 391 | 365 | 26 | |||||||||
| Total other intangible assets | $ | 12,496 | $ | 8,158 | $ | 4,338 | ||||||
Amortization of intangible assets was included in the following financial statement captions:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Research and development expense | $ | 130 | $ | 176 | ||||
| Selling, general and administrative expense | 105 | 129 | ||||||
| Total | $ | 235 | $ | 305 | ||||
Except for the impairment charge recorded against a Communications Systems trademark in 2015, the change in the cost value of total intangible assets is a result of the effect of foreign currency exchange rate fluctuations.
Note 6 - Fair Value of Assets and Liabilities
Our financial instruments include cash and cash equivalents, trade receivables, accounts payable and accrued liabilities. For these short-term instruments, we have concluded that the historical carrying value is a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization.
During 2015 and 2014, there were no transfers of financial assets between Levels 1, 2 or 3 of fair value measurements. There have been no changes in the methodologies used at December 31, 2015 and December 31, 2014.
The table below shows assets measured at fair value on a non-recurring basis. The fair value of goodwill, trademarks and other intangible assets are determined using Level 3 inputs.
| Assets Measured at Fair Value on a Non-recurring Basis | ||||||||||||||||||||
| Balance, December 31, 2015 | Level 1 | Level 2 | Level 3 | Total Gain / (Loss) | ||||||||||||||||
| Goodwill – Battery & Energy Products Segment | $ | 4,790 | $ | — | $ | — | $ | 4,790 | $ | — | ||||||||||
| Goodwill – Communications Systems Segment | 11,493 | — | — | 11,493 | — | |||||||||||||||
| Trademark – Battery & Energy Products Segment | 711 | — | — | 711 | — | |||||||||||||||
| Trademarks – Communications Systems Segment | 2,700 | — | — | 2,700 | (150 | ) | ||||||||||||||
| Total | $ | 19,694 | $ | — | $ | — | $ | 19,694 | $ | (150 | ) | |||||||||
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The quantitative impairment test for goodwill consists of a comparison of the fair value of the reporting unit with the carrying amount of the reporting unit to which it is assigned. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, a second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. At December 31, 2015, we estimate that the fair value of goodwill exceeds the recorded value by more than 50%.
The impairment test for intangible assets with indefinite lives consists of a comparison of the fair value of the intangible assets with their carrying amounts. If the carrying value of the intangible assets exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. We determine the fair value of the reporting unit for goodwill impairment testing based on a discounted cash flow model. We determine the fair value of our intangibles assets with indefinite lives (trademarks) through the royalty relief income valuation approach.
For our impairment tests of both goodwill and trademarks, we use key assumptions that include estimates of future customer orders and revenues. The use of such estimates involves inherent uncertainties, and future impairments may be warranted if such future orders and revenues do not materialize.
Note 7 - Operating Leases
We lease various buildings, machinery, land, automobiles and office equipment. Rental expenses for all operating leases were approximately $672 and $775 for the years ended December 31, 2015 and 2014, respectively. Future minimum lease payments under non-cancelable operating leases as of December 31, 2015 are as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | ||||||||||||||
| $ | 571 | $ | 589 | $ | 544 | $ | 415 | $ | 100 | |||||||||
Note 8 - Debt
Credit Facilities
We are party to a Revolving Credit, Guaranty and Security Agreement (the “Credit Agreement”) and related security agreements with PNC Bank, National Association (“PNC”), which provides us a $20 million secured asset-based revolving credit facility that includes a $1 million letter of credit subfacility (the “Credit Facility”). The Credit Agreement provides that the Credit Facility may be increased with the PNC’s concurrence to $35 million prior to the last six months of the term, and expires on May 24, 2017.
On April 30, 2014, the Company and PNC entered into an amendment (the “Amendment”) to the Credit Agreement. The Amendment permits the Company to commence the Share Repurchase Program described in Note 4, provided that (a) the Company is not in default under the Credit Agreement, (b) the Company’s undrawn availability under the Credit Agreement is at least $6 million both prior to and immediately following any repurchase, (c) the Company’s undrawn availability under the Credit Agreement plus domestic unrestricted cash is at least $8 million both prior to and immediately following any repurchase, and (d) the Company uses its unrestricted cash for such repurchases and does not request advances against the Credit Agreement for such purposes. On October 28, 2014, the Company and PNC entered into a second amendment to the Credit Agreement which modifies the definition of EBITDA in the Credit Agreement to include non-cash stock- based compensation expense.
On April 29, 2015, the Company and PNC entered into a third amendment to the Credit agreement which permitted the Company to extend the Share Repurchase Program to April 30, 2016. On June 15, 2015, the Company and PNC entered into a fourth amendment to the Credit Agreement which permitted the expansion of the Share Repurchase Program described in Note 4 and the extension of this program to June 2, 2016. Finally, on January 13, 2016, Company and PNC entered into a fifth amendment to the Credit Agreement which permitted the Company’s acquisition of Accutronics Ltd. as described in Note 3 above.
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Our available borrowing limit under the Credit Facility fluctuates from time to time based on a borrowing base formula equal to the sum of up to 85% of eligible accounts receivable plus the least of (a) up to 65% of the eligible inventory and eligible foreign in-transit inventory, (b) up to 85% of the appraised net orderly liquidation value of eligible inventory and eligible foreign in-transit inventory, and (c) $7.5 million, in each case subject to the definitions in the Credit Agreement and reserves required by PNC.
Interest is payable quarterly and will accrue on outstanding indebtedness under the Credit Agreement at the alternate base rate, as defined in the Credit Agreement, plus the applicable margin or at the one, two or three month LIBOR rate plus the applicable margin as selected by us from time to time and listed below.
| Quarterly Average Undrawn Borrowing Availability | Applicable Margin for Alternate Base Rate Loans | Applicable Margin for LIBOR Rate Loans | ||
| Greater than $8,000,000 | 1.00% | 2.00% | ||
| $5,000,000 up to $8,000,000 | 1.25% | 2.25% | ||
| Less than $5,000,000 | 1.50% | 2.50% |
We must pay a fee on the Credit Facility’s unused availability of 0.375% per annum and customary letter of credit fees in addition to various collateral monitoring and related fees and expenses.
In addition to customary affirmative and negative covenants, we must maintain a fixed charge coverage ratio as defined in the Credit Agreement of 1.15 to 1.00, tested quarterly for the four-quarters then ended. As of December 31, 2015 we were in compliance with all covenants. The Credit Facility is secured by substantially all our assets.
Any outstanding advances must be repaid upon expiration of the term of the Credit Facility. Payments must be made during the term to the extent outstanding advances exceed the maximum amount then permitted to be drawn as advances under the Credit Facility and from the proceeds of certain transactions. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and PNC will have other customary remedies.
As of December 31, 2015, we had $-0- outstanding under the Credit Facility, an applicable interest rate of 2.43%, approximately $8,927 of borrowing capacity in addition to our unrestricted cash on hand of $14,393, and no outstanding letters of credit related to the Credit Facility.
Note 9 - Commitments and Contingencies
| a. | Indemnity |
Our organizational documents provide that our directors or officers will be reimbursed for all expenses, to the fullest extent permitted by law arising out of their performance.
| b. | Purchase Commitments |
As of December 31, 2015, we have made commitments to purchase approximately $511 of production machinery and equipment.
| c. | China |
Our operating facility in China presents risks including, but not limited to, changes in local regulatory requirements, including changes in labor laws, local wage laws, environmental regulations, taxes and operating licenses, compliance with U.S. regulatory requirements, including the Foreign Corrupt Practices Act, uncertainties as to application and interpretation of local laws and enforcement of contract and intellectual property rights, eminent domain claims, labor disputes, rapid changes in government, economic and political policies, and other various contingencies that are outside of our control. Any such event could depress our earnings and have other material adverse effects on our business, financial condition and results of operations.
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| d. | Employment Contracts |
We have an employment contract with Michael D. Popielec, our President and Chief Executive Officer, which remains in effect until terminated by either party. This agreement provides for a base salary, as adjusted for increases at the discretion of our Board of Directors, and includes incentive bonuses based upon attainment of specified quantitative and qualitative performance goals. This agreement also provides for severance payments in the event of specified events of termination of employment. In addition, this agreement provides for a lump sum payment in the event of termination of employment in connection with a change in control.
As part of our employment commencement process, employees are required to enter into agreements providing for confidentiality of certain information and the assignment of rights to inventions made by them while employed by us. These agreements also contain certain noncompetition and nonsolicitation provisions effective during the employment term and for varying periods thereafter depending on position and location. There can be no assurance that we will be able to enforce these agreements. All of our employees agree to abide by the terms of a Code of Ethics policy that provides for the confidentiality of certain information received during the course of their employment.
| e. | 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 years ended December 31, 2015 and 2014 were as follows:
| 2015 | 2014 | |||||||
| Balance, January 1 | $ | 376 | $ | 513 | ||||
| Provision (reversal) for warranties issued | (90 | ) | 122 | |||||
| Settlements made | (94 | ) | (259 | ) | ||||
| Balance, December 31 | $ | 192 | $ | 376 | ||||
f. 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.
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.
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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 USD 42 million 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.
Note 10 - Shareholders' Equity
| a. | Stock-based Compensation Expense |
We recorded non-cash stock compensation expense in each period as follows:
| 2015 | 2014 | |||||||
| Stock options | $ | 489 | $ | 614 | ||||
| Restricted stock grants: | ||||||||
| Employee | 82 | 29 | ||||||
| President and CEO | — | 150 | ||||||
| Board of Directors compensation – | ||||||||
| stock grant | — | 210 | ||||||
| Total | $ | 571 | $ | 1,003 | ||||
These are more fully discussed as follows:
b. Stock Options
We have various stock-based employee compensation plans, for which compensation cost is 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 employee’s 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 stock options outside of these plans.
In June 2004, our shareholders adopted the 2004 Long-Term Incentive Plan (“2004 LTIP”) pursuant to which we were authorized to issue up to 750,000 shares of common stock and grant stock options, restricted stock awards, stock appreciation rights and other stock-based awards. Through shareholder approved amendments to the LTIP in 2006, 2008, 2011, and 2013, the total number of shares authorized under the LTIP were increased to 2,900,000.
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In June 2014, our shareholders approved the 2014 Long-Term Incentive Plan (“2014 LTIP”) as the successor plan to the 2004 LTIP which expired on June 10, 2014. Under the 2014 LTIP, a total of 1,750,000 shares of Common Stock will be available for grant of awards. However, of the total number of shares of common stock available for awards under the 2014 LTIP, no more than 800,000 shares of Common Stock may be used for awards other than stock options and stock appreciation rights. Grants under the 2014 LTIP may be awarded through June 2, 2024.
Stock options granted under the LTIPs 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 options given to employees. As of December 31, 2015, there were 1,447,219 stock options outstanding under the 2004 LTIP and 410,750 stock options outstanding under the 2014 LTIP.
On December 30, 2010, pursuant to the terms of his employment agreement, we granted our President and Chief Executive Officer, Michael D. Popielec, options to purchase shares of common stock under the 2004 LTIP as follows: (i) 50,000 shares at $6.42, vesting in annual increments of 12,500 shares over a four-year period commencing December 30, 2011; (ii) 250,000 shares at $6.42, vesting in annual increments of 62,500 shares over a four-year period commencing December 30, 2011; (iii) 200,000 shares at $10.00, with vesting to begin on the date the stock reaches a closing price of $10.00 per share for 15 trading days within a 30-day trading period, with such vesting in annual increments of 50,000 shares over the four anniversary dates of that date; and (iv) 200,000 shares at $15.00, with vesting to begin on the date the stock reaches a closing price of $15.00 per share for 15 trading days within a 30-day trading period, with such vesting in annual increments of 50,000 shares over the four anniversary dates of that date. All such options in items (i) and (ii) shall expire on December 30, 2017. All such options in items (iii) and (iv) shall expire as of the later of December 30, 2017 and five years after the initial vesting commences, but in no event later than December 30, 2020. The options set forth in items (ii), (iii) and (iv) were subject to shareholder approval of an amendment to the 2004 LTIP, which approval was obtained on June 7, 2011.
On January 3, 2011, pursuant to the terms of his employment agreement, we granted our President and Chief Executive Officer, Michael D. Popielec, an option to purchase 50,000 shares of common stock at $6.58 under the 2004 LTIP. The option vested in annual increments of 12,500 shares over a four-year period commencing December 30, 2011. The option expires on December 30, 2017.
As of December 31, 2015, there was $440 of total unrecognized compensation costs related to outstanding stock options, which is expected to be recognized over a weighted average period of 1.7 years.
We use the Black-Scholes option-pricing model to estimate fair value of stock-based awards. The following weighted average assumptions were used to value options granted during the years ended December 31, 2015 and 2014:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Risk-free interest rate | 0.72 | % | 1.10 | % | ||||
| Volatility factor | 48.54 | % | 50.70 | % | ||||
| Dividends | 0.00 | % | 0.00 | % | ||||
| Weighted average expected life (years) | 4.15 | 4.15 | ||||||
| Forfeiture rate | 13.8 | % | 13.8 | % | ||||
We used a Monte Carlo simulation option-pricing model to estimate the fair value of market performance stock-based awards, of which there were no new awards in the years ended December 31, 2015 or 2014.
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. Forfeiture rates are calculated by dividing unvested shares forfeited by beginning shares outstanding. The pre-vesting forfeiture rate is calculated yearly and is determined using a historical twelve-quarter rolling average of the forfeiture rates.
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The following tables summarize data for the stock options issued by us:
| Year Ended December 31, 2015 | ||||||||||||||||
Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| Shares under option – January 1 | 2,056,122 | $ | 6.66 | |||||||||||||
| Options granted | 411,250 | 4.68 | ||||||||||||||
| Options exercised | (137,937 | ) | 3.90 | |||||||||||||
| Options forfeited or expired | (71,466 | ) | 11.86 | |||||||||||||
| Shares under option – December 31 | 2,257,969 | $ | 6.30 | 3.57 | $ | 3,094 | ||||||||||
| Vested and expected to vest - | ||||||||||||||||
| December 31 | 2,093,294 | $ | 6.45 | 3.39 | $ | 2,731 | ||||||||||
| Options exercisable – December 31 | 1,255,736 | $ | 5.22 | 2.44 | $ | 1,786 | ||||||||||
| Year Ended December 31, 2014 | ||||||||
Number of Shares | Weighted Average Exercise Price Per Share | |||||||
| Shares under option – January 1 | 2,131,622 | $ | 6.99 | |||||
| Options granted | 252,500 | 3.94 | ||||||
| Options exercised | (3,067 | ) | 3.67 | |||||
| Options forfeited or expired | (324,933 | ) | 6.77 | |||||
| Shares under option – December 31 | 2,056,122 | $ | 6.66 | |||||
| Options exercisable – December 31 | 1,296,619 | $ | 5.63 | |||||
The following table represents additional information about stock options outstanding at December 31, 2015:
| Option outstanding | Options exercisable | |||||||||||||||||||||
| Range of Exercise Prices | Number of Outstanding Options – December 31, 2015 | Weighted-Average Remaining Contractual Life | Weighted- Average Exercise Price | Number of Options Exercisable at December 31, 2015 | Weighted- Average Exercise Price | |||||||||||||||||
| $3.22-$3.99 | 817,064 | 4.64 | $ | 3.78 | 348,581 | $ | 3.76 | |||||||||||||||
| $4.00-$4.99 | 427,500 | 2.79 | $ | 4.47 | 393,750 | 4.44 | ||||||||||||||||
| $5.00-$9.99 | 581,833 | 2.84 | $ | 6.60 | 481,833 | 6.45 | ||||||||||||||||
| $10.00-$15.00 | 431,572 | 3.30 | $ | 12.48 | 31,572 | 12.18 | ||||||||||||||||
| $3.22-$15.00 | 2,257,969 | 3.57 | $ | 6.30 | 1,255,736 | $ | 5.22 | |||||||||||||||
The weighted average fair value of options granted during the years ended December 31, 2015 and 2014 was $2.32 and $1.60, respectively. The total intrinsic value of 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 years ended December 31, 2015 and 2014 was $364 and $3, respectively.
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Cash flows from excess tax benefits are classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. We recorded excess tax benefits totaling $287 in 2015, and $0 in 2014. Cash received from option exercises under our stock-based compensation plans for the years ended December 31, 2015 and 2014 was $538 and $11, respectively.
c. Restricted Stock Awards
On January 29, 2013, we granted 120,000 contingent restricted stock units to our President and Chief Executive Officer, Michael D. Popielec, subject to shareholder approval, which was obtained on June 4, 2013. These restricted stock units vest as follows: (i) 30,000 shares of our common stock will vest on the later of January 1, 2014 or the date when our common stock first reaches a closing price of $4.00 per share for 15 trading days in a 30 trading day period; (ii) 30,000 shares of our common stock will vest on the later of January 1, 2014 or the date when our common stock first reaches a closing price of $5.00 per share for 15 trading days in a 30 trading day period; (iii) 30,000 shares of our common stock will vest on the later of January 1, 2015 or the date when our common stock first reaches a closing price of $4.00 per share for 15 trading days in a 30 trading day period; and (iv) 30,000 shares of our common stock will vest on the later of January 1, 2015 or the date when our common stock first reaches a closing price of $5.00 per share for 15 trading days in a 30 trading day period.
The restricted stock units described in (i) and (iii) had achieved their closing price condition prior to shareholder approval and were valued at the closing price on the date of grant. The restricted stock units described in (ii) and (iv) had not yet achieved their closing price conditions and were valued utilizing a Monte Carlo simulation to determine fair value and the derived service period. The weighted average assumptions utilized in this simulation included the risk-free interest rate of 0.21%, volatility of 59.08% and no dividend payouts. The weighted average fair value per share was estimated at $3.62 for an aggregate value of $434. Of this amount, $150 was recognized in selling, general and administrative expenses in the years ended December 31, 2014. The restricted stock units described in (ii) and (iv) both vested during 2015.
During 2014, we awarded 49,200 restricted stock units under the 2014 LTIP to certain key employees. These units vest over three years and we estimated their weighted average grant date fair value to be $3.24 per share. $82 and $29 of expense was recorded in 2015 and 2014, respectively, relating to these units. At December 31, 2015, there was $49 of unrecognized compensation expense related to restricted stock grants.
d. Reserved Shares
We have reserved 3,596,719 shares of common stock under the various stock option plans, warrants and restricted stock awards as of December 31, 2015.
Note 11 - Income Taxes
Our income tax provision consists of:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Current: | ||||||||
| Federal | $ | 4 | $ | — | ||||
| State | 15 | 12 | ||||||
| Foreign | 111 | 65 | ||||||
| 130 | 77 | |||||||
| Deferred: | ||||||||
| Federal | 169 | 220 | ||||||
| State | — | — | ||||||
| Foreign | 11 | (29 | ) | |||||
| 180 | 191 | |||||||
| Total income tax provision | $ | 310 | $ | 268 | ||||
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The income tax provision (benefit) related to discontinued operations was immaterial in 2014.
The deferred tax provision in both 2015 and 2014 is principally a result of the increase in the net deferred tax liability related to deferred tax liabilities generated from goodwill and certain intangible assets that cannot be predicted to reverse for book purposes during our loss carryforward periods. In 2015, the deferred provision was reduced by a deferred tax benefit amounting to $51 relating to our $150 impairment of a trademark.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of our deferred tax liabilities and assets are as follows:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment | $ | — | $ | — | ||||
| Intangible assets | 4,631 | 4,462 | ||||||
| Total deferred tax liabilities | 4,631 | 4,462 | ||||||
| Deferred tax assets: | ||||||||
| Property, plant and equipment | 288 | 88 | ||||||
| Net operating loss carryforwards | 27,283 | 20,164 | ||||||
| Tax credit carryforwards | 1,596 | 1,455 | ||||||
| Intangible assets | 3,391 | 3,841 | ||||||
| Accrued expenses, reserves and other | 2,127 | 2,509 | ||||||
| Total deferred tax assets | 34,685 | 28,057 | ||||||
| Valuation allowance for deferred tax assets | (34,593 | ) | (27,951 | ) | ||||
| Net deferred tax assets | 92 | 106 | ||||||
| Net deferred tax liabilities | $ | 4,539 | $ | 4,356 | ||||
Net deferred tax liabilities is comprised of the following balance sheet amounts:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Current deferred tax assets | $ | 92 | $ | 106 | ||||
| Non-current deferred tax liabilities | (4,631 | ) | (4,462 | ) | ||||
| $ | (4,539 | ) | $ | (4,356 | ) | |||
The valuation allowance for deferred tax assets increased $6,642 and $659 in the years ended December 31, 2015 and 2014, respectively. The 2015 increase in the valuation allowance included an increase of $7,296 relating to the release of our unrecognized tax benefit during 2015 (see below). Excluding the effect of the release of the unrecognized tax benefit during 2015, the valuation allowance would have decreased by $654.
In 2015 and 2014, in the U.S. and the U.K., we continue to report a valuation allowance for our deferred tax assets that cannot be offset by reversing temporary differences. We continue to conclude that, based on historical factors, it is more likely than not that we will not fully utilize our U.S. and U.K. NOLs that have accumulated over time. The recognition of a valuation allowance on our deferred tax assets results from our evaluation of all available evidence, both positive and negative. The assessment of the realizability of the NOLs is based on a number of factors including, our history of net operating losses, the volatility of our earnings, our historical operating volatility, our historical inability to accurately forecast earnings for future periods and the continued uncertainty of the general business climate as of the end of 2015. We believe that these historical factors represent negative evidence sufficient to conclude that we should record a full valuation allowance against our deferred tax assets. In both 2015 and 2014, we have not recorded a valuation allowance against our foreign deferred tax assets as we believe that it is more likely than not that they will be realized. We continually assess the carrying value of this asset based on relevant accounting standards.
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As of December 31, 2015, we have foreign and domestic NOLs and credit carryforwards totaling approximately $86,800 and $1,600, respectively, available to reduce future taxable income. Included in our NOL carryforward are foreign loss carryforwards of approximately $12,400 which can be carried forward indefinitely. The domestic NOL carryforward of $74,400 expires beginning in 2019, through 2034. The domestic NOL carryforward includes approximately $3,000 for which a benefit will be recorded in capital in excess of par value when realized.
For financial reporting purposes, income (loss) from continuing operations before income taxes is as follows:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| United States | $ | 2,582 | $ | (1,808 | ) | |||
| Foreign | 568 | 6 | ||||||
| $ | 3,150 | $ | (1,802 | ) | ||||
There are no undistributed earnings of our foreign subsidiaries, at December 31, 2015 or 2014.
The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to income (loss) from continuing operations before income taxes as follows:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Statutory income tax rate | 34.0 | % | 34.0 | % | ||||
| (Increase) decrease in tax provision resulting from: | ||||||||
| Equity compensation | 2.2 | (12.9 | ) | |||||
| Income tax credits | (4.5 | ) | 4.2 | |||||
| Foreign tax rates | (2.2 | ) | (1.9 | ) | ||||
| Release of unrecognized tax benefits | (231.6 | ) | — | |||||
| Valuation allowance | 210.9 | (36.6 | ) | |||||
| Other | 1.0 | (1.7 | ) | |||||
| Effective income tax rate | 9.8 | % | (14.9 | %) | ||||
Accounting for Uncertainty in Income Taxes
Our unrecognized tax benefits related to uncertain tax positions at December 31, 2014 related to Federal and various state jurisdictions. The recorded the release of uncertain tax positions in 2015 relating to the conclusion of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carryforward. The following table summarizes the activity related to our unrecognized tax benefits:
| Years Ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| Balance – beginning of year | $ | 7,296 | $ | 7,296 | ||||
| Increases related to current year tax positions | — | — | ||||||
| Increases related to prior year tax positions | — | — | ||||||
| Decreases related to prior year tax positions | — | — | ||||||
| Expiration of statute of limitations for assessment of taxes | — | — | ||||||
| Settlements of examinations | (7,296 | ) | — | |||||
| Balance – end of year | $ | — | $ | 7,296 | ||||
The total unrecognized tax benefit balances at December 31, 2014 was comprised of tax benefits that, if recognized, would result in a deferred tax asset and a corresponding increase in our valuation allowance. As a result, because the benefit would be offset by an increase in the valuation allowance, there would be no net effect on our effective tax rate or income tax provision. We recorded the release of this unrecognized tax benefit amount during 2015 upon the conclusion of a of a federal tax examination, resulting in a $21.4 million increase in the amount of our reported domestic NOL carryforward.
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We are not required to accrue interest and penalties as the unrecognized tax benefits have been recorded as a decrease in our NOL. Interest and penalties would begin to accrue in the period in which the NOLs related to the uncertain tax positions are utilized. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.
As a result of our operations, we file income tax returns in various jurisdictions including U.S. federal, U.S. state and foreign jurisdictions. We are routinely subject to examination by taxing authorities in these various jurisdictions. Our U.S. tax matters for the years 2001 through 2015 remain subject to examination by the Internal Revenue Service (“IRS”) due to our NOL carryforwards. Our U.S. tax matters for the years 2001 through 2015 remain subject to examination by various state and local tax jurisdictions due to our NOL carryforwards. Our tax matters for the years 2009 through 2015 remain subject to examination by the respective foreign tax jurisdiction authorities.
Note 12 - 401(k) Retirement Benefit Plan
We maintain a defined contribution 401(k) plan covering substantially all employees. Employees can contribute a portion of their salary or wages as prescribed under Section 401(k) of the Internal Revenue Code and, subject to certain limitations, we may, at the discretion of our Board of Directors, authorize an employer contribution based on a portion of the employees' contributions. Since January 2010, we have matched 50% on the first 4% contributed by an employee, or a maximum of 2% of the employee’s income. For 2015 and 2014, we contributed $201 and $164, respectively, to the 401(k) plan.
Note 13 - Business Segment Information
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 various 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, integrated communication system kits 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.
2015:
| Battery & Energy Products | Communi- cations Systems | Discontinued Operations | Corporate | Total | ||||||||||||||||
| Revenue | $ | 65,272 | $ | 11,155 | $ | — | $ | — | $ | 76,427 | ||||||||||
| Segment contribution | 18,698 | 4,618 | — | (19,986 | ) | 3,330 | ||||||||||||||
| Interest expense, net | (245 | ) | (245 | ) | ||||||||||||||||
| Miscellaneous | 65 | 65 | ||||||||||||||||||
| Income tax provision | (310 | ) | (310 | ) | ||||||||||||||||
| Noncontrolling interest | 29 | 29 | ||||||||||||||||||
| Net income attributable to Ultralife | $ | 2,869 | ||||||||||||||||||
| Total assets | $ | 35,295 | $ | 28,849 | $ | 17,378 | $ | 81,522 | ||||||||||||
| Capital expenditures | 355 | 973 | 562 | 1,890 | ||||||||||||||||
| Goodwill | 4,790 | 11,493 | 16,283 | |||||||||||||||||
| Depreciation and amortization | 1,625 | 98 | 984 | 2,707 | ||||||||||||||||
| Intangible asset impairment | 150 | 150 | ||||||||||||||||||
| Stock-based compensation | 46 | 3 | 522 | 571 | ||||||||||||||||
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2014:
| Battery & Energy Products | Communi- cations Systems | Discontinued Operations | Corporate | Total | ||||||||||||||||
| Revenue | $ | 56,772 | $ | 9,722 | $ | — | $ | — | $ | 66,494 | ||||||||||
| Segment contribution | 15,516 | 3,834 | — | (20,793 | ) | (1,443 | ) | |||||||||||||
| Interest expense, net | (205 | ) | (205 | ) | ||||||||||||||||
| Miscellaneous | (154 | ) | (154 | ) | ||||||||||||||||
| Income tax provision | (268 | ) | (268 | ) | ||||||||||||||||
| Income (loss) from discontinued operations | (61 | ) | (61 | ) | ||||||||||||||||
| Noncontrolling interest | 15 | 15 | ||||||||||||||||||
| Net loss attributable to Ultralife | $ | (2,116 | ) | |||||||||||||||||
| Total assets | $ | 38,415 | $ | 29,056 | $ | 20,171 | $ | 87,642 | ||||||||||||
| Capital expenditures | 1,400 | 1,066 | 206 | 2,672 | ||||||||||||||||
| Goodwill | 4,914 | 11,493 | 16,407 | |||||||||||||||||
| Depreciation and amortization | 2,089 | 89 | 955 | 3,133 | ||||||||||||||||
| Stock-based compensation | 28 | 4 | 971 | 1,003 | ||||||||||||||||
U.S. and Non-U.S. Revenue Information (in millions)1:
| 2015: | Total Revenue | United States | Non-United States | |||||||||
| Battery & Energy Products | $ | 65.3 | $ | 37.1 | $ | 28.2 | ||||||
| Communications Systems | 11.1 | 9.6 | 1.5 | |||||||||
| Total | $ | 76.4 | $ | 46.7 | $ | 29.7 | ||||||
| 61 | % | 39 | % | |||||||||
| 2014: | Total Revenue | United States | Non-United States | |||||||||
| Battery & Energy Products | $ | 56.8 | $ | 30.7 | $ | 26.1 | ||||||
| Communications Systems | 9.7 | 8.7 | 1.0 | |||||||||
| Total | $ | 66.5 | $ | 39.4 | $ | 27.1 | ||||||
| 59 | % | 41 | % | |||||||||
1 Sales classified to U.S. include shipments to U.S.-based prime contractors which in some cases may serve non-U.S. projects
Long-lived assets (including goodwill and intangible assets) held outside the U.S., principally in China, were $4,748 and $5,153 at December 31, 2015 and 2014, respectively.
Commercial and Government/Defense Revenue Information:
| 2015: | Total Revenue | Commercial | Government/ Defense | |||||||||
| Battery & Energy Products | $ | 65.3 | $ | 33.7 | $ | 31.6 | ||||||
| Communications Systems | 11.1 | — | 11.1 | |||||||||
| Total | $ | 76.4 | $ | 33.7 | $ | 42.7 | ||||||
| 44 | % | 56 | % | |||||||||
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| 2014: | Total Revenue | Commercial | Government/ Defense | |||||||||
| Battery & Energy Products | $ | 56.8 | $ | 30.1 | $ | 26.7 | ||||||
| Communications Systems | 9.7 | — | 9.7 | |||||||||
| Total | $ | 66.5 | $ | 30.1 | $ | 36.4 | ||||||
| 45 | % | 55 | % | |||||||||
Note 14 - Fire at Manufacturing Facility
In June 2011, we experienced a fire that damaged certain inventory and machinery and equipment at our facility in China. The fire occurred after business hours and was fully extinguished quickly with no injuries, and the plant was back in full operation shortly thereafter with no significant disruption in supply or service to customers. We maintain adequate insurance coverage for this operation.
The total amount of the loss pertaining to assets and the related expenses was approximately $1,589, including damaged inventory, business interruption and lost profits. Previous payments received against the loss claim total approximately $1,286, and no gain or loss has been recognized upon receipt of these partial payments. As of December 31, 2015, we reflect a receivable from the insurance company relating to this claim of $177, which is net of our deductible of approximately $125, and represents additional proceeds we expect to receive when the insurer finalizes the claim.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 Rule 13a-15(e)) as of the end of the period covered by this annual 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 Controls 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 fourth quarter of the fiscal year covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting – Our management team is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial reporting is a process designed 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. Because of the inherent limitations of internal control systems, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2015. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on our assessment, we concluded that, as of December 31, 2015, our internal control over financial reporting was effective based on those criteria.
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ITEM 9B. OTHER INFORMATION
None.
PART III
The information required by Part III, other than as set forth in Item 12, and each of the following items is omitted from this report and will be presented in our definitive proxy statement (“Proxy Statement”) to be filed pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report, in connection with our 2016 Annual Meeting of Shareholders, which information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled "Election of Directors", "Executive Officers", "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" in the Proxy Statement are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation", “Directors Compensation”, “Employment Arrangements” and "Compensation and Management Committee " in the Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The section entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” in the Proxy Statement is incorporated herein by reference.
Equity Compensation Plan Information
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |||||||||
| Equity compensation plans approved by security holders | 2,257,969 | $ | 6.30 | 1,338,750 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 2,257,969 | $ | 6.30 | 1,338,750 | ||||||||
See Note 10 in Notes to Consolidated Financial Statements for additional information.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The section entitled "Corporate Governance - General" in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The section entitled "Proposal to Ratify the Selection of Independent Registered Accounting Firm - Principal Accountant Fees and Services" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
| 1. | Financial Statements |
The financial statements and schedules required by this Item 15 are set forth in Part II, Item 8 of this report.
(b) Exhibits. The following exhibits are filed as a part of this report:
|
Exhibit Index
|
Description of Document |
Incorporated By Reference from: |
||
| 2.1 | Stock Purchase Agreement by and between BCF Solutions, Inc. and Ultralife Corporation | Exhibit 2.1 of the Form 10-Q for the quarter ended September 30, 2012, filed November 8, 2012 | ||
| 2.2 | Stock Purchase Agreement relating to Accutronics Limited by and between Robert Andrew Phillips and Others and Ultralife Corporation | Filed herewith | ||
| 3.1 | Restated Certificate of Incorporation | Exhibit 3.1 of the Form 10-K for the year ended December 31, 2008, filed March 13, 2009 | ||
| 3.2 | Amended and Restated By-laws | Exhibit 3.2 of the Form 8-K filed December 9, 2011 | ||
| 4.1 | Specimen Stock Certificate | Exhibit 4.1 of the Form 10-K for the year ended December 31, 2008, filed March 13, 2009 | ||
| 10.1* | Technology Transfer Agreement relating to Lithium Batteries | Exhibit 10.19 of our Registration Statement on Form S-1 filed on October 7, 1994, File No. 33-84888 (the “1994 Registration Statement”) | ||
| 10.2* | Technology Transfer Agreement relating to Lithium Batteries | Exhibit 10.20 of the 1994 Registration Statement | ||
| 10.3* | Amendment to the Agreement relating to rechargeable batteries |
|
Exhibit 10.24 of our Form 10-K for the fiscal year ended June 30, 1996 (this Exhibit may be found in SEC File No. 0-20852) | |
| 10.4† | Ultralife Corporation 2014 Long-Term Incentive Plan | Appendix A to our Definitive Proxy Statement filed on April 21, 2014 | ||
| 10.5† | Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 99.2 of our Registration Statement on Form S-8 filed on July 26, 2004, File No. 333-117662 | ||
| 10.6† | Amendment No. 1 to Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 99.3 of our Registration Statement on Form S-8 filed August 18, 2006, File No. 333-136737 |
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| 10.7† | Amendment No. 2 to Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 99.4 of our Registration Statement on Form S-8 filed November 13, 2008, File No. 333-155349 | ||
| 10.8† | Amendment No. 3 to Ultralife Batteries, Inc. Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 99.5 of our Registration Statement on Form S-8 filed November 13, 2008, File No. 333-155349 | ||
| 10.9† | Employment Agreement between the Registrant and Peter F. Comerford | Exhibit 10.30 of the Form 10-K for the year ended December 31, 2009, filed March 16, 2010 | ||
| 10.10† | Employment Agreement between the Registrant and Michael D. Popielec dated December 6, 2010 | Exhibit 10.40 of the Form 10-K for the year ended December 31, 2010, filed March 15, 2011 | ||
| 10.11† | Revised definition of “Change in Control” for Ultralife Corporation Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 10.1 of the Form 8-K filed on May 26, 2011 | ||
| 10.12 | Settlement Agreement between the Registrant and the United States of America dated June 1, 2011 | Exhibit 10.1 of the Form 8-K filed on June 2, 2011 | ||
| 10.13† | Amendment No. 4 to Ultralife Corporation Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 4.5 of the Registration Statement on Form S-8 filed on January 30, 2012, File No. 333-179235 | ||
| 10.14† | Amendment No. 5 to Ultralife Corporation Amended and Restated 2004 Long-Term Incentive Plan | Exhibit 10.1 of the Form 8-K filed on May 26, 2011 | ||
| 10.15 | Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2013, filed August 9, 2013 | ||
| 10.16† | Retirement and Consulting Agreement, Release and Waiver of All Claims, between Ultralife Corporation and Peter F. Comerford, dated May 28,2013 | Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2013, filed August 9, 2013 | ||
| 10.17† | Restricted Stock Unit Agreement between Ultralife Corporation and Michael D. Popielec. Dated June 4, 2013 | Exhibit 10.1 of the Form 10-Q for the quarter ended June 30, 2013, filed August 9, 2013 | ||
| 10.18† | Amended No. 6. to Ultralife Corporation Amended and Restated 2004 Long-Term Incentive Plan | Appendix A of Form DEF 14A filed on April 22, 2013 | ||
| 10.19 | Amendment No. 1, dated April 30, 2014, to the Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 10-Q for the quarter ended March 30, 2014, filed May 9, 2014 | ||
| 10.20 | Amendment No. 2, dated October 28, 2014, to the Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 10-Q for the quarter ended September 28, 2014, filed November 3, 2014 | ||
| 10.21 | Amendment No. 3, dated April 30, 2015, to the Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 8-K filed on April 30, 2015 |
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| 10.22 | Amendment No. 4, dated June 5, 2015, to the Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 8-K filed on June 5, 2015 | ||
| 10.23 | Amendment No. 5, dated January 13, 2016, to the Revolving Credit, Guaranty, and Security Agreement between Ultralife Corporation and PNC Bank, National Association, dated May 24, 2013 | Exhibit 10.1 of the Form 8-K filed on January 20, 2016 | ||
| 21 | Subsidiaries | Filed herewith | ||
| 23.1 | Consent of Bonadio & Co.,LLP | Filed herewith | ||
| 31.1 | CEO 302 Certifications | Filed herewith | ||
| 31.2 | CFO 302 Certifications | Filed herewith | ||
| 32 | 906 Certifications | Filed herewith | ||
| 100.INS | XBRL Instance Document | Filed herewith | ||
| 100.SCH | XBRL Taxonomy Extension Schema Document | Filed herewith | ||
| 100.CAL | XBRL Taxonomy Calculation Linkbase Document | Filed herewith | ||
| 100.LAB | XBRL Taxonomy Label Linkbase Document | Filed herewith | ||
| 100.PRE | XBRL Taxonomy Presentation Linkbase Document | Filed herewith | ||
| 100.DEF | XBRL Taxonomy Definition Document | Filed herewith | ||
* Confidential treatment has been granted as to certain portions of this exhibit.
† Management contract or compensatory plan or arrangement.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 | ||
| Date: March 2, 2016 | /s/ Michael D. Popielec | |
| Michael D. Popielec | ||
| President, Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: March 2, 2016 | /s/ Michael D. Popielec | |
| Michael D. Popielec | ||
| President, Chief Executive Officer and Director | ||
| (Principal Executive Officer) | ||
| Date: March 2, 2016 | /s/ Philip A. Fain | |
| Philip A. Fain | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial Officer and Principal | ||
| Accounting Officer) | ||
| Date: March 2, 2016 | /s/Steven M. Anderson | |
| Steven M. Anderson (Director) | ||
| Date: March 2, 2016 | /s/ Thomas L. Saeli | |
| Thomas L. Saeli (Director) | ||
| Date: March 2, 2016 | /s/ Robert W. Shaw II | |
| Robert W. Shaw II (Director) | ||
| Date: March 2, 2016 | /s/ Ranjit C. Singh | |
| Ranjit C. Singh (Director) | ||
| Date: March 2, 2016 | /s/ Bradford T. Whitmore | |
| Bradford T. Whitmore (Director) |
71
| Index to Exhibits | |
| 2.2 | Stock Purchase Agreement relating to Accutronics Limited by and between Robert Andrew Phillips and Others and Ultralife Corporation |
| 21 | Subsidiaries |
| 23.1 | Consent of Bonadio & Co., LLP |
| 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 |
| 72 |