ULBI

Business Context and Reporting Period

Company: Ultralife Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2009
Business Overview: Ultralife designs, manufactures, and installs power and communications systems for government, defense, and commercial customers. The company operates through four segments: Non-Rechargeable Products, Rechargeable Products, Communications Systems, and Design and Installation Services.

Key Financial Metrics

Note: Debt increased significantly due to revolver drawdowns to fund operations and acquisitions.

Material Changes vs. Prior Period

• Revenue Decline: Q2 2009 revenues dropped 55.0% year-over-year, primarily driven by an 89.3% collapse in Communications Systems revenue due to the non-recurrence of large SATCOM-on-the-Move orders from 2008 and delays in government contract finalization.
• Profitability Reversal: The company swung from a net income of $6.4M in Q2 2008 to a net loss of $7.0M in Q2 2009. Operating expenses as a percentage of sales rose to 33.1% from 12.2% due to the lower revenue base.
• Acquisitions: Ultralife acquired the AMTI tactical communications business in March 2009 for $5.7M in cash. This contributed to increased inventory levels and goodwill.
• Inventory Buildup: Inventories increased to $51.2M from $40.5M at year-end 2008, reflecting a buildup in anticipation of delayed government orders and increased inventory provisions due to economic slowdown.
• Debt Utilization: The company drew down $23.9M on its revolving credit facility during the six-month period, increasing total debt obligations significantly.

Guidance, Outlook, and Risks

Guidance and Outlook

• Revenue Guidance: Lowered full-year 2009 revenue guidance from $230M to a range of $180M–$210M.
• Operating Income: Expects operating income for the second half of 2009 to range from $1M to $10M, contingent on the release of delayed government orders.
• Cost Reductions: Implemented a four-day workweek for production personnel in Newark operations starting Q3 2009 and consolidated amplifier manufacturing into the new AMTI facility to reduce overhead.

Risks and Contingencies

• Covenant Compliance: As of June 28, 2009, the company was not in compliance with financial covenants (Debt-to-Earnings ratio of 6.05 vs. 2.75 limit; Fixed Charge ratio of 0.35 vs. 1.25 limit). A waiver was obtained on June 28, 2009, but future waivers are not guaranteed.
• Liquidity: Cash burn from operations ($13.0M used in six months) and reliance on credit markets pose risks. The company has $10.8M remaining borrowing capacity under its $35M revolver.
• Government Delays: Significant revenue is tied to U.S. and foreign military contracts (approx. 75% of revenue in 2008). Delays in SATCOM-on-the-Move and UK Ministry of Defence programs are the primary drivers of current losses.
• Legal Proceedings: Ongoing litigation with a vendor regarding breach of contract (claims of $3.6M vs. counterclaims of $3.5M) and environmental remediation costs at the Newark facility.

Investor Verification Checklist

• Covenant Waivers: Verify the terms and duration of the June 28, 2009 waiver regarding debt covenants and the likelihood of obtaining future waivers if performance does not improve.
• Government Contract Timing: Assess the probability and expected timing of the delayed SATCOM-on-the-Move and UK Ministry of Defence orders to validate the H2 2009 operating income guidance.
• Inventory Valuation: Review the adequacy of inventory reserves given the economic slowdown and the specific buildup of parts for delayed government programs.
• Liquidity Runway: Confirm the company's ability to service debt and fund operations with current cash ($1.2M) and remaining revolver capacity ($10.8M) if operating losses persist.
• Legal Exposure: Monitor the resolution of the vendor litigation and the final Remedial Action Plan for the Newark environmental site to ensure reserves are sufficient.