ULBI

Business Context and Reporting Period

Company: Ultralife Corporation (formerly Ultralife Batteries, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 27, 2008
Business Overview: Ultralife designs, manufactures, and installs portable and standby power solutions, communications systems, and electronics 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

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 104% year-over-year for both the quarter and the nine-month period. This was driven primarily by the Communications Systems segment, which grew 504% in the quarter due to large orders received in late 2007, and the Design and Installation Services segment, which grew due to acquisitions (RedBlack and SPS) completed in late 2007.
• Profitability: The company turned a net loss of $128,000 in Q3 2007 into a net income of $4.7 million in Q3 2008. Operating income surged from $198,000 to $5.3 million.
• Segment Performance:
  • Non-Rechargeable Products: Revenues declined 31% in the quarter due to the non-recurrence of specific international defense shipments from 2007. Margins compressed to 12% from 19% due to lower volumes and higher raw material costs.
  • Rechargeable Products: Revenues increased 147% in the quarter, driven by lithium-ion and BA-2590 battery sales.
• Debt Reduction: Total debt decreased significantly from $29.6 million at year-end 2007 to $6.3 million in Q3 2008. This was achieved through the conversion of $10.5 million in convertible notes to equity and repayments on the revolving credit facility.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2008 operating income in the range of $22 million on revenues of nearly $270 million. For 2009, management expects a revenue base of at least $250 million.
• Subsequent Events:
  • Share Repurchase: In October 2008, the Board authorized a $10 million share repurchase program.
  • Acquisition: On October 31, 2008, the company agreed to acquire U.S. Energy Systems, Inc. for $2.85 million in cash plus performance-based equity.
• Risks and Contingencies:
  • Legal Proceedings: A customer counterclaimed for approximately $2.8 million regarding product conformity; the company disputes this. Additionally, the company faces potential liability from a workers' compensation trust underfunding, with a current reserve of $350,000.
  • Environmental: Ongoing remediation at the Newark, NY facility; costs incurred to date are approximately $206,000 with a remaining reserve of $48,000.
  • Taxation: A $3.1 million non-cash deferred tax liability was recorded in Q2 2008 related to goodwill and intangible assets. The company maintains a valuation allowance on U.S. and U.K. net operating loss carryforwards.
  • Market Conditions: The company notes risks related to the global credit crisis and potential impacts on customer demand and supplier relationships.

Investor Verification Checklist

• Revenue Quality: Verify the sustainability of the Communications Systems revenue spike, which was driven by specific large orders from late 2007.
• Debt Covenants: Confirm continued compliance with the credit facility covenants (debt-to-earnings, fixed charge coverage) as the revolver expires in January 2009.
• Legal Exposure: Monitor the status of the $2.8 million customer counterclaim and the workers' compensation trust litigation.
• Acquisition Integration: Assess the performance of recent acquisitions (RedBlack, SPS, RPS) and the pending U.S. Energy Systems acquisition.
• Tax Position: Review the impact of the $3.1 million deferred tax charge and the utilization limits on Net Operating Loss (NOL) carryforwards under Section 382.