ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: Ultralife is a global provider of high-energy power systems, manufacturing non-rechargeable and rechargeable lithium batteries for military, industrial, and consumer applications. The company operates in three segments: Non-Rechargeable Batteries, Rechargeable Batteries, and Technology Contracts.

Key Financial Metrics (Year Ended Dec 31, 2005)

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 28% to $70.5 million. This was primarily driven by a $29.4 million drop in Non-Rechargeable battery sales, specifically due to lower shipments of BA-5390 military batteries caused by a transition in procurement responsibility within the U.S. military (from CECOM to DLA).
• Profitability Reversal: The company reported a net loss of $4.3 million in 2005, compared to net income of $22.3 million in 2004. The 2004 income included a one-time $21.1 million deferred tax benefit that did not recur in 2005.
• Margin Compression: Consolidated gross margins fell from 21% in 2004 to 17% in 2005 due to lower production volumes resulting in higher unabsorbed overhead costs.
• Inventory Build-up: Inventory increased by $5.5 million to $19.4 million, largely due to a strategic buildup of BA-5390 batteries in anticipation of future military orders.
• Debt Reclassification: Due to uncertainty regarding compliance with financial covenants in the coming year, the company reclassified its entire $25 million credit facility as a current liability.

Guidance, Outlook, and Risks

• 2006 Outlook: Management projects full-year 2006 revenues of at least $90 million, driven by the restart of BA-5390 military shipments and growth in commercial markets (automotive telematics, search and rescue). Q1 2006 revenue is expected to be approximately $21 million.
• Acquisition: In January 2006, the company announced an agreement to acquire Able New Energy Co., Ltd. (China) for approximately $4.2 million to expand product offerings and market access. Closing is expected in Q2 2006.
• Government Contract Risks: The company faces potential pricing adjustments of approximately $1.4 million from post-audits of "exigent" government contracts. While management believes these can be offset by other cost increases, the final outcome is uncertain.
• Customer Concentration: The U.S. Department of Defense remained a major customer, accounting for 25% of 2005 revenues (down from 56% in 2004).
• Regulatory & Environmental: The company is subject to ongoing environmental remediation at its Newark, NY facility, with estimated final costs of approximately $28,000 beyond current reserves. New transportation regulations for lithium batteries are expected to take effect in 2006.

Investor Verification Checklist

• Military Order Fulfillment: Verify the timing and volume of BA-5390 battery orders from the U.S. military to confirm the revenue recovery projected for 2006.
• Debt Covenant Compliance: Monitor the company's ability to meet the amended financial covenants of its $25 million credit facility to avoid default or forced refinancing.
• Acquisition Integration: Track the closing of the Able New Energy acquisition and its impact on cash flow and product portfolio expansion.
• Inventory Turnover: Assess whether the significant inventory buildup ($19.4 million) converts to sales as expected or requires write-downs if military orders are delayed further.
• Government Audit Resolution: Confirm the final resolution of the DCAA audit findings regarding exigent contracts to determine potential margin impacts.