Business Context and Reporting Period
Company: Ultralife Corp
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 27, 2009
Business Overview: Ultralife designs, manufactures, and installs power and communications systems for government, defense, and commercial customers. Operations are reported in four segments: Non-Rechargeable Products, Rechargeable Products, Communications Systems, and Design and Installation Services.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9-Month 2009 | 9-Month 2008 |
|---|---|---|---|---|
| Revenues | $42,363 | $67,993 | $121,759 | $205,478 |
| Gross Margin | $10,364 (24.5%) | $15,686 (23.1%) | $24,925 (20.5%) | $47,189 (23.0%) |
| Operating Income (Loss) | $(404) | $5,298 | $(8,986) | $17,598 |
| Net Income (Loss) Attributable to Ultralife | $(605) | $4,657 | $(10,081) | $13,486 |
| Diluted EPS | $(0.04) | $0.26 | $(0.59) | $0.77 |
| Cash and Cash Equivalents | $1,697 | $1,878 (Dec 2008) | N/A | |
| Net Cash Used in Operating Activities | N/A | $(15,058) | $16,460 | |
| Total Debt (Current + Long-Term) | $31,450 | $6,095 (Dec 2008) | N/A |
Note: Debt figures include current portion of debt ($26,995) and long-term debt ($4,455) as of Sept 27, 2009.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 37.7% in Q3 2009 and 40.7% for the nine-month period compared to 2008. The Communications Systems segment saw a 76.5% drop in Q3 revenue due to the lack of recurring large orders for SATCOM-on-the-Move systems that occurred in 2008.
- Profitability Reversal: The company shifted from a net income of $4.7M in Q3 2008 to a net loss of $0.6M in Q3 2009. For the nine-month period, the company reported a net loss of $10.1M compared to income of $13.5M in the prior year.
- Debt Increase: Current portion of debt surged from $1.4M at year-end 2008 to $27.0M in Q3 2009, driven by significant drawdowns on the revolving credit facility to fund operations and acquisitions.
- Acquisitions: In March 2009, the company acquired AMTI (tactical communications products) for $5.7M in cash. In late 2008, it acquired U.S. Energy Systems (USE).
- Working Capital: Accounts receivable increased to $36.2M (from $30.6M), and Days Sales Outstanding (DSO) rose to 70 days from 53 days at year-end 2008.
Guidance, Outlook, Risks, and Contingencies
Outlook and Guidance
- 2009 Revenue: Management revised full-year 2009 revenue guidance to approximately $175M.
- 2009 Profitability: The company expects to be profitable in Q4 2009 but anticipates a full-year operating loss between $8M and $9M.
- Contract Updates: A $20M order for SATCOM-on-the-Move systems was placed in late October 2009. However, the company lost the MRAP All Terrain Vehicle (MATV) contract to a competitor.
Material Risks and Contingencies
- Debt Covenant Default: As of September 27, 2009, the company was not in compliance with financial covenants (Debt-to-Earnings ratio of -34.37 vs. required 2.75; Fixed Charge ratio of -0.07 vs. required 1.25). This constitutes an event of default.
- Liquidity Crisis: The company does not have sufficient liquidity to repay the full outstanding indebtedness ($15.5M) if lenders demand payment. Management is negotiating a forbearance agreement and seeking to refinance into an asset-based credit facility. Failure to secure this could lead to foreclosure or Chapter 11 bankruptcy.
- Legal Proceedings:
- Vendor Litigation: Settled in September 2009 for a net gain of $1.3M.
- Environmental Remediation: Ongoing remediation at the Newark, NY facility. Costs incurred to date are $247k, with a reserve of $39k.
- Workers' Compensation Trust: Potential liability related to an underfunded trust; a $350k reserve is maintained.
- Impairment Risk: Management is evaluating retiring certain acquired brands, which could trigger non-cash impairment charges on indefinite-lived intangible assets.
Investor Verification Checklist
- Debt Restructuring Status: Verify if the company has successfully secured the forbearance agreement or the new asset-based credit facility to avoid immediate default and foreclosure.
- Covenant Compliance: Monitor future filings for confirmation of covenant compliance or further waivers from lenders.
- Contract Execution: Confirm the timing and revenue recognition of the $20M SATCOM-on-the-Move order announced in October 2009.
- Brand Strategy: Watch for announcements regarding the retirement of acquired brands and potential associated impairment charges.
- Cash Burn Rate: Assess the sustainability of the current cash position ($1.7M) given the negative operating cash flow of $15M for the nine-month period.