ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: April 2, 2005
Business Overview: A global provider of non-rechargeable and rechargeable batteries and power solutions for military, industrial, and consumer applications. The company operates in three segments: Non-rechargeable Batteries, Rechargeable Batteries, and Technology Contracts.

Key Financial Metrics

Note: Total Debt calculated as Short-term debt ($2,219) + Long-term debt ($6,548). Working Capital calculated as Current Assets ($40,857) - Current Liabilities ($11,967).

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 43% ($11.6 million) year-over-year. The Non-rechargeable segment dropped 49% due to a transition in U.S. military procurement responsibility for BA-5390 batteries from the Army/CECOM to the Defense Logistics Agency (DLA).
• Margin Compression: Gross margin percentage fell from 23% to 13%, driven by lower production volumes of large cylindrical batteries. Operating expenses increased 26% to $3.7 million, primarily due to higher R&D spending and Sarbanes-Oxley compliance costs.
• Profitability Shift: The company reported a net loss of $1.55 million compared to net income of $3.24 million in the prior year. This was partially offset by a $310,000 income tax benefit related to U.S. net operating loss carryforwards.
• Liquidity Improvement: Cash and cash equivalents increased significantly to $10.7 million from $1.1 million, aided by the sale of available-for-sale securities ($1 million) and proceeds from stock option exercises ($714,000).

Guidance, Outlook, and Risks

Management Commentary and Outlook

• 2005 Guidance: Management expects full-year 2005 revenues to increase 10% to 20% over 2004 levels, driven by commercial growth (automotive telematics, medical, search & rescue) and stabilization of military contracts.
• Q2 2005 Projection: Projected revenues of approximately $28 million and operating income of $2.5 million, contingent on receiving additional U.S. military orders for BA-5390 batteries.
• Long-term Targets: Targeting 30% gross margins and 20% operating margins as quarterly revenues approach $50 million.

Risks and Contingencies

• Debt Covenant Violations: As of April 2, 2005, the company failed to meet debt-to-earnings and EBIT-to-interest expense covenants. On May 4, 2005, the company secured a waiver and amended the credit facility to adjust metrics.
• Tax Law Change: New York State tax legislation enacted in April 2005 will reduce the effective tax rate but requires a non-cash deferred tax expense of approximately $1 million in Q2 2005 due to the revaluation of deferred tax assets.
• Environmental Liability: Ongoing remediation of contaminated soil at the Newark, NY facility. Estimated total cost is $230,000; $100,000 incurred to date. Final costs remain uncertain.
• Supplier Risk: Prepayments of $211,000 made to Ultralife Taiwan Inc. (UTI) for raw materials carry risk if UTI faces financial difficulties.

Investor Verification Checklist

• Military Contract Status: Verify the timing and volume of new BA-5390 orders from the U.S. military to confirm Q2 revenue guidance.
• Debt Covenant Compliance: Review the specific terms of the May 4, 2005 credit facility amendment and the company's ability to meet revised covenants.
• Deferred Tax Asset Valuation: Monitor the Q2 2005 financials for the anticipated $1 million non-cash deferred tax expense resulting from NY State tax law changes.
• Environmental Remediation: Track updates from the NY State Department of Environmental Conservation regarding the Newark facility cleanup costs.
• Commercial Segment Growth: Assess the actual growth rate in non-military segments (automotive, medical) to determine if the company can offset military procurement delays.