ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: The Company develops, manufactures, and markets lithium primary (non-rechargeable), lithium ion, and lithium polymer rechargeable batteries for military, industrial, and consumer applications. Operations are reported in three segments: Primary Batteries, Rechargeable Batteries, and Technology Contracts.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 140% to $79.45 million from $33.04 million in the prior year. This was driven primarily by a 139% increase in Primary Battery sales ($77.1 million) due to strong military demand for cylindrical batteries (specifically the BA-5390).
• Profitability Turnaround: The Company reported a Net Income of $6.45 million, a significant improvement from a Net Loss of $22.41 million in the prior year. Operating income swung from a loss of $21.84 million to a profit of $5.98 million.
• Margin Expansion: Consolidated gross margin improved from 9% in 2002 to 22% in 2003, attributed to increased production volumes and manufacturing efficiencies.
• Expense Management: Operating expenses decreased as a percentage of revenue from 32% (excluding a $14.3M impairment charge in 2002) to 14% in 2003. R&D expenses declined to $2.5 million as the Company shifted strategy away from high-volume polymer rechargeable development.

Guidance, Outlook, and Risks

Outlook and Guidance

• 2004 Revenue Projection: Management expects 2004 revenues to reach approximately $104 million, representing over 30% growth.
• Segment Growth: Rechargeable battery revenues are projected to be at least $5 million in 2004. Military demand is expected to remain strong, though the outlook for the second half of the year suggests demand may level off.
• Margin Targets: Gross margins are expected to be in the 23%-24% range for 2004, with a long-term target of 30%. Operating income is projected to be approximately $12 million in 2004.
• Capital Expenditures: Projected spending of $5 million to $6 million in 2004 for machinery and equipment to alleviate production bottlenecks.

Risks and Contingencies

• Customer Concentration: The U.S. Army/CECOM comprised approximately 51% of total revenues in 2003. Loss of this customer would have a material adverse effect.
• Contract Uncertainty: The Company was not selected for the "Large Cylindrical" phase (Phase III) of the U.S. Army's Next Gen II solicitation, losing a potential $9 million contract. Bids are pending for Phase IV (Rectangular batteries).
• Debt Covenants: The Company must maintain a minimum net worth covenant. While currently compliant ($34.4 million vs. $22.4 million required), the credit facility expires in June 2004 and requires refinancing.
• Environmental Liability: Ongoing remediation of contaminated soil and groundwater at the Newark, NY facility. While remediation was completed in December 2003, final costs and regulatory approval remain pending.
• Investment Risk: The Company advanced $2.35 million to its affiliate, Ultralife Taiwan, Inc. (UTI), as a short-term note receivable. Recovery depends on UTI's ability to raise additional equity capital.

Investor Verification Checklist

• Military Contract Status: Verify the outcome of the Phase IV (Rectangular) Next Gen II bid and the stability of current exigent contracts with the U.S. Army.
• Refinancing Progress: Confirm the status of refinancing the $15 million credit facility expiring in June 2004 to ensure continued liquidity.
• UTI Note Receivable: Monitor the repayment or conversion status of the $2.35 million note to Ultralife Taiwan, Inc., due March 1, 2004.
• Environmental Resolution: Track the final regulatory approval and cost settlement for the Newark, NY environmental remediation project.
• Customer Diversification: Assess progress in reducing reliance on the U.S. Army, which accounted for over half of 2003 revenues.