ULBI

Business Context and Reporting Period

Company: Ultralife Batteries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 27, 2004
Business Overview: The company develops, manufactures, and markets lithium primary (non-rechargeable) and lithium ion/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

Note: Debt figures represent short-term debt ($5,940) plus long-term debt ($68) as of March 27, 2004.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 75% year-over-year, driven primarily by a 73% surge in Primary Battery sales ($25.3M vs $14.6M). This was largely due to strong shipments of HiRate(R) products and BA-5390 military batteries.
• Margin Expansion: Gross margin improved to 23.5% from 20.5%, aided by higher production volumes spreading overhead costs and manufacturing efficiencies. Primary battery margins specifically rose to 27%.
• Profitability: Net income jumped from $311,000 to $3.235 million. Operating expenses as a percentage of sales declined from 17% to 11%.
• Segment Performance: While Primary Batteries drove growth, the Rechargeable Batteries segment reported a gross margin loss of $485,000 (vs. $208,000 loss in 2003), impacted by increased inventory obsolescence reserves.
• Liquidity: Cash and cash equivalents increased to $1.136 million. The company generated positive operating cash flow of $373,000, reversing a negative flow of $62,000 in the prior year.

Guidance, Outlook, and Risks

Management Commentary and Guidance

• Q2 2004 Outlook: Revenues expected to reach approximately $28 million; operating income projected at $3.5 million.
• Full Year 2004 Outlook: Revenues expected to reach at least $106 million (up from previous guidance of $104 million). Gross margins expected to range between 23% and 24%.
• Long-Term Targets: Targeting 20-30% annual revenue growth over the next 3-5 years, aiming for $200 million in revenue. Long-term gross margin target is 30%.
• Capital Expenditures: Projected to spend $5-6 million in 2004 on machinery and equipment to enhance capacity and productivity.

Risks and Contingencies

• Debt Refinancing: The primary credit facility expires on June 30, 2004. The company is seeking refinancing to secure greater capacity and lower costs.
• Environmental Liability: Ongoing remediation of contaminated soil and groundwater at the Newark, NY facility. Estimated cost is $230,000, though actual costs could be higher. A third party has agreed to reimburse 50% of costs.
• Investment Risk: The company holds a $2.35 million note receivable and a $1.55 million equity investment in Ultralife Taiwan, Inc. (UTI). UTI's uncertain financial condition poses a risk to the recovery of these funds.
• Tax Limitations: A change in ownership in late 2003 limits the annual utilization of Net Operating Loss (NOL) carryforwards to approximately $14-18 million, potentially resulting in future cash tax outlays.

Investor Verification Checklist

• Debt Maturity: Verify the status of refinancing negotiations for the credit facility expiring June 30, 2004.
• Military Contract Stability: Confirm the duration and renewal status of BA-5390 exigent contracts, which drive the majority of revenue growth.
• Rechargeable Segment Turnaround: Monitor the Rechargeable Batteries segment for continued losses and inventory obsolescence trends.
• UTI Investment: Assess the financial health of Ultralife Taiwan, Inc. and the likelihood of recovering the $2.35 million note.
• Environmental Costs: Track updates from the NY State Department of Environmental Conservation regarding the Newark facility remediation to ensure costs remain within the $230,000 estimate.