Business Context and Reporting Period
Company: Ultralife Corp (ULBI)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Ultralife designs, manufactures, and services portable and standby power solutions (rechargeable and non-rechargeable batteries) and communications/electronics systems for government, defense, and commercial customers. The company operates globally with facilities in North America, Europe, and Asia.
Segment Restructuring: Effective in fiscal 2010, the company will consolidate its four reporting segments into three: Battery & Energy Products, Communications Systems, and Energy Services.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Revenues | $172,109 | $254,700 |
| Gross Margin | $36,860 (21.4%) | $56,943 (22.4%) |
| Operating Income (Loss) | $(7,362) | $17,305 |
| Net Loss Attributable to Ultralife | $(9,241) | $13,663 (Income) |
| Diluted EPS | $(0.54) | $0.78 |
| Cash and Cash Equivalents | $6,094 | $1,878 |
| Working Capital | $27,824 | $42,937 |
| Total Debt (Current + Long-Term) | $19,349 | $6,095 |
| Operating Cash Flow | $2,032 | $19,058 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 32.4% to $172.1 million. The primary driver was a 68.1% drop in Communications Systems revenue ($136.1M to $43.4M) due to the non-recurrence of large SATCOM-On-The-Move orders fulfilled in 2008. This was partially offset by growth in Rechargeable Products (+21.9%) and Design & Installation Services (+30.3%) driven by the AMTI and USE acquisitions.
- Profitability Reversal: The company swung from an operating income of $17.3 million in 2008 to an operating loss of $7.4 million in 2009. This was caused by the revenue decline and a $4.6 million increase in operating expenses (R&D and SG&A) due to acquisition integration and product development investments.
- Segment Performance:
- Non-Rechargeable: Revenue down 3.5% due to automotive telematics recession impact, though gross margin improved to 18.9%.
- Rechargeable: Revenue up 21.9% driven by defense demand; gross margin improved to 21.6%.
- Communications Systems: Revenue down 68.1%; gross margin percentage increased to 30.1% due to a $1.3M litigation settlement gain.
- Design & Installation: Revenue up 30.3%; gross margin declined to 11.0% due to price competition and integration costs.
- Debt Position: Current portion of debt increased significantly to $19.1 million (from $1.4 million) as the company drew down its revolver to fund operations and acquisitions. The company was not in compliance with financial covenants under its previous credit facility as of year-end.
Guidance, Outlook, Risks, and Unusual Items
- 2010 Outlook: Management plans to generate revenue of approximately $177 million and operating income of $4.6 million on the base business. Growth is expected from new lithium-ion backup products, expanded SATCOM systems, and the transition of 9-volt production to China.
- Credit Facility Restructuring: In February 2010, the company entered a new senior secured asset-based revolving credit facility with RBS Business Capital ($35M capacity) to replace the previous facility with JP Morgan Chase, which had been declared in default due to covenant breaches.
- Key Risks:
- Customer Concentration: The U.S. Department of Defense represented 26% of 2009 revenue. Two customers comprised 45% of trade receivables.
- Government Audits: Ongoing inquiries by the DoD Inspector General and potential price adjustments on "exigent" contracts could reduce margins.
- Goodwill Impairment: The Stationary Power reporting unit narrowly passed Step 1 goodwill impairment testing in 2009; failure to meet 2010 projections could trigger a write-down of the $5.2M goodwill balance.
- Environmental: Ongoing remediation of contaminated soil/groundwater at the Newark, NY facility (reserve of $49k).
- Unusual Items:
- Acquisitions: Acquired AMTI (tactical communications) in March 2009 for $5.7M cash.
- Management Turnover: High turnover in late 2009 included the resignation of the COO, CFO, VP of Manufacturing, VP of Sales, and Director of Technology.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the fixed coverage ratio (1.20:1) under the new RBS credit facility starting March 28, 2010.
- Order Backlog: Confirm the $42.7M order backlog is converting to revenue in 2010, specifically the delayed government orders.
- Stationary Power Performance: Monitor the wireless services market growth to ensure the Stationary Power segment avoids goodwill impairment.
- Government Contract Audits: Track the status of the DoD IG inquiry and DCAA audits regarding potential pricing adjustments on past contracts.
- China Transition: Verify the successful ramp-up of 9-volt battery production in the China facility to meet the target of 75% production by year-end 2010.