Good day and welcome to the Ultralife Corporation First Quarter 2012 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Jennifer, and good morning, everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the first quarter of fiscal 2012. With us on today’s call are Michael Popielec, Ultralife’s President and CEO; and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the company’s website www.ultralifecorp.com were you will find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. These include uncertain global economic conditions, increased competitive environment pricing pressures, and disruptions related to restructuring actions and delays. The Company cautions investors not to place undue reliance on forward-looking statements, which reflect the Company's analysis only as of today's date. The Company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results is included in Ultralife's filings with the Securities and Exchange Commission, including the latest Annual Report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful metrics and differ from GAAP. These non-GAAP measures should be considered as supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Good morning, Jody, and thank you everyone for joining the call this morning. As we have done previously, today I’ll start by making some high level observations about our first quarter 2012 operating performance. Then I’ll turn the call over to Phil who will take you through the detailed financial results for the quarter. After Pill has finished, I’ll take the call back to provide a progress report on our top 2012 priorities with a particular focus on new product development, as well as our thoughts on the full-year financial outlook for 2012 before opening it up for questions. The first quarter of 2012 was characterized by lower battery and energy products demand, negatively impacting both revenue and gross margins, offset to some degree by a very favorable improvement in our communications systems business performance. In the first quarter, we saw the softness in our battery and energy products business that was experienced in the fourth quarter of late last year extend to this year. As we mentioned during our last call, revenue softness included a large recurring Telematics contract that reached its life end late last year, and the slowed U.S government defense business, due to overseas troop withdrawals and well-publicized budget constraints. In anticipation of a slower first half for B&E products, we reduced manufacturing output to bleed down inventory roughly 10%. In the first quarter, we also completed our 9-volt lithium battery product line transition to our China operations. The combination of these 2 events, along with lower demand, led to approximately $1.9 million of negative manufacturing variances in Q1, which was higher than expected and hence impacted net gross margin rates. We have implemented additional head count rightsizing in Q1 to correct a large portion of these variances and have implemented a detailed sales and operations planning process to more quickly respond to demand fluctuations. On a positive note, our communication systems business showed a nice rebound in its sales in Q1 by doubling year-over-year revenue driven in-part by the international project we announced in January. Comm Systems gross margin rates declined modestly as a result of a large project tender pricing. However, we expect to fully recover this slight erosion from lean productivity gains throughout the year. Looking at operating expenses, we continue to knowingly spend ahead of revenue realization on new product development to increase feet on the street, but nevertheless we were able to reduce operating expenses 6% year-over-year. In a few moments, we will talk about several exciting new product introductions we will make this month, which will expand our opportunities for organic growth, despite the present challenging government defense budget environment. But first I like to ask Ultralife’s CFO, Philip Fain, to take you through some additional details of our first quarter 2012 financial results. Phil?

Thank you, Mike, and good morning everyone. Earlier this morning, we released our first quarter results for the period ended April 1, 2012. As a reminder, I will provide you revenue, gross profit, operating expenses, and operating results from continuing operations for the 2012 first quarter compared to the 2011 first quarter. Discontinued operations contain the results of RedBlack Communications. 2011 discontinued operations also contain the results for the Energy Services business, which we exited in the second quarter last year. Consolidated revenues for the first quarter totaled $27.5 million, representing a 1% decline from the $27.9 million for the first quarter of 2011. Revenues from our Battery & Energy Products segment were $20.1 million, a decrease of $4.2 million or 17% from last year. This decrease was primarily attributable to the completion of the non-U.S portion of a Telematics battery contract in the first quarter of 2011 that accounted for in excess of $4 million of revenue for that period. The first quarter performance was also impacted by a slower government and defense order rate for rechargeable and non-rechargeable battery. Communications Systems' sales of $7.4 million increased by $3.8 million or 102% from the prior year. This increase reflects our broader focus on large, global defense modernization opportunities, which resulted in higher amplifier shipments. Our consolidated gross profit was $6.6 million in the first quarter of 2012, compared to $4.4 million for the first quarter of 2011. As a percentage of total revenue, consolidated gross margin was 24.0% in 2012 versus 15.8% for last year’s first quarter, an increase of 820 basis points. During the first quarter of 2011, the company recorded a $2.7 million charge for the settlement of a matter with the U.S. government pertaining to Exigen contracts completed between 2003 and 2004. Excluding this charge, gross…

Thanks, Phil. For 2012, we have said that our 3 top priorities are essentially; one, to optimize the company’s profitability; two, execute our growth game plan; and three, more fully leverage our China operations to access global commercial markets and to improve our cost competitiveness. To optimize company’s profitability, we have established a framework to delivering interim operating margin goal of 10%, which is based on working towards a total company gross margin rate of 30%, allocating 10% to 11% to sales on new product development and selling expense, and 9% to 10% to sales on G&A. When we look at the mix and the pricing trends at both Battery & Energy Products and Communications Systems, we see a rebound path to high 20’s gross margins this year once the B&E manufacturing rightsizing adjustments are completed, with any upside to our revenue growth providing additional leverage on the way to 30%. In terms of our new product development and selling expense, we have kept spending several points higher than the 9% to 10% of sales-dated target in an effort to drive our top line growth achievement for the year. However, we will start to modulate this spending back to targeted levels as the initial round of new products move into full production and the new sales force hire-on boarding and training processes stabilize. One of the challenges we face in terms of our current business cycle is that we are in the awkward period in between the time in which we have made some significant changes to the portfolio and operating practices to better position the company for higher quality earnings growth, and the time needed for the gestation cycle of new product development to result in meaningful organic revenue growth. We continue to scrutinize all existing spending and aggressively…

Thank you. [Operator Instructions] We’ll take our first question from Walter Nasdeo with Ardour Capital.

You’ve talked a lot about the military and the developments that you see in there and also some of the slowdown. Can you kind of give me a little bit of a breakdown right now on how the military to commercial sales are breaking out and then what you expect to see kind of going forward?

Yeah, I mean generally speaking, when you look at Q1 for the total company, we’re about close to 70% on G&D and 30% commercial. In that, obviously Communication Systems is 100% G&D. Battery products is probably more or like 60/40 at this time. The commercial pieces is growing certainly. When I look at it, the other figures [ph] are most likely at 4's [ph]. How does that look on a global scale. And what we’re really seeing in Communications Systems is that, they’re getting roughly half of their business from the United States, but half of it from international markets. So whereas it’s a -- G&D-pretty-much-centric-business, we’re seeing significant growth opportunities outside the United States.

Okay. And then you were talking about increasing inventory turns, what are you at now?

We are at approximately 3 turns right now. And under our lean initiatives, we look at that as totally unacceptable.

Okay, okay. What’s your goal then?

Our goal is to add at least 2 more turns a year to that to get into the 5 to 6 range.

We’ll take our next question from Mike Cikos with Sidoti & Company.

I just had a couple of quick questions for you. Regarding the DCAA charge of $2.7 million relating to the 3 exigent contracts, what was that for?

We had a contract in 2003, 2004 timeframe, which is done as you’re working in parallel to execution of the contract, you’re still defining some of the commercial parameters. There were some costs that went down, some costs that went up. We had the opportunity to ask for increased costs, we sort of looked at it as a net some 0 type of situation and just kept moving forward, trying to support our soldiers in harm's way. In a post audit, when people looked at the charges, the things that went -- costs actually went down. There was an opportunity for us to recoup that for things that went up. We didn't necessarily do that and as by the rules that results in a shortfall and we owed the government some additional monies with that. There's -- they have a lot of tools at their disposal to try to enforce these types of contracts. We felt that we negotiated in very good faith to try to resolve it, and for something that has been around from 2003, 2004, and recognizing that U.S. government is one of our biggest customers, that we felt it was prudent to settle it and we did it quickly at the beginning of last year.

Okay. So all those charges were then in the first quarter of last year?

Right, about $2.7 million.

Okay. Another question for you regarding the MKM product, I don’t know if you’ve done it before or if you could, but just as far as thinking about this product, what’s the typical price range that you are looking for or is it a higher margin product compared to the products already offered by you guys?

Yes, we certainly, when we look at products, we look for the overall need, we look at the niche and of course, we are looking for the opportunity to make a reasonable return. In this project, in the design of the project, we tried to understand, what was the strength of the market and where did it make sense from an applications standpoint. And so when you look at various forms of power many times, you look at it from a dollars per kilowatt hour type of perspective. And we tried to target-price it based on that fit. Now we look at it for as replacement for, say, lotaspet [ph] in some cases in environments where you have a lot of geography, unconstrained space and a high ability to go and maintain on a regular basis those products and perhaps not very high temperatures, sometimes the economics wouldn’t necessarily look so favorable. Whereas if you have very remote locations or places you don’t want to do a lot of maintenance, either from access or from availability of the equipment that it’s part of, and/or very higher temperatures where lithium ion products tend to perform very, very well, then those economics sort of swing in the favor of lithium ion. So at this point, they're over a $1000 of kilowatt hour type of price range and for its selected applications those are very competitive levels.

All right. And also touching on the B&E business segment that you guys had seeing some softness in the first quarter carry over from the fourth quarter, just a recap, that’s mainly attributable than to the budget uncertainty we’re seeing out there, as well as the troop withdrawals?

Yes, and then as we mentioned, we had a longstanding recurrent contract that ended in the last year. And there was a significant portion of that, that shifted in the first quarter of 2011, and did not repeat again this year.

Okay. And how much revenue did that contract generate in the first quarter last year?

$4.0 million.

Okay. And then just 2 other things I wanted to ask you about, with the accounts receivables you guys did a great job bringing that down this quarter. Should we expect it to kind of echo the movements that you anticipate in sales where it'll probably decline in the second quarter again because you are expecting sales in the second quarter of either flat to modestly down. And then accounts receivable will kind of increase in the third and fourth quarters as sales approach that double-digit growth that you’re highlighting?

Well, that’s just one way of looking at it. The way we look at it internally is based on DSO and what you are seeing is both sales-driven, causing the reduction in DSO in absolute receivable balance, as well as a market improvement in day sales outstanding to very, very good levels. Going forward as we increase the international portion of the business, there will be a tendency for the DSO to climb. I’m not saying significantly because we’re very, very cognizant of managing our cash, but nevertheless I would expect an increase in DSO based on normal sales terms.

All right. And one other thing was the sales force that you guys have and I know that you’ve added to it over the last year. Are you still adding to that force at this point or I know the training is an ongoing thing, but is the force itself expanding any more?

Yes, at this point, we’re not increasing the overall number of people, but what we’re doing I mean sales is as a very Darwinian type of a profession. It’s variably compensated and there’s an opportunity for people here to be very, very successful, both for the company and for themselves personally, with strong performance. And there is also times though that when you have bad fits you need to move people on. So at this point, most activity is associated with understanding the people that make it and understanding the people that don’t make it and being very human and respectful about it, but moving those people on who don’t make it and we replacing those with people that we think have a better shot at it. But the overall quantity of people that we’re looking at is where we like it to be relative to the current revenue size, but as we continue to grow our business and create more bandwidth for penetrating new places, we will continue to add more people on stream at that time.

Okay. And then just one thing to cycle back with the B&E business segment, so the growth that we’re projecting then through the rest of 2012 will be based on the fact that this Telematics contract will drop out because the first quarter is now behind, as well as the fact that you’ve expanded on your product offering as well as the traction you are building up in the international markets and these new commercial applications that you do have.

Exactly.

[Operator Instructions] We will take our next question from Sam Bergman with Bayberry Asset Management.

Couple of questions. Are you pretty much saying Ultralife’s earnings get more into the second half of 2012 from the pipeline that you see.

That’s correct.

And what can you tell me about R&D going forward into the next several quarters. Is it going to tick up or is it going to remain somewhat flat from the first quarter.

I would expect it to step flat to down. And we are really trying to looking at that in the context of the overall revenue. We have a number of -- like as I mentioned very exciting introductions that are happening in the month of May and so some of those efforts will result in new opportunities which will of course drive additional engineering requirements, but of the good kind, of the time that you are looking in terms of real transactions and shipping product to customers. But we will be looking very, very closely at the overall expenditures for R&D, selling expenses as well as G&A, to make sure that the hard work we did last year isn’t really reversed this year by overspending in some of those areas.

And can you tell us on the MKM system that you recently shipped to a defense integrator, what was that particular order in terms of dollar value and what could follow-up orders be in what range of parameter.

We don’t provide and we can’t provide any individual details of this particular transaction. But generally speaking the products, this pricing order of magnitude are in a sort of $3,000 to $5,000 range per large format battery depending on its size and capabilities. When a customer buys these in large quantities, we'll be well-suited to rapidly deploy a number of these units, which could create a very substantial part of our ongoing revenue stream. But at this point, the initial customers are making sure that the product does what it says going to do, there is an abundance of brochure-wear [ph] large format batteries, but when you really blow it away and you take it in-house and you do all the detail testing that our customers require, there is actually very few people that have a commercially-viable product out there. So we are very excited about this big first step in this product.

And the other question I wanted to ask you is in terms of your Chinese operation, many companies are bringing manufacturing somewhat or back to the U.S., do you find your costs in China pretty much remain the same or lower than what they were 6 months ago?

Costs have a way of moving up no matter where you are and part of being a world class man who set those costs. So the costs that we see in China increasing make strong headlines because of the percentages, but then when you look at the actual dollars, they're not that big. And nevertheless, just because maybe you have a different starting point doesn’t mean that we want to waste money in China either. So we are working as hard on lean improvement in China as we are in the United States. Now that being said, when we decide a product wants to be in China versus the U.S., what we're really making the decision is not the U.S.A versus China thing, but rather where is my end user, where is my market. And we are trying to be closest to the customer. So that’s really driving our decision to be in China or the U.S. or in another place, more than some of the things that may hit the headlines.

[Operator Instructions] And it looks like we have no further questions in queue. I would like to turn it back over to Mike with any closing and additional remarks.

Sure. Thanks very much. And thank you everyone for joining us today for our first quarter 2012 earnings call. Once again, we look forward to meeting up with several of you in person over the next week or so and also to sharing with you our quarterly progress on each quarter's conference call in the future. Thank you very much and have a great day.

And that does conclude today’s conference. Thank you for your participation.