Good day, and welcome to this Ultralife Corporation Third Quarter 2016 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. John Heilshorn with LHA. Please go ahead.

Thank you. Good morning, everyone. This is John Heilshorn of LHA. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the third quarter of fiscal 2016. With us on today's call are Mike 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, ultralifecorp.com, where you'll find the release under the 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 potential reductions in U.S. military spending, uncertain global economic conditions and acceptance of the Company's new products on a global basis. The Company cautions investors not to place undue reliance on forward-looking statements, which reflects 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 filings, 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 that differ from GAAP. These non-GAAP measures should be considered as supplemental to the corresponding GAAP figures. With that, I would like to turn the call over to Mike. Good morning, Mike.

Good morning, John and thank you everyone for joining the call this morning. Today, I'll start by making some overall comments about our Q3 2016 operating performance. Then I'll turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2016 revenue initiatives, then open it up for questions. For Q3 of 2016, we were pleased to deliver our eighth consecutive quarter of total company profitability and positive EPS, generating an operating profit of $1.1 million on revenues of $19.6 million for an operating margin of 5.8%. Operating profit was more than double than what was reported in the second quarter due to a 150 basis points gross margin improvement and a 10% reduction in run rate expenses. Q3 revenue was up $0.6 million or 3.1% year-over-year, resulting primarily from a strong increase in communication systems. Battery and energy products Q3 revenues were $14.9 million, down 9% from the prior year and including the Accutronics acquisition, which again delivered $2.5 million in revenue. An increase in B&E's commercial revenue business of 14% and a favorable increase in our international government defense business were more than offset by 35% decrease in our U.S. government defense business, primarily from a large OEM prime customer. Softness also continues in our 9-Volt demand due to excess channel inventory from last year's 9-Volt surge. For our Communication Systems business, third quarter revenues were $4.7 million up 77% year-over-year, another three-year high quarterly revenue mark, driven by deliveries under the vehicle installed Power Enhanced Riflemen Appliqué or Viper large program contract announced last year. So though three quarters year-to-date, revenue was up 6%. We're seeing this favorable benefit of the cost reductions taken in the first half hit the ledger in the back half to improve quarterly profitability and our new acquisition is performing to expectations. We continue to see some sluggishness in some of our legacy market segments in both business units, however our broad business model driven cost realignment as well as revenue diversification activities are helping us mitigate the impact. In a few minutes I'll give you an update on our revenue initiatives for 2016, but first I would like to ask Ultralife's CFO, Phil Fain to take you through additional details of the third quarter 2016 financial performance. Phil?

Thank you, Mike and good morning, everyone. Earlier this morning, we released our third-quarter results and Form 10-Q for the period ended September 25, 2016. Consolidated revenues for the third quarter totaled $19.6 million representing a $0.6 million or 3.1% increase from the $19.0 million for the third quarter of 2015. Revenues from our battery and energy products segment were $14.9 million, a decrease of $1.4 million or 8.8% from last year. For the third quarter, a $2.5 million revenue contribution from Accutronics and a 6% increase in shipments to medical customers were offset by lower sales to a large U.S. prime defense supplier, the 2015 spike in 9-Volt batteries sales to large global smoke detector OEMs in response to legislation passed in the European Union country and lower shipments of batteries to service the metering and toll pass industries in China. Commercial revenues for the third quarter of 2016 increased 14.1% over the prior year, reflecting an increase in sales to medical customers, including the contribution from Accutronics. Government and defense sales decreased 35.1% from the 2015 period due to lower battery and charger sales to a large U.S. defense supplier and lower sales of primary batteries to the US Department of Defense, partially offset by a large charger shipments to a non-US defense contractor. As a result, battery and energy product sales were split 67-33 between commercial and government and defense compared to 53-47 for the 2015 period. Communications Systems sales of $4.7 million increased by $2.0 million or 76.6% from the prior year. This increase is attributable to shipments of Viper system. Our consolidated gross profit was $6.0 million compared to $5.9 million for the 2015 period, an increase of 1.6%. As a percentage of total revenues, consolidated gross margin was 30.5% versus 31.0% for last year's…

Thanks Phil. For 2016, our focus on revenue growth has remained on three elements, expanding our market and sales reach, new product development and pursuing acquisitions. In the battery and energy products business, for Q3 2016, we continue to make progress in diversifying beyond our core U.S. government defense business by growing in the global commercial and international government defense markets. In Q3 2016, total commercial revenue was up 14% and represented 67% of total B&E sales as compared to 53% in Q3 2015. This net increase in the commercial revenue was driven by the medical market for which the core medical business continue to show momentum by growing 6% year-over-year and up 22% sequentially from Q2. Since 2011, the year we initially launched our commercial diversification strategy, core medical business has grown at a compounded annual growth rate of 40%. Combining core medical revenue and Accutronics, our total medical market revenues now represent approximately 36% of the total B&E quarterly revenues. Progress also continues on Accutronics revenue growth initiatives. Starting with its medical business, they recently won a development contract from an existing customer for a high-end digital x-ray application with shipments expected to begin Q3 2017 and be potentially valued up to $1.5 million. Also completed recently was the designing qualification of a new commercially off the shelf battery product, offering high energy density for high power discharge applications and for use by medical OEMs, desiring reduce time-to-market versus a custom solution. We're also starting to see some new direct commercial 9-Volt business transactions into Europe as well as additional EU Government defense penetration. Most notable however, is Accutronics contribution to the development of a major global medical devices manufacture relationship, that started with an initial ongoing customer contact in Europe who has grown upstream into a technology…

[Operator Instructions] Our first question comes from Gary Siperstein of Eliot Rose Wealth Management. Q - Gary Siperstein Good morning, guys. Nice quarter. Congratulations.

Thank you, Gary.

Mike, can you give us a little more color on a couple things. First, you mentioned a follow-on order on the Viper of $2.2 million with some shipments in Q4. So I am assuming that's the same customer or is that a different customer?

That's the same customer to the same channel.

Okay. And you mentioned that you're hopeful that that could continue the $2.2 million that could be other quarterly awards, can you just give me a little more color on that? Are they basically creating some inventory or do they have other shipments against their prime contract which is allowing them to buy more than the originally $0.2 million.

All the units that were awarded under existing contracts are included in those two tranches we talked about. Initial over 1,000 unit award that we completed shipping in Q3 and then the subsequent award that is starting to ship in Q4. What's driving the overall demand is the feeling of the Rifleman Radio and what's unknown at this point as to what extent do they continue to feel that Rifleman Radio in the marketplace. What we do know from independent third-party information is that the end-users are receiving the product well and to the extent that there was an initial tranche of awards shipped and then there was a follow-on award, I think that was a very positive indicator. And then depending on how many units of the initial Rifleman Radio are actually fielded, they would go to be an ongoing demand for additional life. So we just hope this is the beginning of a long-term type of the commitment and fielding of units, but looking to the budgets we're trying to gain as much information as we can about what could potentially be budgeted and we see some interest, but we don't know how those final budgets will fall out. So that's what I mean of those comments is that there could be an ongoing tail to that initial Viper award.

And do you expect full $2.2 million to ship between Q4 and Q1?

Yes.

Okay. And in terms of, so that you said you won that $2.2 million early in Q4, but you didn't announce that at the news release. Did you feel that $2.2 million wasn't material.

I think Gary it's in case of some of our other business as well. Whenever there is something new and strategic of a large size, we're trying to announce those kinds of things, but follow-on of orders like this which are smaller than the initial award, I didn't feel overly compelled to announce this. I knew I would mention it during this call.

Okay. That's fair enough. You also on Accutronics I guess I wasn't expecting it to be accretive and so Q4 you did a quarter earlier than I thought, was that due to the cost reductions you made there or are they seeing some improvement in revenue?

I think the revenue or ad expectations and we made some adjustments in our cost structure both here and there and that was completely consistent with our original integration plan. We didn't disclose when we expected to crossover profitability, but we are very pleased that it occurred in Q3.

And do you expect to at least continue with it being accretive going forward A; and B, based on the their RSPs and backlog, do you think they could get to $0.02 a quarter sometime next year in terms of accretion?

We would certainly hope so.

Okay, and you mentioned I guess on the company's domestic medical orders, I think you mentioned one is if I understood you correctly, was as high as $4.8 million on one particular contract.

Yes that was for an ongoing blanket for an existing ongoing customer and that's why it wasn't mentioned as a specific press release.

Okay. You anticipated my question. All right. I am trying to get a sense of materiality you announced the $8.2 million you didn't announce the $2.2 million and then I heard a $4.8 million, so that you didn't announce that not a question of materiality but because it was ongoing.

That's correct.

Okay. And is there a timetable on that $4.8 million, can that ship within the next 12 months?

Yes.

And can you just tell me what that was, what was the particular use for that contract what's the product?

I'm trying to maintain the confidentiality of the customer, but it's a rechargeable battery pack.

Okay and it's a medical OEM.

That's correct.

And can you tell us, so you can't without mentioning customer name you can tell us what the battery pack is for?

It's for a breeding type device generically.

Okay. And so it's not a new customer, it's someone who has previously done business with.

That's correct.

And had we done business with them before on a breeding type of device or is this a new application.

We have ongoing relationships with multiple globally OEMs for breathing type devices and this is one of those.

Okay. Super and in terms of the inventory reduction year-over-year, so that you highlighted is that on a gross basis or is that apples and apples pulling out the inventory from Accutronics?

Well I'll be perfectly specific on that, that is when -- it's apples and apples. If you look at the inventory number that we reported, that all you have to do is take the let's call it $2 million of the Accutronics inventory off of that and you'll see that overall, the core inventory excluding Accutronics is down and that certainly is in line with our goal because we consider inventory reduction the cheapest form of financing available to us.

Okay. And hasn’t that been one of the larger decreases in inventory over the past 12 months and if that's the case with revenues on the flattish side, how do you do that and why did that happen?

Well that's just part of our overall this is not only in generating cash and I guess the important message is that we're not sitting idly around in any manner especially when it comes to inventory and we have a full-court press on to reduce inventory to build up the cash position, to be a very valuable resource as we continue to pursue acquisitions and that is a very, very conscious effort throughout the company on a worldwide basis. So that's the advice from my end.

Okay. And can we expect that maybe not at that level, but can we expect that to continue on the inventory reduction or was that just a blip for this quarter?

I certainly expect that but I also have to take into account of fulfilling some orders in buying larger quantities of product to fulfill larger orders to get the economies of scale on the buy side. So you may see some of that going on and I could certainly call that out in the future, but my expectation is that we're going to continue to reduce the inventory -- the core inventory and get the benefits from that.

Okay. Super and so EBITDA was excellent for the trailing 12, but I think you called out cash flow in the quarter positive of over $4 million that was extraordinary and I guess after having spent the $11 million on Accutronics last year and buy back, the fact that you get cash back up over $6 million is very positive. So I am not expecting you to annualize that cash flow going forward but do you still think you'll be able to continue to elevate it quarter by quarter not greater than the $4 million but a strong elevated level.

Well that certainly is my own expectation and certainly my own plan because when all is said and done, the first thing I look at is cash, every morning when I come in and our evening when I leave.

Okay. And Mike back to Viper, so that's great that we're getting follow-on from the original customer, but you've talked in prior calls and on the PowerPoint about a $300 million communications opportunity and I think the original Viper $8.2 million was awarded August 2015. So it's then 15 months and we haven't had any new orders from different customers. Can you tell us what's going on with that pipeline?

It's still very active Gary. We're also looking for the next one as well as we look into 2017, we get updated on a regular basis, as a matter of fact weekly on the large transactions, the overall opportunity basket still remains and we make selective decisions as to which ones we continue to support with new product development versus other ones that may seem a little more flaky that we can't support. But generally speaking, that's a core part of our overall strategy for communications systems is to pursue not only core ongoing business activity in the products that we develop over the last couple years, but to put a top hat on if you will with the next program. So it's in the middle of everybody's focus. If there is something that comes up that's significant, we would certainly make a announcement about it.

Okay. And then you mentioned you called out putting someone on your executive team, I guess with an additional or more focused on the M&A. Can you just give us a little more color on that? You didn't have him before and you got Accutronics. Is it that there are more opportunities or you just moving that up in terms of priority. So you're giving someone more responsibility with that, can you just give us a little more color on why?

Absolutely as a small company the good thing about doing acquisitions is that you have all the principles involved in due diligence such that when you look at what you have and you make a business case to do the deal, everybody knows what they need to do to make it successful and I think it demonstrates that in Accutronics. When it comes across finding these acquisitions, that takes a little bit of the skill as well and as a matter of fact, we did some management changes here where the person that was involved in initially locating Accutronics and making those initial contacts and recognizing it as a solid acquisition candidate, we decided to give him that as his full-time job. And he happens to be a battery expert, has very good global relationships and ongoing networks in the community and so we're very excited about to have someone of his stature dedicated to an activity.

Super, Okay, guys thanks very much.

Okay. Thank you, Gary.

[Operator Instructions] And we'll go next to Sam Bergman of Bayberry Asset Management.

Good morning, gentlemen. Nice quarter.

Thank you, Sam.

Couple questions. Can you tell me beginning of the year versus now what has been if any increase in R&D employees or R&D dollars?

Our business model is talked about in previous calls would say that no matter what our revenue conditions are we want to spend at least 5% to sales on new product development technology R&D etcetera. I can tell you quantitatively that in both of our businesses we're spending more than that percent to sales amount. In terms of additional resources, the biggest addition of additional resources that joined our team in 2016 was in the acquisition of Accutronics. That's what a delight about bringing on another company like this as we get the instant benefit of all that experience and technical capabilities. So in my prepared remarks I talk about design capability and assembly capability rechargeable battery packs and I alluded to the fact that we're looking at doing that more in U.K. That's obviously specifically related to the acquisition as well as trying to be more using of our resources that we have in China. So net, net, there is an ad of technical resources net, net, for spending a higher than targeted amount in terms of new product development as a percent of sales and at the same time, we're trying not to overspend.

I am not saying you're not trying to overspend but my concern is the commercial medical market is so vast and you have been talking about that market for the last several years and it has not been that much of an increase other than the Accutronics acquisition in terms of revenue growth. So am wondering if it does make more sense to add some people in R&D in the United States precisely Accutronics division to shore up the R&D department, so these products come out quicker, the opportunities and much, much larger going forward.

Yeah I think that's a great point and what we've done is whereas we continually bring in new talent there is always attrition, there is always people deciding to different things. We haven't had any major changes there, but what we have done and I personally monitored it was that at one time we'll spent about 100% of our engineering resources on U.S. government defense business and nothing on commercial or new product development and other kinds of things. We've completely turned that on its head such that the majority of our existing resources our focus on medical devices and other commercial type activities. So I think you're correct that perhaps in an absolute sense or hasn’t been a lot of ads in that area, but certainly how we've allocated their time has changed dramatically, but we're continuing to look for new talent and we find superstars out there, our engineering team and our new product development team knows that any superstar talent they come across they should always be recruiting.

Yes, can you give us a number of new commercial wins in the medical space for the quarter? Is that something you give us a metric or not?

I know that there is several, but it would just be a wild guess and it would inappropriate to try to just spot a number.

Can you give us the highest revenue amount in terms of what's the lowest?

The lowest could be just insignificant. I tried in my comments that the ones that I've mentioned between $300,000 and $4.8 million with the $4.8 million being the largest that was an ongoing existing customer relationship and the smaller ones are around $300,000 range.

So any other new relationships that precisely the $4.8 million that a new relationships over $1 million.

Absolutely and that's what I mentioned in the anecdote about one of the things that Accutronics is bringing is developing a major global customer in the United States that we got in through sort of a side door relationships we had over in Europe. So yes indeed.

Along with that relationship, Mike to development of something concrete.

It depends after using existing products or if it's a brand new development. If it's an existing product, it usually takes about 12 months or if it's a brand-new product, it could be a couple years. I should also mention Sam that we talked a little bit in the past about my personal involvement in visiting customers. We did 13 additional customer base in the third quarter and I would say a disproportionate number of those were with medical customers I had never met before at their headquarters, at least three.

That's a big plus, that's very good. And the only other question in terms of the M&A, is there anything on the table right now that you're looking at or is it -- or you just hide this new advisor from within the company and he's beginning to look or should we expect something in 2017.

I think we would be certainly disappointed if we didn't accomplish something in 2017. I think we have a pretty good and list of different targets. Lots of times you end up expressing interest in because everybody is spamming for acquisitions right now. You have to develop a relationship with a potential acquisition to create the understanding of it being a soft landing, usually for their legacy and life's work. It takes time to develop those relationships. So there's multiple companies on that list, there is multiple dialogues underway, impossible to tell when someone is going to say it's time for me to divest, but certainly we're looking to try to do something in calendar years 2017.

Okay. Thank you very much.

Welcome Sam. Thank you for the questions.

[Operator Instructions] And at this time, we have no further questions in queue. So I would like to turn the call back over to management for any additional or closing remarks.

Great. Thank you, everybody for joining us again for our third-quarter 2016 earnings call. Certainly look forward to sharing with our quarterly progress on each quarter's conference call in the future. I would also like to mention that we launched an update to our website last week. So please check it out. Everybody have a nice day. Thank you.

And that does conclude today's conference ladies and gentlemen. We appreciate everyone's participation today.