Good day, and welcome to this Ultralife Corporation Second Quarter 2017 Earnings Release Conference Call. At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. John Heilshorn. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us this morning for the Ultralife Corporation's earnings conference call for the second quarter of fiscal 2017. 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, www.ultralifecorp.com, where you'll 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 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 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 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 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 Q2 2017 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 our progress against our 2017 revenue initiatives, then open it up for questions. For Q2 of 2017, we were pleased to deliver another solid quarter of year-over-year operating profit and earnings per share growth, generating an operating profit of $1.3 million for an operating margin of 6.6%, up 410 basis points year-over-year. Earnings per share was $0.07, more than two times last year's Q2 reported $0.03. Second quarter 2017 revenue was $19.9 million, roughly 2% below the prior year, which included $3 million of shipments under last year's VIPER Contract with our communications systems business. That said, when excluding the impact of this prior year large contract, total company revenues were up 15% with total battery and energy products business revenues up 7% and the base communication systems business revenues up 92%. This is noteworthy as the communications systems base business sales increase drove a very favorable mix and gross margin improvement in the communications systems business, such that when combined with the battery and energy products topline revenue growth and ongoing disciplined cost reductions in both businesses, led to a more than doubling of the year-over-year operating earnings reported for the second quarter 2017. In a few minutes, I'll talk more about our revenue initiatives for 2017 but first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the second quarter 2017 financial performance. Phil?

Thank you, Mike and good morning, everyone. Earlier this morning, we released our second quarter results for the period ended July 2, 2017. We also filed our Form 10-Q with the SEC this morning and have updated our investor presentation in the Ultralife website. I would like to personally thank all of those that were responsible. For the second quarter, consolidated revenues totaled $19.9 million, representing a $0.4 million or 2.1% decrease from the $20.4 million for the second quarter of 2016. Revenues from our Battery and Energy product segment were $16.9 million, an increase of $1.1 million or 7.1% from last year. The year-over-year increase was attributable to higher commercial and government and defense sales. Commercial revenues for the first quarter of 2017 grew 11% driven by a 10% increase in shipments to medical customers, supplemented by a 12% increase across our expanding commercial customer base. Government and Defense sales increased 1% over the 2016 period, due primarily to higher shipments to our international defense customers. After four quarters of year-over-year sales declines in 2016 from this sector, this year, we have posted two consecutive quarters of growth in Government and Defense Sales. As a result, the Battery and Energy product sales split between commercial, and government, and defense was 64-36 compared to 62-38 for the 2016 period. Sales to our medical customers comprised 32% of total revenues for the segment, representing one-half of our commercial sales. The geographic distribution of our Battery and Energy Product Sales was more diverse with an international to domestic split of 57-43 compared to 51-49 for the 2016 second quarter. Communication System Sales of $3.1 million decreased by $1.5 million or 33.7% from the prior year when we had $3.0 million of VIPER Unit shipments. Offsetting the decline, the segment's core products, including…

Thanks, Phil. For 2017, to continue the broadening of our revenue growth opportunities, our focus remains 3 proven elements -- expanding our market and sales reach, new product development, and acquisitions. Regarding market and sales reach expansion in the Battery & Energy Products business, the approach has been to diversify more into the global commercial and international government defense markets to lessen our historical concentration in the U.S. government and defense market. In the second quarter of 2017, total B&E Commercial revenue was up 11% year-over-year, while international Battery and Energy Products government defense sales were over three times the prior year's revenue level. Looking deeper into commercial revenue, which represents 64% of total B&E Q2 revenue, our overall medical market sales were up 10%, of shipments representing about $4.4 million or 80% of our total medical sales in the second quarter, included battery and charger products serving applications such as breathing devices, infusion pumps, automated external defibrillators, and medical carts. We also received a purchase order from an existing U.S. customer valued close to $1 million for AED batteries to ship by year-end, and secured exclusivity as the ongoing battery supplier for a significant European medical OEM through 2022 and valued at approximately $4.8 million per year. We continue to be engaged in pursuing several European growth initiatives involving new projects, cross-selling, and extending distribution. Present new business development projects touch a diverse set of applications, such as pharmaceutical delivery systems and other new medical devices, remotely located industrial valves, and in-flight entertainment. Cross-selling activities included recently providing samples of an Accutronics Smart Battery to a longtime U.S. defense customer, and gaining a new entry point with the global procurement arm of a large medical OEM in the USA due to an existing relationship with Accutronics in Europe. We…

Thank you. [Operator instructions] We'll take our first question from Sam Bergman with Bayberry Asset Management.

Good morning, Mike and Phil. Great quarter. How are you?

Good. Thank you.

Thank you.

Can you elaborate a little bit more on the $4.5 million facility that you're putting up? When is that going to be up and running and what kind of business are you seeing for the Internet of Things that prompted you to do that?

Great question. When we look at the overall Internet of Things market, there's a ton of information out there and it's hard to pick one that's the best predictor of the future. But there's anywhere in literally the tens of billions of total number of units of all different kinds that are serving this sort of emerging space. And we sort of move it down to what we think is the battery component of it. But in addition to the overall size of the market, it's got a really fast growth rate. We're seeing anywhere from 15% to 20% in most of the different outside expert opinions. The 3-volt battery system that we're looking at, we tried to get a feel for what the size of that overall market was, and being reasonably conservative but logical about it, we can see that 3-volt battery portion to be anywhere from about 50 to 100 million units per year. You try to put that into context. If you think about it, there's about 125 million households in the United States and as each household gets more engaged in wireless devices and Internet of Things, you start to get an order of magnitude of what -- if each household just had one or I know in our household we probably have a dozen or so -- what the overall size of the market could be. And then we took it a step further and said, okay, if we think given our presence in, say, our 9-volt and other battery areas, if we could somehow capture between 5% and 10%, let's call it 7.5% of the market, it's anywhere between four million and eight million units a year. And we look at that potential capacity need. We looked at the desire to do that through a highly automated process to take advantage of the repeatability and the volume and the cost position we could have, and we looked at it from the standpoint depending on what an average selling price would be of the product, of maybe driving between $4 million, $8 million, $10 million a year of incremental revenue on top of the Battery and Energy products business. And for a business right now that is roughly around $65 million or so, as of last year, that would represent anywhere from 6% to 10% additional topline organic growth. So anytime we could get another 6%, 10%, 12% on top of our existing growth rates, and particularly in a market segment, which is growing at double-digits as a minimum, it seemed to be very attractive. And from the standpoint of making the investment, this is an investment that we're putting inside our existing facility in Newark, New York, which just yields further dividends of operating leverage of overall manufacturing capabilities. So that was sort of the basis of the overall investment.

A couple accounts that you mentioned with batteries in the medical area going into defibrillators and other areas, can you talk about, are they with leading companies? Are they with small companies? Number one, two in the marketplace or not?

They're with major AD manufacturers. They're names that you would know, and see up on walls in airports and other places you may visit.

Any color on business with Harris going into the second half of the year?

We don't comment specifically on any particular customer activity, but in the overall area of tactical communications, we're still actively involved with all the radio OEMs. Sometimes we provide amplifiers. Sometimes we provide battery packs. But in any event, those relationships are very solid, very consistent and it's just that in their end market, they're usually the army or other special forces groups tends to be lumpy from time to time. So typically, when we see a high level of revenue coming in, that's through a radio program that's currently in play. But what we don't see is all the development activity that's happening behind the scenes for the next generation of radios. And as we know, radios continue to evolve. I would just characterize our relationship involvement with the global radio OEMs to be very solid and very consistent.

RFPs for communication systems, how are they right now and how would you compare them to last year?

I think the RFP activity for sure is increasing and there's some notable RFPs that we're following and the industry is following to come out from the Army throughout this year. I also think the team there is really fine-tuned well, how they apply their precious financial and human resources so that we're chasing the pertinent number of new projects at any given one time so we can really help our customers achieve a competitive advantage versus just working on a whole bunch of different projects, not really sure which one is going to hit and really not helping our customers too much and spending a whole bunch of money along the way. I think the team has really matured in that regard and we're very excited about their prospects for large programs going forward.

Okay. Thank you very much.

Thank you.

We'll take our next question from Jason Siperstein with Eliot Rose Wealth Management.

Hi, this is Gary for Jason. Good morning, Mike and Phil and congratulations on a very nice quarter.

Thanks Gary.

Just following up on your comments, Mike, on this investment in IoT. So, it's not adding to the particular facility you had. This is within your current structure and you expect the $4.3 million to be spent over 18 months to the end of 2018; is that how you're gauging it?

Yes, definitely inside the facility and up to $4.3 million with that project being completed by the end of next year.

Okay, any sense on what that can do for efficiency in margins as you spend the money? I assume you have some 3-volt products now and there's some sales going on now? And as you evolve that product line and get -- so I'm assuming they will be between now and the end of 2018 some additional revenues. So, will that have better margins because of the extra efficiency in the facility?

Conceptually, for sure. We're not planning on making massive increases of costs in our facility. We're just getting much better leverage on things like our variable overhead component. So logically speaking, we definitely assume that there would be some increased leverage and opportunity for gross margin improvement by putting it here in the facility in Newark.

Okay. And you mentioned a production line on 3-volts. How many specific individual products do you look for creating?

I'm not going to get specific in the number of products. We're trying to maintain some competitive element of surprise, but at the same time, what we learned as we looked at the space and we had both an internal view and we had some external experts look at things, is that it's just not one size fits all. There's some applications that may work wonderfully and spend most of their life in a room temperature environment. There's other applications which really have really high temperatures and there's some other applications that have very low temperatures. So, when we refer to product line, we look at the opportunity to try to explore opportunities in all those segments.

Okay, super. On the medical side, you called out a particular exclusive arrangement with a European OEM and you mentioned $4.8 million in business annually through 2022. Can you give us any color? Is that something that's going to ramp from this year forward or you're absolutely looking for $4.8 million this calendar year?

That's something that we do on a regular basis. What's the pertinent point on that is, is that like most customers over time, they tend to call their supplier base, and so they'll be working with somebody for a while and everybody tries to make the best value proposition of products and have the best collaborative relationship. But just the economics of the world require that people have to continually look at their suppliers and evaluate do we continue, or do we expand the number of suppliers, or reduce the number of suppliers. In the medical space, we do see in many cases where our end customers are taking a look at that supplier base and deciding whether or not they expand the number of suppliers or reduce. In many cases, they're reducing. And what's significant about this award was this was an existing customer, very strong customer of ours who is now sort of re-upped its commitment to us and our commitment to them, which is even more important, for the ongoing foreseeable future.

So, this could actually result in additional products and additional from them that need our batteries besides --

Gary, it's primarily their core business, what they've been doing from this point forward but to me it's more giving us better visibility to a longer-term future. At any customer, this customer, as well as any other customer, one of the reasons we decide to have really strong collaborative relationships with those customers, those OEMs is because there's an opportunity to grow our wallet share. And by developing those relationships, we know where they're headed on a longer-term basis. So, in every single case, and as much as our customers are expecting to grow, there's an opportunity for us to grow not only as they grow their business by improving wallet share.

And then Mike, you also called out some work beginning on that significant IDIQ you folks won in the last 12 months, I think earlier this year. Do you expect any revenues to hit this year or is it all going to start next year?

Most of that is going to start next year, but in the meantime, Gary, we still continue to get revenue from the legacy products. So that IDIQ was sort of the next phase of that type of product line. It's a little bit different product but in the meantime, we continue to supply our legacy products. So, we're excited about that project. It was $21.4 million in the max case. We're starting to see some initial delivery orders for the early testing and validation. We have some first article testing that needs to be done. So, we have delivery orders for those kinds of things that will happen throughout next year but in the meantime, we still continue to get orders and delivery orders on the product. So, I would say it's fairly consistent this year and into next year.

And lastly with cash being up 50% year-over-year, plus your new expanded line of credit, can you tell us what the thinking is in regard to M&A and perhaps because of your results being so robust and the balance sheet improvement, and the increase in the line, are you seeing or targeting with your advisors larger accretive acquisitions? And are they exclusively in the medical space or are you looking at other industries as well?

There's several questions there. I would say that for sure from a capital deployment perspective, our sort of ranking and hierarchy of how we deployed capital, we start with the organic opportunities, new product development, market, sales reach expansion. Then we move to acquisitions and then if there's still capital to be deployed in terms of returning, our success story to shareholders, we've done things like stock buybacks. What we've added this year is the strategic capital investment because we saw an opportunity to exploit some organic revenue growth opportunities. Relative to specific medical versus non-medical M&A activity, of course, we would be very interested in something medical but it's certainly not limited to medical. Relative to sizes, we love the Accutronics acquisition that we did. It's still performing exceeding expectations. We'd like to do multiple Accutronics or even a smaller number of larger acquisitions. So, I think we have a lot of flexibility. I think we have the capital structure and access to capital to do bigger M&A activity and we're using both internal and external resources to help us with targeting. And it's just a very lengthy, tedious process to go through developing those relationships and identifying targets, and deciding whether or not it makes sense to go to the next step for the formal acquisition. But I hope that that answers some of your -- several questions that you asked.

It did Mike, thank you. So, in terms of what you're seeing versus last year, has it -- I guess in terms of the amount of packages you're seeing for those companies that for sale, is that up year-over-year from what you're looking at before?

Our activity is definitely up but it's been pretty active the whole time. I know it's sort of frustrating for someone on the outside because we don't talk about things unless we actually close something. But I can ensure you the activity level internally is at a feverish pace. We're pretty selective. We're expanding our view of different opportunities. We're not only looking about acquisitions in our core space and adjacent space, but we're also looking at some vertical integration plays where the combination of our two companies -- the technology of the batteries and the performance level of batteries really make that integrated device even more profitable and more successful in the marketplace. So, I would say we expanded our range of views to include vertical integration activities as well as what we've been looking at historically, but I know it's frustrating that we haven't been able to say more specifics about particular transactions and the timing when they may or may not occur.

Understood. I think that's all I got. So, thank you and congratulations again on a great quarter.

Thank you.

[Operator instructions] And there are no further questions at this time.

Okay. Well, thank you once again everyone for joining us for the Second Quarter 2017 Earnings Call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. We'd also like to mention that we have updated through the first half trailing 12 months, the financial information, as well as some other slides in our Investor Presentation that's on the website. So please check it out. Thank you everybody and have a great day.

And that concludes today's call. Thank you for your participation. You may now disconnect.