Good day, and welcome to the Ultralife Corporation Fourth Quarter 2017 Earnings Release Conference Call. At this time, for opening remarks and introductions, I'd like to turn the call over to Jody Burfening. Please go ahead.

Thank you, Dale, and good morning everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the fourth 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 and if anyone has not yet received a copy, I invite you to visit the company's Web site at 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 contains 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 the 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 that 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. Today I'll start by making some overall comments about our Q4 and total year 2017 operating performance. Then I'll turn the call over to Phil, who would take you to the detailed financial results. After Phil is finished, I'll provide an update on the progress against our 2017 revenue initiatives, talk about some focus areas for 2018; then open it up for questions. For Q4 of 2017, we were delighted to reach our highest quarterly revenue and operating profit level in five years, delivering a solid quarter of year-over-year revenue and operating profit growth. By generating an operating profit of $2.1 million on revenue of $22.5 million, our operating margin was 9%; the highest quarterly earnings quality reported in seven years. Regarding earnings per share, EPS for the fourth quarter of 2017 was $0.24, and included $0.12 from our operating performance as compared to $0.11 per share reported for the fourth quarter of 2016. Plus, an additional $0.12 related to the Tax Cuts and Jobs Act. For the total year of 2017, we were pleased to deliver total year top-line revenue growth and bottom line profitability improvements for the third consecutive year. Total year 2017 revenue was up 4% year-over-year, while operating profit was up 72% year-over-year. EPS came in at $0.49, including $0.12 in Tax Cuts and Jobs Act benefit. On an apples-to-apples basis, excluding the new tax law, EPS was $0.37, up 61% year-over-year. Throughout 2017, we aggressively pursued exciting new revenue contributions from market and sales reach expansion, new product development, and customer partnership, while preparing to launch new products to serve the emerging IoT demand. In a few minutes, I'll give you further information about our revenue initiatives, but first, I'd like to ask Ultralife's CFO Phil Fain to take you through additional details of our fourth quarter and full-year 2017 financial performance. Phil?

Thank you, Mike, and good morning everyone. Earlier this morning, we released our fourth quarter and total year results for the year ended December 31, 2017. It gives me great pleasure to share with you that we also filed our Forms 10-K and 8-K with the SEC this morning, and have updated our Investor Presentation in the Ultralife Web site. For the fourth quarter, consolidated revenues totaled $22.5 million, representing a $0.9 million or 4.1% increase from the $21.6 million reported for the fourth quarter of 2016. Revenues from our Battery and Energy products segment were $16.8 million, a decrease of $0.9 million or 5.3% from last year, which gains in Government and Defense offset by lower commercial sales. Timing differences in medical sales caused commercial revenues to come in below last year by 18.4%. Sales to our medical customers represented 47% of our commercial sales, or 27% of total revenues for the segment. Government and Defense sales increased 25.3% over the 2016 period due to higher demand from our U.S. and international defense customers, which grew 8.2% and 88% respectively over 2016. After four quarters of year-over-year sales declines from this sector in 2016, this year we have posted four consecutive quarters of growth in government and defense sales. As a result, the Battery & Energy Product sales split between commercial and government and defense was 58-42 compared to 68-32 for the 2016 period. The geographic distribution of our Battery & Energy Product sales was an international to domestic split of 55-45 compared to 59-41 for the 2016 fourth quarter. Revenues from our communication system segment were 5.7 million, an increase of 1.7 million or 41.9% over the last year. The year-over-year increase reflects higher shipments of our core products such as our 20 watt amplifiers and universal vehicle…

Thanks, Phil. As we look back at 2017 and think about the year ahead, what stands out of the many new revenue contributions we created that positioned Ultralife for future revenue growth. The mechanics of our business model working, producing profitable growth, and improving quality of earnings. To more fully realize the operating leverage potential of our business model in 2018, we are keenly focused on advancing new revenue initiatives carried over from 2017 and on increasing our revenue opportunity set through market and sales reach expansion and new product development. The strategy for market and sales reach expansion in the Battery & Energy Product business has been diversified more into the global commercial markets and international government defense markets. This serves to mitigate our historical dependence on the U.S. government defense market, particularly as up until recently U.S. government defense market had been on downward trend. Looking more deeply into our global commercial revenue, the largest segment is medical, which represented 27% of the total beanie revenue in the fourth quarter. Key fourth quarter shipments for medical products included battery and charging solutions for breathing devices, infusion pumps, medical cards, automated external defibrillators, and digital X-ray. For the total year and isolating the impact of one customer associated with some lumpiness in the fourth quarter, in 2017 our overall medical revenue increased 6%. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown organically at a compound annual growth rate of 25% and including the acquisition of Accutronics in January of 2016, the total compounded annual growth rate is closer to 45%. The fundamentals for sales growth from medical devices with lithium batteries continue to be attractive. First of all, medical device for the growing aging population who desire more portability and convenience are…

Thank you. [Operator Instructions] Our first question is from Sam Bergman from Bayberry Asset Management. Please go ahead.

I have. Can you discuss the first couple of products that you have developed in the IoT area, and what markets they serve?

I'm sorry, Sam, I don't know if the beginning of your question got cut off or not, but I think you asked about --

Okay, so for the IoT market that you're adding -- or expanding one of your facilities you have several products that are coming out I guess in the first half of 2018. Can you talk to us about those products and what markets they serve?

Sure. Primarily we're looking at the cell level at this immediate time. They consist both of our ThinCell products which we've been talking about some time, but also some individual 3-volt cylindrical cells that tend to be the dominant cell used for the emerging space in wireless devices in IoT. And sort of the logic behind that was is that we know that there is a certain volume of units that are going to be produced or being consumed over the year as household security systems, and other types of devices become more prevalent. And just looking at sort of the mathematics of the number of units that are available, we estimate those could be anywhere between 50 million to 100 million units per year thinking about 125 million households in U.S. that sort of makes sense. And we're looking to see if we can try to capture about 5% to 10% over the next couple of years. And the cells that we will use to support that are individual 3-volt cells which we benchmarked the existing competition for and are coming out of the south [ph] that we think is going to offer a very competitive but better performing cells available in the marketplace. We will continue to produce other devices that serve the IoT market, but the major thrust at this point is in pushing this new 3-volt cell. And that's being done both in United States to serve the U.S. and North American market being really close to where the demand is. And then we also have a parallel activity for a 3-volt product being produced in China which would be really close connected to a number of the OEMs that are assembling devices inside China.

So do have ongoing collaborations with other companies right now in that space?

Yes, as a matter of fact, just as a rough order of magnitude, there's probably over 20 companies that we currently are working with in various stages of qualifying our products.

Okay. And Communication Systems, let's talk about that for a minute. And it seems there's been a little pickup there, you just got awarded a contract in December. I noticed the backlog is I guess $8.9 million on the 10-K. Can you give us a backlog on the whole company at this point or not?

Yes, we certainly can, Sam. And it's also just as simple of some mathematics from the 10-K. But what you'll see is that the backlog that we have entering 2018 is $39.1 million. That compares to the backlog that we entered 2017 with, it was $26.2 million. So we're talking about a $13 million increase, 49% as Mike had mentioned a little bit earlier.

Okay. And also in regard to the batteries that you're dealing with medical companies, have you been able to discuss any names in public or do you have the ability to bring out those names to us?

Sam, we've not really done that really across all of our product lines. We try to respect the privacy and the confidential nature of those relationships.

And is it going to remain that way?

Yes, I mean, really because we play across multiple competitors. And one thing that we value dearly is a close, intimate collaborative relationship with our customers. And as much as that we're trying to be friends with a lot of people that may be competing themselves, we're very careful not to disclose those name and jeopardize that relationship.

Okay. Thank you very much.

Thank you, Sam.

Thank you. Our next question is from Gary Siperstein from Eliot Rose Wealth Management. Please go ahead.

Good morning, guys. Congratulations on a strong Q4 and an extraordinary year.

Thank you.

Thank you, Gary.

Mike, I just want to start with you called out the success of medical over the last several years both pre Accutronics and post. And yet last year or the fourth quarter, I didn't hear clearly, was only up 6%. And I know you aspire to upper single digits going forward. So I think you had called out one particular customer which had some delays, lumpiness in Q4. Can you give us a little more color about that?

Yes. In Q4 of 2016, we had a -- there is a normal replacement cycle for some of our products in the field. And working in collaboration with one of our key customers, they decided to accelerate a replacement cycle and to incorporate some improvements in the product. And then we just sort of view that as sort of an extraordinary event which really provided a surge of volume in Q4 of 2016, which did not recur again in 2017. It was sort of a onetime event as we replaced that installed base.

Okay. So if you X that out what would it -- instead of being 6%, what would it be, the growth?

It was 6% without that growth. And Accutronics is up around 5% or so, the overall rest of business is up around 6% excluding that onetime surge.

Okay. And so if you do achieve in 2018 upper single digits, so it goes from 6% to, let's say, 8% or 9% for the year, am I correct in assuming the medical margins are a little better than our government defense margins?

Generally they're a little bit better. They involve, because of the continued development in multigenerational product planning you end up having a little more value contribution for a lower number of total units. And so, yes, I'd say generally margins are a little bit better than some of the legacy government defense products.

Okay. So I guess what I'm trying to get at is, so for 2018, we wont be anniversarying that particular onetime surge from that customer. So if we get to the upper single digits in growth with slightly better margins that'll be sort of added then to 2018 earnings going forward. That fair?

Yes, and we fell that is a very positive opportunity. And also, there's long cycle times for the development of products, and so we're excited about some of the new maturation of products that we've been working over the last couple of years driving some revenue in 2018 and 2019.

Great, okay. And then, Mike, you had also called out for the IoT -- You had called out drones, UAV, and robotics for, I guess, IoT/3-volt. Can you give a little more color on those kinds of opportunities?

The reference to the robotics is really sort of fascinating because that crosses over a couple of different areas. I mean there is -- we're working on with some of our sort of [indiscernible] replacement products some of our Smart U1 batteries, we're looking at applications for robotic and things like material handling and warehousing. It's also being utilized in medical carts. And then we're just starting to get involved in some of the surgical instrumentation and some battery supply strip for those applications. So you have robotics that is probably the most exciting has been some of the things in medical, but it also is involved in energy storage and material handling applications. Internet of Things -- don't know if I specifically said it was associated with Internet of Things, it tends to be more in medical and material handling.

Okay. And robotics is a more significant opportunity and more timely than drones and UAV?

Yes, I mean, we sort of have them on our screen. We keep watching UAVs very, very closely. We know that the pain point for some of the drones is the life of the battery. We're just trying to determine if the overall size of the market and our value contribution is there to make a strong thrust in it. But there are some military applications, and we're just sort of trying to keep everything on our screen to make sure there's an opportunity for us to continue or grow revenue, but not be so scattered that we don't get anything in particular done. But right now the robotics seems to be a pretty exciting area for us.

Okay, super. And moving on to IoT, so is that mostly all 3-volt, a. And then b, is it mostly asset tracking or is it mostly meters?

It's largely 3-volt, but there's other battery voltages and things involved. There's some 9-volt still. But I think it's mostly wireless devices, Gary. I mean, it's not so much asset tracking and some of the other kinds of things, a lot of wireless devices.

Okay. And then you mentioned with the 3-volt, this IoT opportunity. You mentioned -- I didn't do the math quick enough, but you mentioned the number of households and then you said you hope to get 5% to 10% of that market. Can you tell us what the size would be if we get 5%, in dollars?

Yes, I mean, the way I try to think of it, Gary, is like when we do new product development for the batter business, let's say, we always have to make decisions as to the risk benefit of spending the money in new product development and how does that impact overall revenue growth. And so we tend to think of things in the battery business in terms of point. So if we can --we're trying to grow the business at two to three times GDP, and it's a $70 million business, any time we can get a revenue stream it's an incremental $700,000 a year. That's an extra point of organic growth for the battery business. When we look at the IoT space, in just doing some sort of back-of-the-envelope calculations, if we think that we can get between 5% and 10% of the available market as we see it we think we could grow the batter business if we -- say between somewhere between 6% and 10% individual growth if we were to pick up 5% to 10% of the overall market. So when we looked at it collectively, and we talk about this sort of capital investment, any time we can make an investment where we could get 6% to 10% or 11% growth in the batter business that seemed to make a lot of sense for the overall investment for the efforts to develop a new product.

Okay. And then on the dedicated space in your manufacturing facility for the IoT opportunity, you mentioned some progress there in the first-half of 2018. What have you budgeted to spend, and when will that space be built out and ready?

I think we made a comment overall about what the authorization was for the project, but I really don't want to comment about individual budgets by year here versus China versus anywhere else.

Okay. But do you expect it to be completed by the summer of 2018?

In my prepared remarks I said we'd expect it to be throughout the end of 2018 and into 2019.

Okay. And then when you talked about the heretofore difficult government spending environment for the last few years, how that's starting to change. So as the government goes from a continuing resolution to an actual budget and some of the preliminary stuff I saw the last couple of days talked about an $80 billion increase in defense spending. Just for my education, clarify for me how once there's a budget in place with the $80 billion raise, how that should flow down to the companies, the defense contractors like you guys versus the continuing resolution.

That's an outstanding question. I'm not sure I can give you the real secret answer to that. But I guess the way I'm looking at this, Gary, is that for such a long time we knew we were in constraining budgets. There was sequestration; we were operating on a continuing resolution. And it just felt like that people were sort of withholding funds that they had because there was no clear visibility to whether or not they'd be getting new funds in the future. And what's really interesting to me at least is that, and as much as we're still under -- technically operating under the continuing resolution, yet we're seeing a pretty decent growth rate last year, that there seems to be feeling from the government defense customers that more money is on its way. We still haven't seen that yet. So, the best I can really describe at this point without being very precise about where the money actually is going to hit us is that it's really encouraging that the people that are placing contracts with us and the ones who make those decisions for the spending in the Department of Defense feel so strongly that they're going to be getting more money that they're willing to release money that they may have already had and to serve some pent up demand. And if we can grow at a strong double-digit way just from pent up demand we're really excited about the prospects of what could happen longer term as more money is available, just not new money.

Got you, that makes sense. And Mike, you also called out some of the VIPER shipments from those two contacts. Could you tell us how much shipped in Q4? And was it both contracts, the $3.9 million and the $4.7 million, or was it just from one of the contracts?

Of the VIPER contract, I believe, we shipped in 2017 is a $4.7 million contract, and believe we shipped $2.9 million in in 2017 which means we've got about another $1.8 million to go in 2018 and the additional, the other contract with the S5 just really started shipping the very tail end of last year it's going to be shipping throughout 2018. So, the full amount of that $3.9 million contract is expected to ship product as a purpose in 2018.

Okay, great. And then Phil, just a quick question on the $6 million in cash outside the USA, that sounds high, is it well, Accutronics or it's Accutronics plus your international government business, defense business?

No, it's -- I would say, Gary, it's split 50:50 between China and the U.K. and we obviously watched that very closely but the bottom line to my comment was that there is no toll taxes because of our situation with the international entities. So we have the ability now to pull that cash back in with no tax penalty going forward.

Oh super, okay, so had there been Phil, had there been the possibility of if you had pulled that in any part of that $6 million back in 2017 there could have been some tax penalty but there's not going forward?

Yes, it is correct, yes, and that's the whole purpose of the toll tax thing we hear of is part of the Tax Act.

And so what's the comfortable level of cash to keep in China and Accutronics, how much is available to take back?

Well, that absolutely depends on the level of activity which certainly is growing for both, so just to be very clear as you'll see in the 10-K, we make a statement that our current intention is to use their cash where it currently exists organic growth in both of those operations.

Okay. And on the NOL carry-forwards based on the new tax law what's the figure on NOLs going forward?

Okay, let me share with you in for your reference, if you refer after the call to Note 9 in the 10-K, it goes in there in quite some detail but a quick summary is follows. We have $70 million of domestic net operating losses with certainly the hope being to fully utilize those. So we still have 100% of the $70 million NOLs available to offset against our domestic, our future domestic earnings. The tax rate which was 35% as you know has been reduced to 21%, so what you'll see in our disclosures is that the tax impact on those is a reduction, the pure taxes that would be out of $10 million down to $22 million, actually $23 million. So about a $10 million revaluation both at the gross side of it as well as the valuation allowance that we have in place. So the way I look at it is if we still have the $70 million of NOLs in their entirety to offset against our future earnings and that's my view of this, regardless of what the tax rate is or what it's got to be going forward.

Okay, super. So we still have $70 million to offset.

Yes, we do.

And just the last couple of questions and I'll give someone else a chance, so year-over-year cash went from $10 million to $18 million, the increase cash 80% year-over-year. I'm not going to ask you to think if you could do that again but obviously cash is robust and I know you're being judicious on the M&A and you haven't quite been able to close a deal since Accutronics? So with the cash growing so robustly and the company doing so well growing earning 61% on a 4% to 6% revenue increase, doesn't it make sense maybe to get back in there on a buyback program since the money is not earning much and even if you just add $5 million or $6 million in cash in the next year instead of $8 million, it seems to me you could use some of that cash maybe buyback 1 million shares and still have a huge amount of cash left just in case it takes another two years to be able to close in M&A acquisition?

Well, the way I look at it is, Gary, when you talk about M&A it's not like we're just looking at one-item and it's black and white, we've been working at this for quite some time and I want to have the cash available and the resources available that's going to give the company the absolute highest return. Right now, I see that being as M&A and strategic CapEx, so my ordering would be exactly that MA/Strategic CapEx to increase revenues which would certainly show an impact from our leveraged our business model and then further down, I would look at a share repurchase.

Okay, that's fair, Phil. Mike, can you give us any color on what's been happening on M&A in terms of if you found any prospects but maybe you weren't able to close doing due to price discrepancy or some other reason? I mean or have you just not found anything that you could get to a closing, I mean can you give us some color on maybe you got close once or twice but you were part on price as opposed to there's absolutely nothing out there?

We really don't want to comment on individual transactions that almost occurred but I do know that we've had over a dozen NDAs, so just in terms of order magnitude there has been a number of company's we continue to look at. A lot of that is a relationship you developed and that longer term could be a great fit for your company in terms of acquisition but that the company you're targeting may not be ready for, there may be something going on with them which doesn't make at a great time for them. So we continue to make those relationships we continue to evaluate the fit. I'm not really worried about not being able to do some acquisitions but we're going to continue to be disciplined, so it was the fit with the overall enterprise.

Okay, that's great. I was just hopeful, you mentioned 12 NDA's I was just hopeful that you have been seen things and for whatever reason weren't able to close but as opposed to nothing be really of any quality that you've seen. So that's encouraging and I just lastly on the almost 50% increase in backlog. Are being entire VIPER those two contracts included in that $39.1 million a year?

On the communication system site that is correct.

Okay, that's what I thought. Okay, and I think that's all I've got so congratulations again and thanks for answering all my questions.

Sure, thank you.

Thank you. [Operator Instructions] Thank you and it appears there are no more questions at this time. I'd like to hand it over back to you Mr. Michael Popielec. Please go ahead.

Great. Thank you, once again for joining us for the Fourth Quarter 2017 Earnings Call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. And as Phil mentioned, I also like to mention that we updated the inter-financial information as well as some other slides in our investor presentation that's on the website. So please check it out. And have a great day. Thank you very much for participating today.

Thank you. This marks the end of the conference. We appreciate your participation and have a great day.