Good day, and welcome to this Ultralife Corporation First Quarter 2018 Earnings Release Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Jody Burfening. Please go ahead, ma'am.

Thank you, Gina, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the first quarter fiscal 2018. 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 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 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, 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. Today, I'll start by making some overall comments about our Q1 2018 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 2018 revenue initiatives, then, open it up for questions. We were encouraged to start the new year with multiyear quarterly highs in revenue, operating profit, and earnings per share. For Q1 of 2018, we were very pleased to deliver another solid quarter of year-over-year revenue and operating profit growth, with revenue up 5% and operating profit up 28%, and leading to a basic earnings per share of $0.14. We also achieved an important milestone. As by generating an operating profit of $2.4 million on revenue of $23.1 million, our operating margin rate crossed over the 10% threshold of our "30-5-5-10=10" business model. Total company Government/Defense sales grew 6%, driven by strong communication system shipments and total company commercial sales grew 3%, driven by higher Battery & Energy Products, medical sales. These organic revenue increases combined with solid gross margins from favorable mix and continued disciplined expense control led to double-digit leverage earnings growth for Q1 2018. Our ongoing efforts at commercial and international revenue diversification and new product development now supplemented by an emerging recovery in the Government/Defense markets, have positioned us well for 2018. In a few minutes, I'll give you further information about our revenue initiatives, but first I'd like to ask Ultralife CFO, Phil Fain to take you through additional details of the first quarter 2018 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the period ended April 1, 2018. 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 thank folks who helped make this happen. For the first quarter, consolidated revenues totaled $23.1 million, representing a $1.0 million or 4.7% increase from the $22 million reported for the first quarter of 2017. And is the highest level of quarterly sales reported in over 5 years. In our 2 primary served markets, we experienced year-over-year revenue growth with Government & Defense increasing 6.0% and commercial increasing 2.9%. Although the sales breakdown between the 2 sectors was unchanged at 58% Government & Defense and 42% commercial. Revenues from our Battery & Energy Products segment were $17.2 million, compared to $17.5 million last year, with gains in commercial offsetting lower Government & Defense sales. Sales to our medical customers increased 18.9% over 2017 and represented 60% of commercial sales, 33% of Battery & Energy Products segment sales and 25% of total company sales. The increase in medical sales more than offset lower shipments of our 9-volt batteries compared to last year, primarily due to timing of shipments to a large non-U.S. defense contractor, and the U.S. Department of Defense, Government & Defense sales decreased 6.5%. As a result, the Battery & Energy Products sales split between commercial and Government & Defense was 56-44 compared to 54-46 for the 2017 period. The geographic distribution of our Battery & Energy Products sales was a domestic international split of 55-45 compared to 54-46 for the 2017 first quarter. Revenues from our communication systems segment were $5.8 million, an increase of $1.3 million or 28.3% over last…

Thank you, Phil. For 2018, we are keenly focused on increasing our revenue opportunity set through market and sales reach expansion, new product development, and potential acquisitions. For the Battery & Energy Products business, the strategy for market and sales reach expansion has been to diversify more into the global commercial markets and international government defense markets, thereby lessening our historical concentration in the U.S. Government defense market. For the first quarter of 2018 commercial and international government defense revenues represented 60% of our total B&E sales. The largest portion of our global commercial revenue comes from sales into medical applications, which in the first quarter represented 33% of the total B&E revenue. During Q1 2018, overall medical revenue was up 19% year-over-year. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown at a compounded annual growth rate of 45%, including the contribution of the Accutronics acquisition in January of 2016. Q1 2018 transactional activity with existing and new medical device customers remained high, with recent shipments of our battery and charger products-serving applications, such as breathing devices, infusion pumps, medical carts, automated external defibrillators, digital imaging and surgical robotics. Our role is to provide a technical expertise to our medical device customers as they do the detailed engineering of the battery and/or charger solution for their specific performance requirements. And which also an intellectual property contribution that continues through the manufacturing process. In addition to medical, we also continue to pursue other commercial end markets, including industrial equipment, safety and security, majoring in sensors, asset tracking, in-transport entertainment, drones and UAVs, and the Internet of things. Specific nonmedical commercial and international government defense activity in Q1 2018 consisted of, a steady stream of new 9-volt orders for safety and security applications; continued shipments…

[Operator Instructions]. And we'll take our first question from Gary Siperstein of Eliot Rose.

My first question, I think, is for Phil. I might've missed this, Phil, but I think you -- along the way, you guys said that was the best sales -- quarterly sales in 5 years. With the operating margin over 10%, when was the last time we had an operating margin over 10%?

Well that goes back into 2011, Gary.

2011. Okay. And Mike, I know you, before, given the general category of safety and security, but you called out a specific order for border surveillance, is that -- was that domestic? And was that Canada or a Mexico?

I really can't comment as to where it is, but it's outside the United States, obviously, being a border security application, and it makes use of our multi-kilowatt module, with it's proven robustness for those types of applications.

Right. Is that particular area something new for us? Or does it have some upside potential, if Trump does more along the borders?

You know I really can't speculate about what the President would do, but this is an existing relationship we have with an extremely successful OEM that's worked over a decade in pursuing these types of opportunities. We have been working with this OEM for multiple years, and fully supporting their existing pursuit of these types of applications. It's a great fit for our product line.

Okay. And Mike, in the medical area, you called out infusion, breathing, robotics, carts, et cetera. As those mature, is there any one of those that could be, I guess, meaningful above and beyond what the other 3 categories might do? In other words is there a larger opportunity within one of those categories?

I don't know if I'd characterize it that way, Gary. I mean, as we've talked before, these types of engagements will take 4, 5, 6 years sometimes, to get on board. They could be anywhere from $0.5 million to several million on an annual basis, but what we like about them so much is that they're very sticky. I mean, there's a lot of investment on our customer side to codevelop a product and application with us. And even though it takes a long time, and it may not be something you'd see in a press release, because it's not $3 million, $4 million, $5 million as a single order, we really like the fact that it's a multiyear sticky type of contract relationship. And when I talk about the maturity of the products, that's what this really means, is that you have a number of products that we've been working out with customers, different applications that we're getting to sort of the culmination of that validation period. And so really excited about how that adds to all of our revenue stream. These are sort of layering on a point here, a point there of medical device revenue that has a pretty long tale to it.

Okay. And that includes digital x-ray as well?

That's correct.

Okay. And then, moving over to the drone situation. Is that something we've been doing for years? Or is that relatively new, first of all? And is that -- does that have multiyear opportunity for us?

I wouldn't say it's a wait-and-see because we are pursuing some specific applications, but it's something that we review on a very regular basis as we look at new product development areas. I mean, we know that one of the pain points for our drone application for the service providers is life of the battery. And we're trying to find applications where we bring a specific value-add to the party, whether it's a unique design or a particular battery configuration -- battery protection scheme that may not just be some off-the-shelf type of application. So I have mixed feelings about it because there's a lot of small volume type of applications for very unique battery packs that we get asked about and we pursue some, some we don't. But we're not really extremely aggressively going into the drone space until we can see that there's a pure and substantial value add that we can play versus a commercial off-the-shelf product.

Understood. Okay. And then, on the IoT, I think last quarter, you talked about working with 20 different companies in IoT. Can you tell us -- since this is 3 months later, new developments in that area? Are things moving closer to commercialization? Are some opportunities getting to RFP, that kind of thing? Plus the buildout, how you're doing on the buildout at your plant, on the IoT space?

So to unpack that in a couple of phases. Certainly, the volume of potential revenue in a number of units is pretty attractive as we said from the initial business case to make this investment. We still have anywhere from a couple of dozen type of customers that were going through a validation process and sort of initial revenue streams from one of those customers could be $0.5 million or so, but as we get up to full production rates, and as the customer's product is fully up and running, it could be anywhere from a couple of million dollars to $8 million to $10 million per application. So we're extremely excited about those. We haven't lost any opportunities there. Those continue to mature. But given the qualification period, we want to make sure we're picking good applications. Relative to the overall investments, as I mentioned in my prepared remarks, we already have sort of a legacy product that we developed through a multigenerational product plan of a China-produced product that's out and about right now, making some decent quantities of shipments to go through actual customer validation and verification of the performance and those would be particularly well-suited for -- if there was an OEM located in China, we would like to have a supply chain point very close to where their manufacturing facility is. And at the same time, we continue to pursue the investment that we talked about over a couple of calls ago in United States, which is fully on-time and under budget, and we're looking to -- we are right now putting out some initial qualification testing type products as we speak, as we get towards the latter part of 2018, we'll be able to do that on a higher volume basis. And so we're really excited for the potential revenue increase that we would see, really, in the 2019, 2020 period.

Super. Okay. And then, on the three-volt situation, in terms of asset tracking and metering, has there been any maturity of those opportunities? And are some of those upsides, like you have with the IoT?

Certainly, those continue to mature and expand in overall variety, but nothing right now I'd really want to comment about in terms of any specific dollar revenue.

Okay. And can you give us the backlog at the end of Q1?

Gary, we generally don't provide the backlog during the interim periods. At the end of last year, we mentioned that the backlog in our 10-K increased from $26 million to $39 million. It was a 49% increase. And my only comment is that we're very pleased with the level of backlog as we entered the first quarter.

Okay. Great. And then, Mike, you gave some commentary around, I believe, NextGen, and tactical radios for troop modernization and Special Forces, and I think you talked about it being maybe a 2019 opportunity. So is that moving along at expected rate through the testing?

Yes. It is. I mean, we're very active on all fronts. Like I said, we want to be friends to all the radio OEMs, and we have active projects with each and every one of them.

Okay. Because I've seen some industry commentary out of DOA, and then, some company-specific communication about the tactical radio opportunity growing. And I think, if I recollect correctly, it was a couple-billion-dollar contract that I think started out with 3 vendors and it's down to two. I don't know if it concludes VIPER and ManTech, but the stuff I've been reading in transcripts seems to indicate it's moving forward, and I think even one of the sub-contractors mentioned the expectation up from contract awards later this summer. Is that what you are hearing? Or anything different?

Yes. We've mentioned, I think on previous calls, is that we went through a couple of years. We were very skinny overall Defense Department spending on tactical communications. And so, when we see the industry leaders, the OEMs for radios and various platforms getting some of these large IDIQs, that's a good thing for us. We supply batteries. We supply amplifiers. We supply integrated systems. And so if there's no radio program, there isn't a high demand for some of our products. So it's a good thing, as we see those contracts being allowed, and it takes a little while sometimes to trickle down to us as one of the ancillary equipment suppliers. But generally speaking, we're optimistic about the potential for the future.

Okay. Good. And my last question, I'll give someone else a chance. Since last quarter, obviously, there's been nothing announced, but can you give us any -- a little more color on what you're seeing on the M&A front?

Still extremely involved, continue to go through a lot of one-on-one type of discussions. And we're just trying to make good decision about bringing other entity on with ours that is a good fit. I think we have a good cash position. We have good access to external capital to pursue some of those opportunities, but want to make sure it's a really good fit. I mean, we know there's no perfect acquisition, but we're actively involved and it's at the highest levels of the company that are involved in those types of discussions. And as soon as there -- if there'd be just something to announce, we would definitely put it out there for you to digest.

And we'll take our next question from Sam Bergman of Bayberry Asset.

Couple of things. Can you talk again about -- I know Gary asked about the backlog, that was the number given at the end of December. Should one assume that much of that backlog is going to be manufactured and shipped in the second half? Because the battery division did not seem to have such a great quarter.

I don't think that's a correct assumption because you really have to look at what was shipped versus what was manufactured and the expected timing of those shipments. So when we look at the $39 million, my comment there is that, for the most part, it spread throughout -- it spread throughout the full year.

So I think the standard being spread throughout -- go ahead.

No, go ahead Sam.

So I can understand there being spread out throughout the year, but what was the percentage of battery increase for the quarter?

The Battery business was down 1.5% quarter-over-quarter.

Right. So if you look at the backlog, can you tell us what the breakout of that backlog is, in terms of what divisions have what for backlog? Year-end or not?

Yes, we disclose that in our 10-K. So I'm happy to -- I'm happy to share that with you. What we reported in our 10-K was the backlog was $39.1 million, and we broke it out between the commercial sector and the Government & Defense sector in the 10-K. And I would be happy to provide you with those. The commercial sector was $9.3 million, and that was up from $13.6 million. So that was a 42% increase. Government & Defense was $19.9 million, up from $12.6 million. So that was a 57% increase, resulting in the overall increase of 49% year-over-year.

Okay. Going back to the building and space that you're adding on, when's the conclusion? And when is that finally going to be built out?

The overall majority will be built out through the end of 2018.

And when do you expect production to start there?

As I mentioned in the prepared remarks and some of the Q&A responses, we've already started low volume production, and we expect the higher volume production to start in 2019.

[Operator Instructions]. And it appears there are no further question in the queue. At this time, I will turn the call back over to Michael Popielec, for any closing remarks.

Well, great. Well, thank you, once again, for joining us for our first quarter 2018 earnings call. We look forward to sharing with you the quarterly progress on each quarter's conference call in the future. We also have updated, on our website, our latest investor presentation with some of the new information on a TTM basis. So we encourage you to check that as well. Have a great day everyone.

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