Good day everyone, and welcome to today's Ultralife Corporation Third Quarter 2018 Earnings Release Conference Call. At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Jody Burfening. Please go ahead, Ms. Burfening.

Thank you, Sarah and good morning everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter of 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 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 will 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 revenues from key customers, uncertain global economic conditions and acceptance of our 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, 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 in the call. Today I'll start by making some overall comments about our Q3 2018 operating performance, after which I'll turn the call over to Phil, who will take you through the detailed financial results. When Phil has finished, I'll provide an update on the progress against our 2018 revenue initiatives, then open it up for questions. For Q3 of 2018, operating profit was up 19% year-over-year, net income was up 30% and EPS was up 26%. Communication Systems revenue was up 25% year-over-year, driven by core product sales to a broad range of customers, while Battery & Energy Products revenue was down 7%, with double-digit increases in both the U.S. government/defense and core medical sales more than offset by lower non-U.S. government/defense and 9 Volt sales. The strong Q3 year-over-year growth in our Communication Systems business, combined with disciplined operating expense containment by both business units led to a double-digit total company earnings growth in Q3 2018, despite the slight overall revenue decline. In a few minutes, I'll give you a further update on our revenue initiatives. But first, I'd like to ask Ultralife CFO, Philip Fain, to take you through additional details of the Q3 2018, financial performance. Phil.

Thank you, Mike and good morning, everyone. Earlier this morning, we released our third quarter results for the period ended September 30, 2018. We also filed our Form 10-Q with the SEC this morning, and have updated our investor presentation in the Ultralife website. I'd like to thank all those who helped make this possible. For the third quarter, consolidated revenues totaled $20.3 million, representing a $0.7 million or 3.4% decrease from the $21.0 million reported for the third quarter of 2017. The sales decline resulted from $1.3 million lower Battery & Energy Product sales, which offset $0.6 million increase in our Communication Systems business. Revenues from our Battery & Energy Products segment were $17.3 million compared to $18.6 million last year. Reflecting lower 9 Volt battery sales to our Europe-based customers, timing of orders from non-U.S. government/defense customers and large shipments to an industrial commercial customer in 2017, which did not reoccur at this point in 2018. On a year-to-date basis, medical sales are up 7% and represent 58% of commercial sales, 33% of Battery & Energy Product segment sales and 26% of total company sales for the period. Our U.S. government/defense sales increased 9.6% for the quarter and 21% for the year-to-date period consistent with the recovery in domestic defense spending. International defense revenues continued to lag prior year being subject to the timing of large orders from allied countries. The U.S. portion of our government/defense sales was 85% versus 71% last year. The Battery & Energy Products sales split between commercial and government/defense was 59/41, almost identical to the 58/42 for the 2017 period and the geographic distribution of our Battery & Energy Product sales was a domestic to international split of 54/46 compared to 51/49 for the 2017 third quarter. Revenues from our Communication System segment…

Thanks, Phil. For 2018, we continue to be focused on increasing our revenue growth opportunities 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 continues to be to diversify more into the global commercial markets and international government/defense markets, building off of our historical concentration in the U.S. government/defense market. Looking more closely within the Commercial segment for Q3 2018 at our medical revenue whereas our global medical sales were up sequentially for the fourth consecutive quarter, revenue was down slightly as compared to last year's strong third quarter result. Year-over-year, we generated good order flow from existing customers that was offset by 1 international customer who has expected shifted supply from our U.K. operations to a competitor's manufacturing facility in China. Q3 2018 medical device Battery & Charger Product shipments continued for a wide range of applications such as breathing devices, infusion pumps, medical cards, digital X-ray, automated external defibrillators and surgical robots. One of the larger shipments was to longstanding OEM customer that manufactures breathing devices. This customer as well as many of our other key existing customers continue to place new delivery orders each quarter, creating better visibility to our ongoing medical revenue stream. Looking ahead, we continue to expect revenue expansion in medical devices with several customer specific new projects underway, including battery and charger solutions for digital and portable X-ray OEMs, batteries for repowering wireless chargers and various other medical device battery packs. Regarding non-medical commercial and international defense, this was our softest revenue area in Q3 2018 driven by tightening inventory management on the part of 2 customers and a dip in sales of 9 Volt. As a result of a lumpy nature of our shipment…

[Operator Instructions]. We'll go first to Gary Siperstein with Eliot Rose Wealth Management.

Congratulations on another solid quarter. My first question Mike is obviously there's -- as you mentioned, the ebb and flow in sales, I think you did $23.1 million in the first quarter, maybe $22.9 in the second and then a little drop off in the third, is a lot of it mostly due to the ebb and flow of timing with customers because it seems like there's a robust amount of business out there and I'm just curious if it just happened to fall into that quarter particularly, the slowdown in revenue due to the timing of different shipments and different programs with customers. Can you give us a little more color on that?

Yes, you're exactly correct. I mean, I think we've evolved from in the early years with 1 little area that was down and would take the whole company down to year-over-year decline in revenue. And as we got more healthy and expanded our revenue opportunities, any particular market segment wouldn't take us down. If it was down because we had other offsetting opportunities. In the third quarter, it happened to be 1 of those quarters we had 3 or 4 things aggregate to drop us a little bit below the year-over-year growth line for B&E, but we don't read that as any fundamental shift in loss of momentum of any kind of things like that given the number of other revenue opportunities that you referred to.

Okay, thank you. So, notwithstanding the timing, if the base business is averaging roughly $22 million, let's say to $23 million and you are able to earn $0.14 in Q1, $0.10 in Q2 and I guess even though there was only a couple of hundred thousand dollar revenue difference, it might have been a margin issue. But you averaged about $0.12 a share. So if baseline gets back to that and then we see next year the new business start to layer in above that, is that how I should look at it, where again without you making a future forecast, but if base is around $22 million, $23 million on average, you can always have a down quarter, but on average, as this new business starts to layer in, we could possibly see the average move up to $23 million, $24 million or $24 million, $25 million, is that reasonable?

I think your logic is reasonable, Gary. I mean, we look collectively at the overall opportunities and try to assess whether or not that's going to result in that increase or not. And if we feel like we're not going to increase, we keep working on other kinds of things, but when we look at the overall opportunity basket, particularly given the number of recent awards in Comm Systems and maturing of this existing initiatives in B&E, weather it be overall medical opportunities or the 3-volt per IoT, that's replacement or the 2 major IDIQs that have been germinating for last year and a half, we're really excited about the opportunities for 2019 in terms of revenue growth.

Mike, is, I guess I was thinking on the 2 prior IDIQs from 2017, the $49 million and the $21 million, $22 million, you called out that $70 some odd million in opportunities starting to ship in 2019. I was under the impression that the $21 million had already shipped in '17, '18 and was done. Is that not the case?

No, that's not the case. And if I could break it down a little bit, the legacy 5390 product line under prior IDIQ had expired. And there was a gap between the legacy 5390 IDIQ and the new one that was $21.4 million IDIQ contract that we've referenced. During the interim period, DLA had issued spot buys and there was about $3.3 million, I believe order in January that sort of tied to them over in between the 2 IDIQ periods. And we were talking about on a quarterly basis as well as in Q3, the revenue that came off of that spot buy. That was not the $21.4 million IDIQ, which is still undergoing and hope to be getting to the final stages of first article testing in Q4 and maybe some initial shipments in the beginning part of next year. It really depends on what DLA wants, but the contract we've been shipping off has been an interim spot buy, not the $21.4 million IDIQ that we received in 2017.

No, that's okay. That's super. So starting in 2019 then, so there's that $71 million IDIQ that will begin shipping and I know it's a discretion of DLA, but if they're all 5 year awards or 1 year with annual renewals. Just if we -- is it unreasonable for us to take in and just divide by five, I know it's up DLA, so could just be a little bit in year 1, and then grow each year, but would it be unreasonable for us to divide by 5 and assume that'll be roughly the annual run rate, give or take, going forward?

It's really difficult for me to look at my crystal ball any differently than you, but what I would say is, that there's actually 2 pieces there. There is a $21.4 million, which is for 5390 sort of the multi-generational product plan advancement of legacy 5390 battery and then there's a separate $49.8 million IDIQ for the CFX blend battery. So there's actually two different products there. How you speculate as to what happens per year, I mean, your guess is as good as anybody's guess, but I just want to make it clear that those were two separate IDIQs for two different product lines.

Okay. Yes, got you. So if the government does at their discretion choose to do it ratably over the five years, that $71 million would be -- that could be, I guess, was that $14 million a year if that's possible if they decide to do it ratably. And then on top of that, the new one you announced and just gave a little color on the $9.5 million with the undisclosed customer, that's a completely different product than those 2?

That's correct. That's for Communication System product basket.

And that is not part of the leader program or that is part of the leader?

I'm not going to comment where it's part of it was an undisclosed DoD unit, but it's Communication Systems equipment and that's all I'd say at this point.

Okay. And because it came through as an IDIQ and 1-year renewals up to 5 years. Again, can we guesstimate ratably although it's at the customer of the DLA discretion?

You're correct. You're correct. It's at their discretion.

Okay. So if we add that to the $71 million, that's $80 million and if the government were to go ratably, that would be $16 million a year in incremental business starting in 2019, although to be cautious we know it's at DLA discretion, but the other 2, the $10 million delivery contract, $10.9 million and the $8.3 million, those 2 should definitely be fully delivered by the end of calendar 2019.

That's correct.

All right. Okay, so there -- so that's $19 million in incremental business for 2019 for those two and then if the government goes ratably on all the IDIQs, that's another $16 million in potential business and the $8.3 million leader that was disclosed as Thales being the customer, can you give us any color on the leader in terms of the size of the contract, how many years that the general contractor's Thales and the other supplier had. And then we've seen you get these orders from Thales, I guess this is the first order on leader, but we haven't seen any announcements from the other customer that you're supplying. Is it not being given to the 2 prime contractors equally or does the other customer just -- is it just regular ongoing business and they don't do these kinds of awards like Thales does?

I think I've said in previous calls that we try to work collaboratively and very confidentially with multiple OEMs and our goal is to be to help every single OEM we work with, win with their respective products that uses our products, whether it be a battery product, or a communication systems product. When we have sort of a contract that's issued as a lump with burn deliveries and it's material being a small publicly-held company, we fill the application to disclose that. Other customers sometimes issue their contracts in different forms, quantities, and different time periods, and we don't disclose those. But, so to step back and say that generally speaking we're very excited that the leader road -- leader radio program is matured to the point where we're starting to see some additional revenue contribution and we're trying to serve the needs of the U.S. Army's program with all the -- all the different products that we manufacture, which includes both Communication Systems products and battery products.

Okay. And then can you say whether you've received any orders for the leader from the other customer?

We're not disclosing that right now.

Okay. Can you tell me -- just refresh my memory on the size of the leader opportunity for those two primes, was it $2 billion over 10 years?

Yes, I mean, you can read the published information that the Army put out on that. Our goal is to really focus what's in front of us. We have been supporting the development of products that go towards this overall initiative. And at this point, we're trying to perform as best as we possibly can on our existing contracts. So, we're at best position as possible if there should be follow-on type activity.

Okay, that's fair. Thank you. And, how far are you along on the IoT build out in New York? Is it half done or 2/3's done?

It'd be hard to qualify that way. But, as I mentioned in my prepared remarks, we expect to have low rate production product out in still the fourth quarter. And ramping up with the higher volume automation through the first -- really through the first half of 2019. At this point, it's on track for our goals and objectives.

Okay. And you mentioned a whole bunch of new areas in association with IoT that you're looking into in addition to some of the legacy stuff with metering and smoke detectors. What based on the customer activity you're seeing? Which category do you think is the closest to having something happened, which would be more material to us than the others?

It's interesting. There's a lot of different market segments, which are very active right now and really the onus is on us to have the product done fully through all the testing, go through any iterations of changes that need to be made as we go through the very, very final qualification testing. But I think there is a number of ripe market segments, right now. Whether it be in the legacy smoke detector business, there is a plethora of medical devices that use that battery and then you have all the home security and other type of wireless devices market, that really gets the most attention when we talk about IoT. So I look at them all is very fertile ground, when we have our product in the marketplace and fully released.

Okay and then you mentioned with medical continuing to grow and you mentioned, you called out a lot of the different products that we're involved with these different medical companies. Are there any new ones that have just like in the last quarter received FDA approval? And if not, which areas do you think will receive FDA approval first?

It's interesting, Gary as we don't do any real implantables. So most of our testing -- qualification testing is really design, validation testing and internal quality testing for the individual OEM, it's really not triggered based on an FDA type approval. So these are more internal milestone achievements between us and our collaborative medical device OEM partner.

Okay. Well, Mike, with that being said, based on the visibility you have with the various medical customers, can you call out a particular area of what you think based on what the customers are saying, could be more material for us going forward, out of the various ones you've mentioned?

I think I did, but just to recap, we talked about digital X-ray, portable X-ray, some wireless sort of recharging type batteries. Those are -- and then we have an ongoing, and a whole different broad spectrum of medical cart type applications. Those would seem to be the most active right now.

Okay, great. And then lastly, this is more a comment than a question, with the market having a 10% correction in October Ultralife despite no negative change in the fundamentals, in fact, just the opposite with those 3 contract wins, so with the story getting better and business outlook for the future growing significantly with those contract wins, the stock went from $10 to $6.25, almost down 35%, 40% while the market dropped 10%. So to me, that's more of a function of Investor Relations. And I've been pushing for a while now for you guys to augment what you're doing with either an internal IR person in addition to the CFO and or an additional firm to help you or if you do it on your own to go to sell-side analyst conferences where you can get a lot more exposure because they'll simulcast on the web when you make presentations besides the one-on-one meetings and that could lead to an analyst report. I mean, you got a company, Mike, that's been growing every year for the past 4 years, going from losses to breakeven to profitability and then profitability going from like $0.19 to $0.23 to $0.37 to $0.45 this year, with prospects brighter for next year. So it seems to me whoever was liquidating a position from $10 over the last 3 months, if there was better liquidity in the stock and a little more sponsorship, the volatility would be diminished, which I think is good for all shareholders. So I'm just encouraging you guys to maybe add another leg to your IR stool. Thank you very much.

[Operator Instructions]. Up next from NorthPointe Capital, we'll go to Bryan Franco.

Can you hear me?

Yes.

Yes, very good, Bryan.

I'm Brian Franco, NorthPointe Capital. Just a quick question. The simple math would suggest that given if you were to buy back here for 2.5 million shares up to 10 million, that would be roughly equal to your cash position and then with the little bit of free cash flow, how much room then is there for the first 2 priorities that you had outlined in earlier call internal, CapEx or an external acquisition. Is that I guess are you making the statement that that's kind of off the table or does the share buyback preclude those options? I just want to get a sense of how to think about those first 2 options.

Bryan, I think that's an excellent question and my response is not at all. Our capital deployment strategy as you know has four planks , new product development to expedite organic growth, strategic CapEx to enhance competitiveness, course accretive M&A and share repurchases. So between our balance sheet, our credit facilities, which is $30 million revolver untouched with the $20 million accordion, our capital structure, which right now includes over 4 million of treasury shares, we feel that we have sufficient resources to execute on all 4 simultaneously as Mike had mentioned.

[Operator Instructions]. And we do have a follow-up question today, I apologize, it's Gary Siperstein with Eliot Rose Wealth Management. Please go ahead, Gary.

Yes, to the last questioner's question. So did I hear you correctly, so did you say we have $30 million line and a $20 million accordion?

Yes.

So that's $50 million in buying power in addition to the $25 million cash in the balance sheet. So there's really $75 million in potential horsepower for buybacks and accretive acquisitions?

Yes. And then the dry powder of the treasury shares on top of it should it be decided to go that route.

Okay. Anything new in the quarter? Can you give us a little color on if the environment has changed at all or some new interesting companies have popped up on the radar?

Gary, we continue to be very active. We started a lot of activities for M&A and we go through a very disciplined approach. And we're waiting. We haven't had anything to announce yet, but our intensity level and focus on trying to do an M&A activity that makes sense for us hasn't changed one bit. So it's been a high percentage of our time pursuing those types of activities.

And at this time, I'd like to turn the conference back over to Mr. Popielec for any additional or closing remarks today.

Great and well, thank you once again for joining us for our third quarter 2018 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. Once again, as Phil mentioned, I'd also like to note that we updated our annual financial information in the investor presentation websites. So, please feel free to check that out. Everybody have a great day.

And again, ladies and gentlemen, that does conclude today's conference. We thank you all for joining.