Good day, and welcome to the Ultralife Corporation Fourth Quarter 2018 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead, ma’am.

Thank you, Andrea, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the fourth 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 at www.ultralifecorp.com, where you’ll find the release under investor news in the Investor Relations section. Before I turn 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 revenue from key customers, uncertain global economic conditions and acceptance of 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 the Company’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 this morning. Today, I’ll start by making some overall comments about our Q4 and total year 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, talk about some focus areas for 2019, then open it up for questions. Over the fourth quarter of 2018, our Battery & Energy Products revenue grew 8% year-over-year from increases in both our commercial and government/defense markets with medical sales up 14%. However, at Communication Systems, after four consecutive quarters of double-digit revenue growth, fourth quarter sales decreased year-over-year due to modifications to production and initial shipment schedules for the $19 million in delivery contracts we received in October 2018 for the U.S. Army. Despite the softer Q4, for the total year of 2018, we were pleased to deliver for the fourth consecutive year total year top line revenue growth and an operating profit increase. With modest top and bottom line growth and prior to the favorable tax benefit, total year earnings per share came in at $0.40, an increase of 8% year-over-year. Our year-end cash balance increased by more than 40% year-over-year driven by earnings and strong working capital management including a 13% reduction in inventory. We ended the year with a backlog of over $50 million, a 30% increase over the beginning of 2018, which includes $19 million in large contracts won by our Communications System business and announced during the fourth quarter. In a few minutes, I will give you further information on our revenue initiatives. But first I’d like to ask Ultralife CFO, Phil Fain to take you through additional details of the fourth quarter and total year 2018 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, 2018. We also filed our Form 10-K with the SEC this morning and have updated our investor presentation in the Ultralife website. I give my sincere thanks to all those who helped make this happen. For the fourth quarter, consolidated revenues totaled $20.9 million, representing a $1.6 million or a 7% decrease from the $22.5 million reported for the fourth quarter of 2017. The commercial, the government and defense sales split was 53-47 versus 42-58 for the year-earlier period reflecting 12.6% revenue growth in the commercial sector and lower year-over-year sales for Communications Systems. Revenues from our Battery & Energy Products segment were $18.2 million, an increase of $1.4 million or 8% with gains in both commercial and government and defense sales. Commercial sales of $11 million grew $1.3 million or 12.6% over the prior year driven primarily by a 13.7% increase in medical sales partially offset by lower 9-volt sales. Government and defense sales of $7.1 million increased 1.5% over the 2017 period due to higher demand from our U.S. customers consistent with the recovery in domestic defense spending while international defense revenues continued to lag prior year due to timing differences of large orders from the allied countries. The U.S. portion of our government and defense sales was 73% versus 68% last year. As a result, the Battery & Energy Products sales split between commercial and government and defense was 61-39 compared to 58-42 for the 2017 period. The geographic distribution of our Battery & Energy Products sales was an international to domestic split of 53-47 compared to 55-45 for the 2017 fourth quarter. Revenues from our Communications Systems segment were $2.8 million,…

Thank you, Phil. Building on 2018, for 2019, we will continue to focus on increasing our organic revenue growth opportunities set through diversification and expansion of markets and sales reach, new product development, strategic CapEx and also on potential acquisitions. For the Battery & Energy Products business, the strategy per market and sales reach expansion remains to diversify more into the global commercial markets, in international government/defense markets, while continuing to build off of our historical position in the U.S. government/defense market. Taking a closer look inside our commercial revenue at our medical sales, for Q4 2018 global medical sales represented 29% of total B&E sales and was up 14% year-over-year. As with the first three quarters of the year, we continue to receive new delivery orders from blanket and our multi-year agreements from our medical customer base, leading to good visibility to our ongoing medical revenue stream. Key medical device battery and charger product shipments were made in Q4 2018 under these agreements for applications including breathing devices, medical cards, infusion pumps, automated external defibrillators, digital X-ray and surgical robots. For the total year, our overall medical revenue increased by 8% year-over-year. We also continue working to layer onto our existing revenue streams by pursuing several new project opportunities involving battery and charger solutions for digital and portable X-ray OEMs, batteries for repowering wireless chargers and various other medical device battery packs. Our role is to provide the technical and manufacturing expertise to help the customer develop the battery and/or charger solution that safely and reliably performs at the needed specification level for their medical device application. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown at a compounded annual growth rate of 38% including the acquisition of Accutronics in January of 2016.…

Thank you. [Operator Instructions] We will now take our first question from Gary Siperstein from Eliot Rose Wealth Management. Please go ahead, sir.

Good morning, Mike and Phil. Congratulations on another solid year and the fourth year in a row of increasing revenues, increasing operating income, increasing cash, increasing earnings per share. My first question, Mike, deals with, I think we were expecting a little more out of the fourth quarter and you mentioned in the earnings release the delay, some production delays on the $20 million, $19 million orders. Can you explain what those production delays were and why you’re confident you will begin shipping them in Q1?

Sure, sure. I mean, as you may recall, this project – those projects were awarded in October 2018 and they are a little different than our previous VAAs in that they included a VAA as well as a mounted power amplifier for two channels operation. So they are a little more complex and we had initially targeted fourth quarter 2018 shipments. I think I mentioned it in our last call. It was aggressive, but since we had done VAAs before, we were – we’re doing our best to try to get some out the door in the fourth quarter. During our design finalization and getting ready the supply chain, we definitely experienced some elongated supply chain lead times. As economy is getting better, a little harder to get some of the electronics. Nothing major but more than just one thing. And it was exacerbated a little bit by some slight design tweaks that we made, which together pushed the completion and initial shipment schedule into the Q1 of 2019. I mean, obviously frustrating due from the fact that it was the year-end and the fourth quarter, but we don’t cut corners. And our goal is really to deliver safe and reliable products that meet the customer requirements. And so we move forward and we expect that units will start shipping in the first quarter of 2019 and continue on through Q2 and maybe a little bit into Q3.

Okay. So it could be a blessing in disguise. It will make 2019 a little better than it otherwise would have been if you did get some out in Q4.

We think that was a strong year.

Mike, so I think you just said the shipments will be completed by Q3. Is that for the entire $19 million?

Yes, contractually right now the shipment schedules would expect us that those delivered by the end of the second quarter into Q3, yes.

Wow, okay. So can you give us any color then on the cadence? Is it $2 million or $3 million in Q1 and $6 million to $8 million or $10 million in Q2 and then the balance in Q3? How do you think it will go?

It will be difficult to do by quarter, but it would be certainly be weighted towards the first and second quarter.

Okay. Wow, super, okay. And then on the IDIQ, you mentioned the $72 million in IDIQs that are moving forward through with testing. When does – if I recall, I think those were all five-year IDIQs. When do you expect testing to be completed and then what do you think the cadence – I know you don’t know until you get the order, but is it conservative for us to estimate just divide the $72 million by five or if the testing, let’s say, takes the first half and you start shipping in Q2, maybe take half of that, half of the divide by five and then go from there? What’s a reasonable guesstimate?

It’s really hard to say. I mean, as far as the testing goes, the first part of your question, we hope to be starting into some of this first article testing next week of the 5390s that you see a couple months progress to get that testing done. And that’s for the 5390. For the 5790, we lag by probably about four weeks, the 5390 schedule. So this is something obviously we’ve been working on for last year, year-and-a-half or so. So those milestones I think are important and we’re starting to get into this first article testing time period. If we go through the testing, we have some government entities that go to that with us and validate things and sign off on things. So we don’t entirely control the timing of those activities, but certainly it was a milestone that I thought was worth mentioning. In terms of what the dollar value we should expect, in the case of the first one, I believe, was a three-year plus two-year option and that was 5390s, the second one was just a five-year IDIQ. I wish I could predict and the backlog numbers that we quote do not include those IDIQ numbers because we don’t really have firm delivery orders for those yet, but just as an order of magnitude feeling, I believe in 2018 we had around $4.5 million or so of 5390s just of the legacy product line. So it can be lumpy at times back and forth, but I have in this call before announced a couple $2 million or $3 million type of award. So it feels like the 5390 number, it’s in the $3 million, $4 million, $5 million a year type of range, but we don’t really have a lot of visibility to the 5790s at this point.

Okay, that’s great. But it’s not included in the backlog. So whatever comes in will be gravely above and beyond that 30% increase in backlog.

Yes, and that’s we are not trying to be so wordsmith like in our releases and even our prepared remarks. But as a general approach, we only put things in our backlog that actually has a firm delivery order. So we don’t put any revenue associated with the IDIQ unless there is a delivery order against it in our backlog number, so we put in our documents.

Okay, that’s fine. And in your script you mentioned that you got a $1.5 million award in Q4 that will ship in the Q1 of 2019. Is that in the backlog because of the shipping in 2019?

Yes, yes, sir, it would be.

Okay. And also the $1.6 million IDIQ, that’s supposed to from a non-disclosed prime defense contractor, that’s also in backlog and should ship in Q1?

It ships, that $1.61 million that was done against that $9.5 million IDIQ. To answer your first question, yes, it is in our backlog number that we quoted since it is firm delivery order, but the delivery is scheduled throughout the entire year 2019.

Okay, okay. Okay. And then just back to the $72 million in total IDIQ. So if we divide that by five years, that’s like $4.5 million a year – I’m sorry, that’s like, what is it, $14 million a year or something like that, $15 million a year. So just taking what you did last year at that $4 million to $5 million level, so that would be a conservative level and you would think there will be upside unless the $72 million goes beyond the five years?

It’s really hard to predict, Gary. I mean, it’s so much based on and we don’t have visibility to what the consumption side of it is, military deployments, what does DOA have on the shelf, what the life of those units are. It’s just so hard to predict. But we want to get it to the point where the fair testing is done and we are ready to go so that if there is delivery orders to be had, that were in a position of receive those.

Okay, got you. And Mike, what’s the difference, I think if I recall in terms of description of the different contract awards, maybe in 2017-2018, a lot of them were called readiness orders and now 2017 and 2018-2019 I think they are called modernization? Can you just explain the difference to me?

Gary, I honestly don’t have a distinct difference in the definition of those two, probably just a more creative way to say each one. But we try to track the press releases that the Department of Defense makes in readiness, modernization. Those are the things that tend to pop up in their press releases and we are just trying to mimic what they say.

Okay. And I’m sure some of the contracts we just discussed involve the, especially the – I guess, the $19 million, the new generation, the leader radio and then the VAAs and the VIPERs for the new generation of two-channel radios. So as that testing completes, then that should go into full production?

That’s correct.

Or is it already in production? Okay. And that should complete around mid-year, is that what are you saying?

We expect to be done with the testing and full production starting in Q1.

Okay.

And delivering on those contracts primarily through Q1 and then Q2, it may go over a little bit into Q3.

Okay. And isn’t that – if my understanding is correct, isn’t that a multi-billion – for the primes, it was a multi-billion dollar award to two prime contractors. I think it was Harris and Thales. And doesn’t that go out many years, so we have the ability to get follow-on business once these initial contracts are completed?

Yes, that’s what at the top level, the OEM primes battle it out at that level. And relative to the parts that we provide, our understanding is and I think some of the press releases that the defense department put out said that they were awarding these first initial contracts and then subsequent awards for the stuff that we make will be competed in each individual time that they go out for another lot of equipment. So our goal is in this first tranche, if you will, do the very best job we possibly can and make sure that the end users love it and that we are competitive and our supply chain is wet and ready to go so that in those subsequent contracts which we expect to be competed again, we are in our best position to win some of those as well.

Okay, super. Now I understand it a little better, thank you. And in terms of the cash, now that interest rates have backed up to I guess 3% on CDEs, 2.5% on treasuries, Phil, how is the cash invested right now?

I can assure you and the other shareholders, Gary, that we’re getting the maximum income on the cash that we have in hand. And the easiest way for the investment community, the shareholders, to see that is to look at the line called interest expense where interest income is offsetting interest expense, bank charges and stuff.

Okay. And at 2.5% to 3% on $26 million, I think that’s approaching $0.05 a share. I know it’s not all invested, you needed some cash readiness for the buyback, et cetera. But all of a sudden it’s starting to contribute to EPS, so that’s nice. In terms of the tax rate now going forward, so you mentioned a 21% provision. So just to be clear, so we still have a $7 million in NOL carryforwards that they recognized on the balance sheet. The book value is booked up to $6.40. We still will not generally be paying tax hedges. But the provision will produce GAAP income, but you’re going to go, going forward you’re going to highlight non-GAAP income and GAAP income, so we can see how operating earnings and EBITDA are trending?

Yes, absolutely, Gary. That certainly is our game plan going forward because of course we have to follow GAAP, we have to show a tax provision of U.S. pre-tax income at 21%. But at the same time knowing that we’re going to utilize the NOLs and not pay any taxes, we have to show the true economics that are being yielded by our business. So we will show net income and EPS on a GAAP basis and on an as-adjusted basis with the reconciliation between the GAAP and as-adjusted so all of the shareholders will see all of the details on that.

Okay, okay. So with that backlog and with your commentary and Mike’s script, we’ll be able to clearly see if indeed 2019 proves to be the fifth year in a row of improving sales and improving operating income and EBITDA with that. Any…

But we’re always transparent and we will continue to be so.

Okay. And any impact in Q4 or so far year-to-date from the government shutdown or Brexit?

No, no, no, nothing, nothing at all from our end.

All right. So Brexit hasn’t affected Accutronics really in any material way? And despite the government shutdown, you are able to collect your receivables from the government from DLA?

Absolutely.

Okay, super. And, Mike, going forward on some of the newer initiatives that could provide a future material revenue stream for us, as things stand now when you look at robotics and you look at Internet of Things and you look at the 3-volt and metering and next generation smoke detectors, based on the customer interest and demand out there, what do you think is going to emerge as – I know they all are additive to us, but what do you think is going to emerge as the new revenue stream that has some materiality, medical, et cetera?

I mean, I think that the 3-volt sort of being a pure organic new product in a very high growth, the segment’s growing at double-digits. And given our 20-plus histories in 9-volt and whether it be for smoke detectors or other devices, I’m just really excited and can’t wait to get our new 3-volt product out there because I think it could make a big difference in terms of our overall revenue stream. I think the thionyl chloride cells, the more we be looking to that, we see more of an opportunity for growth. And we’ve been doing this primarily into China at this point. But as we look around globally, we think we have a unique spot that we can exploit for that new cell as well. So those two areas, just pure organic growth from a new revenue stream that we haven’t been playing too deeply and those are extremely exciting. On the battery pack basis, a lot of these things are under the radar. There are – sometimes there are $600,000, $700,000, $800,000 a year which is a point of organic growth, but doesn’t get up to a press release and there’s just a plethora of those. But I would sort of put it in those areas with the 3-volt cell, the ER cells and just a bunch of different medical battery packs and other industry battery packs.

Okay, super. And last couple of questions, I’ll get someone else a chance. On the M&A side, anything new you can share with us in terms of the color of the environment out there for M&A with the government shutdown and Brexit and the rate pricing, that interest rate separates and what’s it look like out there?

I mean, we’re still actively involved. We’re disappointed that we haven’t concluded something at this point. We talked about that on previous calls. We still have a disciplined process. But we expect to be turning the wakeup a little bit. We’re generating a lot of cash. We had dry powder there. We’re very confident in our ability to integrate and once revenue comes in, to make the most amount of profit from it. And so we think we’re in a great position to do an acquisition and we hope to do something sooner rather than later. But unfortunately we don’t talk about it till the deal is concluded. So it’s hard to give much more color on it at this point.

Okay, that’s fair. And, Phil, last question, anything new going on in investor relations? Are you getting out to meetings or considering conferences so we can get analyst coverage?

We consider a lot of different alternatives when we put our schedules together. And the key is based on where do we get the most, the highest return on investment with our time. And working with some very experienced terrific people, we have determined that that is the highest ROI is on working on one-on-one potential investor and existing investor meetings. As you can see from our shareholder list, we have a great listing of institutional shareholders. As we continue to have these meetings, we can look on that list and we can – it’s our score card that we can document, we see documentation of how we’re doing. And we know that the individuals that we’re meeting with are very well connected, very well networked and the Ultralife story certainly makes its way out. So that’s going to continue to be our focus and we feel that we’ve been quite successful with that.

And lastly on the buyback, yes, I guess you guys take it over in 48 hours, but you have that plan in place. So I’m assuming they are buying back some stock today with the stock reacting negatively to the Q4 numbers?

Well, according to the 8-K that we issue, we gave the timelines on when the length of time that the 10b5-1 is in place. We’re back at the controls early next week and like any investor out there, we weigh all the different factors and you can see by the numbers that were presented, 373,000 shares at $7.21. We buy when we think the stock is a good value and that’s guided us thus far and in previous programs. So I think the numbers, the quantitative amount speak for themselves.

Yes, absolutely. You were very active in the quarter. All right, congratulations and best of luck in 2019. It looks like it should be a very exciting year. Thank you, guys.

Thanks so much, Gary.

Thank you, Gary.

[Operator Instructions] We will now take our next question from Bill Lauber from Sterling Capital Management. Please go ahead.

Yes. Phil, I’m glad right there at the end that you repeated the buyback, 373,000 shares. So you spent about $2.6 million. And factoring that in, the cash balance at the end of the year was how much?

$25.9 million.

Okay. And do you all like – I can’t remember from the past, do you all give any estimates on CapEx for the year, for this year or for the going forward?

The only thing that we’ve mentioned in the past is we mentioned the scope of the 3-volt program and that was included in Mike’s script. But you’ll see in the 10-K that was published today, you can see that $4.2 million was cash paid on capital programs in 2018. And with the activity that Mike had mentioned in his script, I’m looking at that to be the continuing running rate in that neighborhood for the next couple of years, strategic CapEx.

About little over $4 million?

Yes.

Okay, okay. Okay, that was all – the only question I have. Thank you.

Thank you.

Thank you, Bill.

I would now like to hand the call back to Mr. Mike Popielec for any additional closing remarks.

Great. Well, thank you very much, everyone, for joining us for our fourth quarter 2018 earnings call. We look forward to sharing with you our quarterly progress on each quarter’s conference call in the future. As Phil mentioned earlier, we also updated investor presentation in the website and got a number of other documents out today. So please check them out. And everybody have a great day. Thank you very much for participating.

Ladies and gentlemen, this now concludes today’s conference call. Thank you for your participation. You may now disconnect.