Good day and welcome to Ultralife Corporation First Quarter 2019 Earnings Release Call. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jody Burfening. Please go ahead.

Thank you, Leanne and good morning everyone. Thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the first quarter of 2019. With us on the call today are Mike Popielec, Ultralife’s President and CEO and Phil Fain, Ultralife’s Chief Financial Officer. The earnings press release was issued earlier this morning. If anyone has not yet received a copy, I invite you to visit the company’s website, www.ultralifecorp.com, where you will find the release under 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 reduction in revenues 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 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 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 the management considers to be useful metrics to 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 will be discussing two topics during my prepared remarks: our Q1 2019 operating performance and the closing of an exciting acquisition that was completed yesterday. I will start by making some overall comments about our Q1 2019 operating performance, then I will turn the call over to Phil, who will take you through the detailed financial results. After Phil is finished, I will provide an update on the progress against our 2019 revenue initiatives, including the acquisition then open it up for questions. For the first quarter of 2019, both of our business units experienced year-over-year down quarters in government defense revenues, which unfavorably impacted our operating results. For the communication systems business, where our shipments of our leader radio ancillary components did start in Q1 2019, it was much later in the first quarter than expected when we spoke to you on last quarter’s call. We are currently working closely with our channel partner as we ramp up production of these units, which fall under the $19 million in U.S. Army delivery contracts, you will recall we received in October of 2018. For the Battery and Energy Products business, Q1 2019 revenues were down year-over-year due to timing differences in several by U.S. government defense revenue channels as well as noteworthy revenue softness in our China manufacturer, ABLE product line, which remain subject to tariffs. The medical segment continues to be a bright spot in our B&E revenue mix, achieving a double-digit revenue increase in Q1 fully offsetting the ABLE softness and leading to a 4% increase year-over-year in our overall commercial revenues. The recent fluctuations in our government defense revenue underscore our motivation to continue to diversify our end markets, particularly in the commercial area. To that end, building on our success in penetrating the medical market both organically and through acquisition, we are thrilled about our next acquisition, which takes us into the oil and gas and subsea electrification markets. In a few minutes, I will give you further information on our organic revenue initiatives and a strategic rationale for the acquisition. But first, I would like to ask Ultralife CFO, Phil Fain to take you through additional details of the first quarter 2019 financial performance. Phil?

Thank you, Mike and good morning everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31, 2018. We also filed our Form 10-Q and Form 8-K with the SEC this morning and have updated our investor presentation in the Ultralife website. I would like to thank all those that help make this happen. We also announced the acquisition of Southwest Electronic Energy Corporation. I will go over the financial and accounting implications of this transaction after my review of the first quarter results. For the first quarter, consolidated revenues totaled $18.9 million, representing a $4.2 million or 18.2% decrease from the $23.1 million reported for the first quarter of 2018. Consolidated revenues were largely impacted by delays experienced by our Communication Systems business in the start up of production and shipment of amplifiers to support the U.S. Army’s Network Modernization initiatives under the $19.2 million delivery orders announced in October 2018. The resulting lower sales cascade through our first quarter financial results and other reported metrics. The commercial to government and defense split was 53-47, versus 42-58 for the year earlier period, reflecting 4% revenue growth in the commercial sector and lower year-over-year sales for government and defense for both businesses. Revenues from our Battery & Energy Product segment were $16 million, a decrease of $1.2 million or 7.1% with gains in commercial revenues offset by lower government and defense sales. Commercial sales of $10 million grew $0.4 million over the prior year driven primarily by a 10.4% increase in medical sales, partially offset by lower 9-volt sales. Government and defense sales of $6 million decreased $1.5 million from the 2018 period due primarily to timing of shipments to the U.S. Department of Defense and non-U.S. defense contractors. As a result, the Battery &…

Thank you, Phil. For 2019, we continue to be focused on increasing our revenue growth opportunities set through diversification and expansion of markets and sales reach, new product development and strategic CapEx and accretive acquisitions. I am very pleased to announce that yesterday the Battery & Energy Products business completed the acquisition of Southwest Electronic Energy Corporation, based in Missouri City, Texas. This bolt-on acquisition further supports our diversification into the commercial space by providing entry to the oil and gas exploration and production and subsea electrification markets, which are largely currently un-served by Ultralife. Another key benefit includes obtaining a highly valuable technical team of battery pack and charger system engineers and technicians that we are very excited to add to our new product development-based revenue growth initiatives in our commercial end markets, particularly for smart metering, asset tracking and other industrial applications. The acquisition does well with our core and that is focused on mission-critical niche applications, has competitive differentiation based on quality and reliability, long term, high value proposition customer relationships and a similar well-run business model. And although the business is cyclical, we expect it to be at least somewhat skewed from the demand cycle of our existing U.S. government defense market. To give you an idea of what this acquisition mean to us in terms of potential revenue contribution, for the total year 2018, revenues of Southwest Electronic Energy were approximately $28 million, which will represent an addition of approximately 39% to be in these annual revenues or 32% on a total company basis, and from a percentage of total revenue mix perspective, it would represent approximately 24% of total company revenues. We are kicking off day 1 of our 100-day integration plan today with the team in Texas, where we plan for them to…

Thank you. [Operator Instructions] And we’ll take our first question from Gary Siperstein with Eliot Rose Wealth Management.

Good morning Mike and Phil. How are you?

Okay.

Good morning.

So Mike just to be clear, so, by reiterating the backlog and talking about these delays we didn’t lose any customers out of their frustration because we have these delays. So everything is still intact? It’s just that they were pushed out a little bit, is that correct?

That’s correct.

Okay. And then last quarter, as you said in your remarks, you had led us to believe that for the $19.2 million, and I think those are VIPER orders that it was half would be in the first quarter, half would be in the second. So, and you had originally bought some of that, which shipped in the fourth quarter of last year. And then you had mentioned, there were some things on Ultralife’s and that you wanted to improve on and that causes the delay. So, since that conference call was in the middle of the first quarter, so what changed? Was the customer push back when they want the delivery? Or did it take you longer to fix the problem that put there from Q4 to Q1? What changed after that when you were leading us to believe it would happen in Q1?

You are correct. I did say that and that’s why I made the direct comments, addressing that during my prepared remarks. Just the continued complexity of really doing 3 new simultaneous amplifier designs all at once, a significant amount and I’ll say actually a Herculean effort by all the project teams involved, our own project teams as well as our OEM partner’s project team and some of their partners as well in trying to coordinate the overall design of a very complicated configuration. And just the timing that it takes and into the process to go through and complete that design and complete just complex communication between 3 different parties from a standpoint of the equipment, any changes that are made during the fine tuning or testing that would trigger a new ordering of components and lead times associated with that. Those things together that I certainly don’t want to burden you with all the details of how the business on a daily basis but on a aggregate basis, they led us to where we are today. And so, I wanted to make sure it was very clear. There was different than what we thought earlier. Really had nothing to do with the level of effort or amount, of hours that people were putting forth but wanted to be truthful and that’s where we stood. We didn’t lose any customers. We’re still doing tender ship the entire amount that’s under contract and that’s where we are.

Okay. So, you mentioned that there was some resolvent in the issues with the amplifiers and that you really ramped up the shipments in April so that they were bigger than the full first quarter. So, does that mean is that both on VIPER and the lead of orders? Or is it just on the $19.2 million VIPER?

Just to be clear, we’re sort of mixing apples and oranges a little bit. But let’s refer to the product sales in the current $19.2 million contract as there’s 2 different types of mounted power amplifiers. And then there is 1 VIPER-esque, meaning that it’s a integrated solution with amplifier power supply holding capability for the handheld radio that we referred to as VIPER when it came out for that initial contract with U.S. Army. Right now, we’re just referring to the product line as the vehicle adaptor amplifier. So, what we’re talking about here is the mounted power amplifiers or 2 separate amplifiers, the vehicle amplifier adapter in another amplifier-type system. And doing all 3 of the of the results at the same time and making sure they are communicating with each other.

Okay. So again, I just want to make sure I’m not confused. So, the fact that you shipped in April a larger amount than the first 3 months, that’s was that all under $19.2 million? Or that was various contracts?

That was all the $19.2 million.

Okay. So that’s up and running. And despite the complexities, the customer in April was happy with the amplifier’s working and so forth?

Absolutely.

Okay. And how much of that $19.2 million shift in Q1, if any?

We don’t really provide that level of details. Just the very beginning part of it.

Okay. So, the majority of it will go over the next 3 quarters?

Right.

Okay. And then on you mentioned timing with battery orders down, and I think you called out that 9-volt was weak in China. Is the weakness had anything to do with the transition in some cases to the 3-volt or again, is that apples and oranges? It’s just the timing issue on 9-volt and 3-volt as for different products, different uses?

I think you’re correct. I mean there it wasn’t just as result of tariffs and things like, and we’ve said it over last couple of quarters. We said the contribution was transition from 9-volt to 3-volt, we said that there was a lot of people that had a liquid supply chain on their own. So, when the tariffs come in place, we thought they’re buying pure products as they’ve let out the internal inventory and then the outright number of people that perhaps are buying less because of the increase in the tariff. At this point, we believe, given some of the customers have gone to very low quantities that the tariff is having a pretty substantial impact on the demand.

Okay, got it. And I don’t know if you had the chance to read it again, but Harris came out with their earnings yesterday and had the conference call. And I thought it was interesting that they specifically talked about how significant the tactical radio business was for DOD. And they’ve said the revenue was up 55% in the quarter, and they talked about going-forward budgets where it’ll be over $1 billion larger over the next 5 years to $7.3 billion and on all modernization and tactical stuff. And they specifically called out reporters on the HMS manpack, the 2-channel radio and how that is going to go into the production, and then they finally said the Marines separate from the Army. They got initial orders for multi-channel manpacks, etcetera and then they talked about international countries as well modernizing. So, I know you don’t talk about specific customers, but I think part of that, at least the leader orders are part of that multibillion-dollar modernization on the handheld that Harris and Thales are the major suppliers, and I know we supply batteries to both of them. So that was a little more commentary from Harris than on any other call regarding some of these future products and how they are ramping significantly and how the budgets are growing very significantly. Is that what you’re starting to hear as well? I know it didn’t come through in Q1, but are you getting some color from your customers on that stuff?

I think we’ve been bullish on it for some time now in terms of the overall expenditure levels without coming specifically about either of the 2 vendors that you mentioned and we’re involved in their program, but I think it bodes well. We’re providing an ancillary equipment to the radio manufacturers themselves. So, without large demand for overall radio contracts, there’s not a lot of need for our ancillary equipment. So, we’re very optimistic about it and we’ll try to serve our OEM partners as best as we possibly can for tactical and performance satisfaction and very optimistic of where this will go, but we will experience lumpiness from time-to-time in the supply chain and we saw that in Q1.

Okay. And Harris also mentioned in that same commentary that they were expecting another LRIP on both the Manpack and the 2-Channel this summer for the Army and then it should soon after that testing go into full production. Is that the sort of schedule you’re hearing? And therefore, at some point later this year or into next year 2020 that it’s scheduled to go into full production?

I read in our comments on somebody else’s view of the outlook, but if that’s true and it turns out to true, then I think that’s good for all of us.

Okay, great. So, none of that’s changed and that’s growing and that’s where we participate in the future. Going back to the acquisition now, so you called out that it was paid forward with cash and utilization a part of the line of credit. Explain to me why the $8 million term loan, in other words, my initial understanding on the line of credit, it was for $30 million or $35 million and there was a balloon aspect for another $15 million or $20 million. Is that still in place? Mine is whatever you use or is the line of credit gone and it’s replaced by this term loan?

Gary, we have that very thoroughly explained in the 8-K that was issued at 7 A.M. this morning, but I’ll recap that. The revolver remains in place. If you recall, the revolver is $30 million plus a $20 million accordion, so, what we’ve done is, we have worked through the First Amendment of that revolving credit agreement. And the First Amendment not only extends the life of the agreement for 2 years, it also puts in place an $8 million term loan as part of the $30 million plus $20 million in addition to, with no prepayment penalties whatsoever. And the point I want to emphasize is, we’ve been working very hard to find an ideal acquisition for us. It doesn’t mean, it’s a clear signal, it does not mean that it’s a one and done proposition. Right after we close the acquisition, we have our eyes out on various other projects. You know very well what our capital allocation strategy is. It’s new products, it’s the strategic CapEx, of course, the share repurchase program, and it’s all about profitable growth, which includes both organic and strategic M&A. So, that just fortifies our desire to move forward on other projects following the same criteria that we have in place.

Okay, super. That’s what I’d thought and that’s anticipating my next question, which was I think you guys originally Accutronics, we’re talking about since there’s almost the same amount of work involved in a $20 million acquisition as there is in a $60 million or $70 million acquisition, the goal was to find something a little more transformative and bigger. So, Southwest Electronic even though was bigger than Accutronics, to me doesn’t satisfy that transformative adjective. However, therefore, I’m wondering, was it just too good to pass up and you’re still looking for the transformative or is it just – you just mentioned you’re back on the hunt again and it just hasn’t shown up yet, the transformative one, but this one was just too good to look up, to give up. Is that close to true?

I don’t know if I look at it that way. I look at it as a very attractive end-market that’s very consistent with what we do. And it happened to be that this company first showed up on our list over 4 years ago. And so you have a number of discussions going on at any time. And as economic conditions improved and the oil and gas market improved, and the owner felt more interested in talking about it, we’ve been in discussions with them over the last year. We’ve been in discussions with lots of people over our last couple of years. And so it wasn’t just the specific goal of it being a X amount of revenue. We certainly like to try to continue to move up the chain and increase the size of our acquisitions, but getting us into an extremely attractive end-market for our product line and the more we got into it and looked up the company, the more we liked it, it was just a great pit for us and we’re very excited about going through the smooth integration.

Did all of the key owners stay or did all of them go? What’s the breakdown on the key management and ownership of the company, the top employee?

Well, we just closed it yesterday. So, we’re hoping they’re still there today, but, no, seriously, we would expect that the overall majority of the management team and the workforce would stay along with us.

Okay, super. And can you guys tell me over the last 5 years, what their CAGR was?

Gary, you’re going to see – we have 70 days, which takes it to July 10, to issue an amendment to the 8-K, which includes all the required SEC disclosures. And most of your financial questions will – the investment community’s financial questions will be answered in that filing.

Okay. But you’ve been obviously – you’re satisfied with their history and I assume they’re EBITDA positive. Can you at least comment on that?

Yes, yes, one of – certainly in – you – I think we shared with the investment community what our criteria are both the strategic benefits in the financial parameters and that’s certainly one of them.

Okay. And Phil, you mentioned you bought 227,000 shares back in Q1. What was – do you have the average price that was paid? And can you also tell me what the highest price per share was paid?

Yes. You’ll see all that, Gary, in our Form 10-Q, which again was filed with the SEC at 7 A.M. this morning. And I’ll say these are the time for working the math, you’ll see it $7.20, it’s disclosed in the 10-Q.

Okay. What was the highest price you paid, that’s the average, right?

That was the average. It was pretty close to that band.

Okay. And the buyback is still open and available?

Yes.

Okay. And then, Mike, on the – you called out the samples in April for a 3-volt, was that – just for my clarity, was that exclusively for IoT or was it for everything, smoke detectors, meters, robotics?

That test was passed and there’s 2 different pieces of it. In the U.S., we passed the UN test and so we are in a position to start shipping samples to a plethora of different end-markets including IoT. In the case of China, we’ve been already shipping there a little bit. A large part of those are associated with smoke detectors, as well as other industrial type application. So, it’s not just exclusive to IoT at this point.

Okay. Got it. And so have we been shipping any 3-volts prior to this or just the first certification and then the first production orders?

We’ve had a 3-volt product for some time and had a little bit different construction. And it was sort of a technician replaceable product meaning that it just wasn’t something between a – an aftermarket type application. And so this is a slight modification to me, really what the current market requirements are for our product, as well as making sure that we’re just a little bit better than the competition in terms of our performance.

Okay. Got it. And last question, so, you said in the script, you still expect to grow earnings this year. So, we did $0.40 non-GAAP last year with the durability quarter-to-quarter. I know it can be all over the place as the first quarter demonstrated, but the implication is, the company should average $0.13 a quarter for the next 3 to beat what we did last year. So, is that sort of the expectation? And do you expect it to – I know the quarters can be different. So, is the ramp hypothetically, could it be – do you expect it to be equal roughly by quarter or could it be like $0.10, $0.15, $0.20 and ramp right into the fourth quarter or do you think you’ll get to a steady state in this Q2, so it’ll be similar Q3s and Q4s?

Phil?

Sure, sure. As you know, we don’t provide quantitative guidance, but I think if you go back and think about or reread the comment that Mike made, we’ll certainly stand by that. Our goal is as Mike said, to have another year of profitable growth in 2019. How we get there? There’s a lot of variables that go into that. We would love to have evenly related quarters throughout the end of the year, but life usually doesn’t work that way. So, we are prepared to get there whatever the configuration is to make that happen.

Yes, understood. But we should at least everything else being equal, do close to $0.40 for the next 3 quarters in order to beat last year. Alright, hey, thanks. Sorry for taking up all your time with all these questions and I’ll give someone else a chance.

And they’re good questions, Gary.

Thank you, Gary.

[Operator Instructions] And it appears that there are no further questions in the queue at this time. I would now like to turn the conference back over to Michael Popielec for any additional or closing remarks.

Great. Well, thank you once again for joining us for our first quarter 2019 earnings call. We look forward to sharing with you our quarterly progress in each quarter’s conference call in the future. As Phil mentioned, I’d also like to note that we did have an updated investor presentation on our website. So please check that out as well as all the other documents and filings that were made today. Have a great day, everyone.

And that does conclude today’s conference. Thank you for your participation. You may now disconnect.