Good day, and welcome to this Ultralife Corporation's Second Quarter 2019 Earnings Release Conference Call. At this time, I'll like to turn the conference over to Jody Burfening. Please go ahead.

Thank you, Audra, and good morning everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the second 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.ultralifecorporation.com, where you'll find the release under 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 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 factors and other factors that could affect Ultralife's financial results is included in 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 and that differ from GAAP. These non-GAAP measures should be considered 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 brief overall comments about our Q2 2019 operating performance. After which, I'll turn the call over to Phil, who will take you through the detailed financial results. When Phil is finished, I'll provide an update on the progress against our 2019 revenue initiatives including the acquisition of Southwest Electronic Energy Corporation, which we refer to as SWE then open it up for questions. Looking at our second quarter results on an organic basis, we were pleased to deliver an 8% increase in revenue and a 70% increase in leveraged operating profit. The revenue increase was driven primarily by Communication Systems and shipments of mounted power amplifiers to our channel partner under existing contracts for the U.S. Army's network monetization initiatives as well as shipments for the first delivery order under the $10 million Universal Vehicle Adapter IDIQ announced in June. Our Battery & Energy Products core business revenues were down from a year ago. Due to prior year large shipments of 5390s to DOA not recurring this quarter and continued softness in our China manufactured tariff impacted 9-volt product line boosted by two months contribution from SWE total company revenue increased 29% year-over-year on a reported basis. In a few minutes, I'll give you further information on our revenue growth initiatives. But first, I'd like to ask Ultralife's CFO, Phil Fain to take you through additional details of the second quarter 2019 financial performance. Phil?

Thank you, Mike and good morning everyone. Earlier this morning, we released our second quarter results for the quarter ended June 30, 2019. We also filed our Form 10-Q and Form 8-K with the SEC and have updated our investor presentation in the Ultralife website. I would like to thank all those who helped make this possible. Our second quarter includes SWE's operating results for May and June along with the purchase accounting adjustments and direct costs related to the acquisition. As I go through my prepared remarks, I will point out the impact of the acquisition on various line items and earnings per share. For the second quarter, consolidated revenues totaled $29.4 million representing a $6.5 million or 28.6% increase over the $22.9 million reported for the second quarter of 2018. Overall, commercial sales increased 46.8% and government and defense sales increased 13.8% over the 2018 period. Revenues from our Battery & Energy Products segment were $20.3 million, an increase of $2.5 million, or 13.9% over last year. The year-over-year increase was attributable to the $4.8 million revenue contribution from SWE, which more than offset lower government and defense revenue associated with the large 5390 battery order and higher 9-volt sales in the second quarter of 2018. Including SWE, the sales split between commercial and government defense was 74%-26% compared to 58%-42% for the 2018 period and the domestic to international split was 51%-49%, compared to 60%-40% for the 2018 second quarter reflecting higher international demand for our medical products. Revenues from our Communication Systems segment were $9.1 million, an increase of $4.1 million or 80.7% over last year. This increase is primarily attributable to shipments of mounted power amplifiers to support the U.S. Army's network modernization and other initiatives under the delivery orders announced in October, 2018 and…

Thank you Phil. For 2019, we continue to be focused on revenue through diversification and expansion of markets and sales reach, new product development and strategic CapEx, and accretive acquisitions. Regarding the recent acquisition of SWE, the initial 100-day functional integration plans are in full execution mode with no negative surprises so far. The acquisition was slightly accretive to Q2 earnings. So we remain on-track for the acquisition's earning contribution to be EPS accretive for the first 12 months. We're very excited about the SWE acquisition as it is another step in diversifying our end markets to not only grow revenue, but to also mitigate the lumpiness and unpredictability of our U.S. Government/Defense revenue streams. SWE provides us an entry to new revenue opportunities in oil and gas exploration and production and subsea electrification. Markets largely currently unserved by Ultralife. These markets possess similar attributes to our core business in that they involve mission critical niche applications with competitive differentiation based on quality and reliability and long-term high-value proposition customer relationships. And most importantly, we're expanding our overall technical and new product development capability by the addition of SWE's highly valuable and unique technical team of battery pack and charger system engineers and technicians. We look forward to their contributions to our efforts to pursue additional revenue growth opportunities in our existing commercial end markets. Stepping back to look more broadly at the Battery & Energy Products business diversification and available market expansion progress, we've been using the global commercial and international Government/Defense market revenue mix as an indicator of diversification from the U.S. Government/Defense market historically our strongest yet lumpiest market. We're now including SWE, the Q2 2019 commercial and international Government/Defense revenues represented 77% of total B&E sales. Reviewing medical revenues in Q2 2019, global medical sales represented…

Thank you. [Operator Instructions] We will go first to Gary Siperstein at Eliot Rose Wealth Management.

Good morning Mike and Phil. Congratulations on another strong quarter.

Thank you.

Thanks Gary.

Mike so my first question is -- you mentioned the 9-volt, I guess slowdown in China. Is that just due to the weak Chinese economy or is it because they are transitioning into the 3-volt and so they are holding off 9-volt orders until the 3-volt goes into full production what's the reason for that?

What I was referring to mostly is, is the supply of the China produced 9-volt into the U.S. market are being impacted by the tariffs that are associated with that product import.

Okay, got you. And also on I guess based on last quarter's news release in terms of SWE's accretiveness, we didn't expect that to necessarily be accretive till the spring of 2020. So is that penny accretive in the quarter due to the fact that you're closed in the quarter? Did it have to do with the various debits and credits and adjustments for the first couple of months in the quarter with the closing or was that an actual business accretiveness, organic?

Really all of the above. I mean I think the team performed very very well from a revenue perspective. I think we got the benefit of sort of the last two months of a quarter versus -- sometimes the first quarter or the first month of a quarter can be a little slower. I think we are beneficiaries in having a second third month of a quarter. The team performed well. But I also think on the acquisition itself that the team associated with the closing of the transaction deployed their typical operating expense -- discipline in making sure that we had all the proper inside and outside resources deployed. But that we just didn't waste money. So the elements that go into sort of the hurdles that we need to overcome the competition upfront. Obviously, it's a one time closing cost the write up of the initial inventory to market the increase in intangible asset amortization and then interest expense. So it's a delightful surprise, the strong revenue production and profitability of SWE was able to overcome all those elements such that we scratched out slight accretion in the second quarter.

Right. So based on what you just said, so it's not automatic that Q3 Q4 will show a slight loss and then we maybe get accretiveness in the spring. It's possible that could breakeven or show accretiveness sequentially from here?

Matter of fact it really depends on volume. And the only thing, I will add here is all the adjustments in one time expenses worked against us in the quarter. They were real positive.

Right and those won't be there in Q3. So that will help. Just one last one on SWE. So you said no surprises thus far as you have delved more into talking with their customers, is it as robust as you expect? I mean, did you find anything within a larger potential now that they are owned by a bigger company as you talk to customers?

Not specifically with the customers yet, I mean I think just generally speaking we have spent a lot of money on investment here, we want to make sure they prosper. So the management team and the Board and etcetera are very interested in this cycle of our strategic plan development to make sure that any and all opportunities that make sense for us that we're fully supporting those with our investment in human resources. So I think its good customer portion of it, but I think above and beyond that it's what more can we bring to the party to help them prosper.

Okay. That’s fair. And one last question on SWE. So Phil, can you tell me how much of the purchase price was allocated to their land and building? A – Phil Fain: Yes, I will break it down for you Gary. So it's $25 million, $25.248 million per the Form 8-KA that was filed, approximately $8.25 million is the assessed value of the building. In addition, there is working capital of just over $7 million. So you have the $8.2 million you have the $7.2 million, the rest of it is truly the generation of cash flows going forward.

Okay. And do you feel that $8.2 million assessed value is current market value as well? A – Phil Fain: I know for a fact it is because the assessment was done at the very end of last year.

Super, okay. Thank you. Okay. And moving on to the -- where we stand in the shipments of the $19.2 million contract with Comm Systems, how much were shipped in Q2 and is the balance going to be all in Q3 or some going to Q4? A – Phil Fain: Well Gary, I will start with the second half of your question. We expect that shipments will likely go across Q3 and Q4 a good chunk -- a good starting point I don't want to give the exact number. But maybe I can give you a fair indication. When you look at backlog and you know that we don't give backlog on an interim basis. We give backlog of just at the beginning of the year. But the backlog is fairly consistent with where it was when we started the year. So, we'll leave it at that. But we are very pleased with the progress that was made and I think we have a pretty solid schedule going forward that will help us in Q3 and Q4.

Super. So, despite all the shipments, backlog is remaining steady. So, in other words you're not going to tell me out of the $19.2 million how much is shipped already through June 30th?

Well, I'm not going to give you the specific dollar amount, but I will tell you that a majority of the $19.2 million lies in front of us in terms of percentages.

Okay, that's all I needed. Thank you. And in terms of the increase in inventory I think $22 million to $34 million, how much of that $12 million came with SWE? How much is related to the balance of the contract we just discussed and how much is just regular business?

Yes, great question, Gary. SWE came in at around just over $3.5 million. So, when I look at the core businesses we had approximately $7.2 million of inventory build from the end of the year. And I would say a very, very large proportion of that is inventory pre-buys to fulfill the $19.2 million. In addition an increase in Battery & Energy Products for what we consider future opportunities that will be upon us I would consider them. Although you don't like to show an increase in inventory, there were some what I would call smart buys associated with that increase.

Okay. Based on that Phil with the $19.2 million completing by 12/31, where should inventory land at year end?

I think inventory Gary at year end in my perfect cash management crystal ball will be in the $25 million to $27 million range. And the reason why I'm using that range is because I expect that there are going to be, God willing, some good solid backlog going into the next year as well.

Super. And in terms of the debt taken on for the SWE acquisition, what's your interest rate on that debt?

The interest rate is approximately 4.22%.

Okay, super. And Mike in terms of -- you mentioned a new contract in public safety with the new OEM. Is that over seven figures or is it in as just a starting contractor with that product with more to follow possibly if they're happy or any more color you can give us on that?

Yes I mean initially its small dollars, but it certainly has potential to be in the seven-figure range.

Okay. And in terms of the 3-volt both in the U.S. and China, which one should move first with commercial orders? And I know there could be as you said in the thousands or it could be in the millions, but -- of units. But is the U.S. ahead of China in the sampling and the testing or should they both sort of launch concurrently?

They're both really concurrently being launched. I mean the focus of the China one would be if there's any particular OEMs that are manufacturing in China. We think that we have a great position developing and manufacturing capability in the U.S. to serve the U.S. market sort of mutual type tariff or not. So, really they're happening in a parallel basis. And ultimately, we want to build the product wherever it needs to be built to best serve the supply chain it's trying to fulfill.

Okay, that's good color. Thank you. And just another follow-up on the $19.2 million. So, is that part of an ongoing program for the general contractor with the government in terms of modernization? And is there potential for additional business in 2020-2021? Or is it won and done once the $19.2 million that satisfies them forever?

That's the -- that would be a fulfillment of our delivery orders we currently have contracts for. But as part of a larger program that is expected to continue on and have additional transits in the future.

So, they can once -- if they get additional orders from the government, they could come back to us for more amplifiers.

That's correct.

Okay. And then so you mentioned some commentary on the end regarding ongoing testing of the Leader radio for later 2019 and 2020. And that's I guess part of this whole modernization next gen on these radios. And you mentioned Manpack and I think you said one and two lines that kind of thing. I don't think we've heard much in terms of Leader revenue in the first six months of this year. So, is that lagging the $19.2 million contract for the other general contractor or they just move at different cadences? But will -- assuming these testings go correctly, will be part of the leader as well.

I think, you may be confusing a little bit of the items. The $19.2 million consisted of two contracts. One, which was -- it's under the overall umbrella of Network Modernization initiatives. And the other one that was attributable to the Leader. Because of -- we're shipping quantities of products from both of those different contracts to our channel partner, we're treading really carefully not to designate one Leader versus not-Leader. But –

Okay.

The point is we still have headroom to ship under both of those contracts for that $19.2 million of contracts that we received last year. And the Leader program is a highly publicized ongoing program that we're looking to try to do our very best on what we're making right now. So we're in our best position to get any future orders that may be more accretive to our channel partner and enhance by extension to us.

Okay. Yes. Understood. And just one last question for my own clarity. So Leader is the name for the general program and the $19.2 million contract was with the European contractor? Whereas, when you say Manpack or the Manpack stuff is a U.S. contractor but they're both -- the U.S. and the international customer are both shipping for the Leader program. Is that accurate?

No, I think, just to try and simplify it. The overall umbrella is U.S. Army's Network Modernization initiatives, which was -- a portion of that was the Leader Radio. And these are being done through frankly the multi-national global OEM primes, but into the U.S. Army.

Okay. All right. I got it. Thank you. And last question, I'll give someone else a chance. In terms of additional M&A and has anything -- I know you're just digesting this one. But is there anything else in the -- any other kind of movement in the pipeline with potentially some prospects that maybe rejected you guys before and have come back to talk again, or has anything new shown up since last conference call?

I mean, the only thing I can really say at this point is that we continue to be equally interested in pursuing acquisitions as we were in the moment before we did the SWE acquisition. Now, we first found out about the SWE acquisition as a potential target was over four years ago. So continuing -- developing acquisition targets, developing those relationships. As our results get better, we're a more attractive acquirer, so that people start to think about combinations and reach out to us or we reach out to them and they're more receptive. So it's just an ongoing prospect development type activity that hasn't changed one bit as a result of this acquisition that we've already done. And we hope to do more in the future.

Yes. Super. Got you. And last question, Phil, was there any stock bought back in the quarter?

There was not. And you'll see a complete reconciliation of what was repurchased, since the program's inception in the 10-Q.

Okay. Super. Thanks, guys and congratulations, again, on the strong quarter.

Thank you, Gary.

[Operator Instructions] And at this time, we have no further questions. I'll turn the conference back over to management for any closing remarks.

Great. Well, thank you once again for joining us for our second quarter 2019 earnings call. We look forward to sharing with you our quarterly progress in each quarter's conference call in the future. I'd also like to note that we've updated our investor presentation on our website, as Bill mentioned earlier, so please check it out. Everybody, have a great day.

And that does conclude today's conference. Again, thank you for your participation.