Good day, and welcome to the Ultralife Corporation Third Quarter 2019 Earnings Release Conference Call. As a reminder, today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Jody Burfening. Please go ahead, ma’am.

Thank you, Chanette, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third 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 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 and differ from GAAP. These non-GAAP measures should be considered supplemental 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 Q3 2019 operating performance. After which, I'll turn the call over to Bill, 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. For Q3 of 2019, total company revenue increased 35% year-over-year, boosted by the contribution of the Battery & Energy Products acquisition of SWE and a 62% increase in communication systems sales, driven by shipments under existing contracts for the U.S. Army's network modernization initiatives and other previously announced IDIQs. These gains fully offset a decline in Battery & Energy Products core revenue, resulting primarily from lower government defense sales. Despite the total company revenue increase, Q3 operating profit was down year-over-year, due to late cycle new product changes and rework at communication systems, manufacturing costs to ramp up production of new products at Battery & Energy Products and investment in engineering and sales headcount to support new product development and future revenue streams. In a few minutes, I'll give you a further update on our revenue initiatives. But first, I'd like to ask Ultralife's CFO, Phil Fain, to take you through additional details of the Q3 2019 financial performance. Bill?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter ended September 29, 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 happen. For the third quarter, consolidated revenues totaled $27.5 million, representing a $7.2 million or 35.2% increase over the $20.3 million reported for the third quarter of 2018. Overall, commercial sales increased 74.6%, boosted by Southwest Electronic Energy Corporation, or SWE, which we acquired on May 1. Government and defense sales decreased 3.8% compared to the 2018 period. Revenues from our Battery & Energy Products segment were $22.6 million, an increase of $5.3 million or 30.6% over last year. The year-over-year increase was attributable to the $7.2 million revenue contribution from SWE and a 3% increase in core commercial sales. These increases more than offset lower government and defense revenue associated with a large 5390 battery order in 2018 and the timing of sales to global defense primes. Including SWE, the sales split between commercial and government and defense was 78-22 compared to 59-41 for the 2018 third quarter, and the domestic to international split was 51-41 compared to 54-46 last year. Revenues from our Communications Systems segment were $4.9 million, an increase of $1.9 million or 61.6% over last year. During the quarter, we increased shipments of vehicle amplifier adapter systems to support the U.S. Army's network modernization and other initiatives under the delivery orders announced in October 2018. Shipments of vehicle communication kits under an IDIQ with a major defense contractor, also announced in October 2018, and shipments of Universal Vehicle Adapters under an IDIQ contract with the Naval Air Warfare Center,…

Thank you, Phil. For 2019, we continue to be focused on increasing our revenue growth opportunities through diversification, market and sales reach expansion, new product development and strategic CapEx and accretive acquisitions. For the overall Battery & Energy Products business, this strategy continues to be market and sales reach expansion into global commercial markets and international government defense markets, thereby lessening our historical concentration in the U.S. government defense market. To that end, we remained very excited about the SWE acquisition, as it is another step in diversifying our end markets to not only grow revenue but also to mitigate the lumpiness and unpredictability of some of our U.S. government defense revenue streams. The acquisition was clearly EPS accretive in Q3, its first total quarter as part of the Ultralight portfolio, net of our acquisition, amortization, interest, taxes and pro forma corporate allocation expenses. Revenues met expectations and in addition to battery pack revenues from its traditional oil and gas end markets, we saw an uptick in revenue from SWE's SeaSafe product line, which is part of its subsea electrification focus. Including SWE, the Q3 2019 total commercial and international government defense revenues represented over 80% of our total B&E sales. The initial 100-day functional tactical integration plans are substantially complete, and we are now transitioning SWE into other regular Ultralife operating cadences, such as implementation of a standard cost system, preparation of a 2020 operating plan and participation in our just completed annual 3-year strategic growth planning process. We intend to continue to expand SWE's wallet share with new and existing customers in our core oil and gas space, while also pursuing new revenue growth opportunities in subsea electrification, currently a small, yet exciting growing new market. We also plan to fully leverage the acquired SWE technical talent base,…

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

Good morning, Mike and Phil.

Good morning, Gary.

So I just want to drill down on the fact that you had some changes from a customer, I guess, in the quarter, which hurt earnings. I think we saw that happen in Q1, and then it seems like you got it fixed and then had a big $0.13 Q2. So I'm just curious, was the problem this quarter, the same customer? And was it a different kind of adjustment you had to make after satisfying their first adjustment and then having the good shipments and earnings in Q2? Just a little more color on that, if you would.

Sure, Gary. I look at Q3 as an investment quarter, as an investment in our future. For Comm Systems, it was continued investments in the integrated system for probably the most complex military radio that's ever been developed. So in situations like that, you always anticipate complexities with a major technical program, especially with the new radio introduction of, and this program is no different. You have some expected changes, some that are not. And Mike will go into some of the examples on that. But the point I want to make is that I think you're trying to look at the quarter and trying to pitch and hold it into one specific item or one specific event. In the time since I've been with the company, this is probably the highest volume of transition – of completing development of new products, and then transitioning those new products into higher volume production. And for us, that's really what Q3 was all about. So we made the necessary investments in the file development and the final engineering and the transition. And I really can't pigeon hole it to one or two items, its several items. And Mike went through the list. So that's how I look at it.

Okay, okay. Phil, that's fair. Now I know you have to do them for the future revenue and to keep the customer happy. And as the product evolves, I guess, based on the second quarter conference call, I – maybe I misunderstood. I thought there was a change from the customer which impacted Q1. You got the change done, so Q2 was very good. The shipments resumed, and they were at the appropriate margin after you made the changes. So we thought that was history. So are you saying this is a different customer? Or it's just – that's part and parcel, it can happen? It's just a little confusion on that. And when does this – when does the product become steady state?

Yes. I mean, there's a couple of moving parts, Gary, this is Mike. In Q1, we were getting things kicked off the ground. There was mount and powering amplifiers and what we call vehicle amplifier adapter. So starting off from really a black start, we started shipping initial units of modern power amplifiers and very, very, very low quantity of initial prototype BAA type amplifiers in Q1. In Q2, we saw a much higher volume of the mount and power amplifiers be shipped, as those sort of made it up its learning curve. And a small amount of vehicle amplifier adapters being shipped in Q2. So the increase in modern power amplifiers from Q1 to Q2 drove pretty significant positive results in Q2. Now we're sort of going through that learning curve with the last part of the system, which is vehicle amplifier adapters. There was a handful shipped in Q1, many dozens shipped in Q2. And as we sit here in Q3, just speaking qualitatively, we've probably shipped as many in the first 30, 31 days of Q4 that we did in all of Q3. So when we're done, we're getting some very solid performance from the final end units. But as the waveforms changed initially as a radio continue to be tweaked along the way, we were sort of the last link in the change, and then we'd have to modify our equipment and hoping we'd have to work in the system. So I know it's a little confusing, but I think of it really in those pieces, really prototype type shipments in Q1, sort of a good volume of shipments and monopower amplifiers in Q3, the beginning shipment of the vehicle amplifier adapters, to some extent, in Q3. And then, in Q4, we expect a much better volume of vehicle amplifier adapters.

Super, Mike, that clears it up for me. I appreciate that. So – and then going forward, Mike, your script just now is extremely robust about all the opportunities coming to bear and all the different IDIQs that could start going into production in 2020, in addition to the three-volt with the various uses and moving into higher speed production for IoT metering, et cetera. It seems like everything is coming together at the same time. I know they all have different starting points. And I think you highlighted the middle of 2020, but it seems like all the hard work is starting to finally come together where we could maybe get into more of a steady state. There's always bumps of customers make changes. But it seems as the different products mature and you get into this more higher volume production, maybe some of the volatility will come out of the quarter-by-quarter results. Is that a fair statement?

Yes. Another way to look at that is we've been working on a number of these projects for a couple of years. And we recognize we're going to report quarterly earnings every quarter. But you reach a point where you just need to get the projects done. And so we got to the place where we had a number of things, these things coming together, rather than try to think on dime – for a particular penny here or there. We went ahead and spent the money on technical resources, testing and even some outside resources to really try to drive these projects over the finish line. So we saw an increase in costs, which is quite rare for us, as you would remember from our history, but we're getting to that point where we want to get these projects done. So we can't pinpoint the exact month or quarter that they're going to hit and – starting in next year, but we're pretty bullish about the prospects for next year.

Okay. And with the various IDIQs I guess, they total over $85 million now in totality over a multiple of years. And they represent, I don't know if it was four, five or six IDIQs, but do you expect in calendar 2020 to be shipping on all four, five or six of them? Or will one or two of them flip into – and I know it's at the discretion of the government, but will one or two of them flip into 2021?

That's always possible. I mean, we're cautiously optimistic that they hit in 2020, but some could dribble over in 2021.

Okay. All right. That's fair. But you have indications that at least maybe four out of the six or three out of the five will start in 2020?

We really don't – I mean, the only indications we would have is that we've completed and getting to the point where we complete our first article testing. At that point, they're free to, once everything signed off, to place delivery orders. So I don't have a specific piece of information that says, yes, we're going to start giving delivery orders for shipments in x time frame. I'm using where we are in the overall milestone schedule and completion of required task to say, okay, we're reaching the conclusion of those paths. The next step would be to start placement of those delivery orders. I don't have any specific information about the exact timing when those delivery orders will be placed.

Yes, understood. And you mentioned in the script a couple of times, the leader radio and the Manpack, is – the Manpack just again, for my clarity, is the Manpack part of Harris? And is the Manpack, a particular the Harris brand of the Leader program? And with testing sort of getting near the end, is that what you were referring to, in that case and that could result in some orders from them in 2020?

Manpack is a generic term used regardless of the manufacturing supplier and we're not involved, obviously, in making the radios, whether they'd be handheld or Manpack, but those suppliers are well-known in the marketplace. But just how they factor into our participation is that, as we've said previously, we work closely with our channel partners. We have the utmost amount of being careful in terms of not sharing from one manufacturer to the others as we participate with them to serve their specifications. But what we provide, we provide some cases, the batteries. For handheld, some as we provide batteries for Manpack, we supply battery worn dismounted amplifiers, sometimes using handheld applications. We supply amplifiers associated with our integrated vehicle adapter amplifier solutions. And we supply other amplifiers for mounted solutions in vehicles. So wherever there's a handheld or a Manpack radio opportunity, we have a product through one of our businesses to support that. And so when we make those comments, we're just really reflecting on the fact that we're continuing to develop new products to support the deployment of both handheld and Manpack radios.

Okay. That helped. I'm more clear now on that. And finally, in your script, you talked about still hopeful to achieve profitable growth in 2019. So I think we did $0.39 last year, with a $0.07 fourth quarter. This year, you're $0.22 through nine months, you've got October pretty much under your belt and you still said profitable growth in 2019. So that would imply an $0.18 in the fourth quarter. So A, is my math right? And B, with October under your belt, and you're saying that, that must indicate a pretty robust November and December.

Yes, Gary, the way I personally look at it, the EPS is calculated on both a GAAP basis and what I would call a real-world cash basis. So we're looking for a year-over-year comparison that's consistent. So there won't be a 10-foot note to describing what the differences are. So my comparison is always apples and apples, meaning I would look at EPS on an adjusted basis, not to say that we're clearly focused on the GAAP [Audio Dip] as well. But the adjusted EPS, and that's the reason why we use it is a better – is the best indication of our business performance and reflect the fact that we have $63 million of NOLs that we're going to use to offset the profitable operations that we're seeing in the U.S. So I think your math is correct. And my recommendation is that you focus on the adjusted EPS because it's a better reflection of the cash performance of the business of liquidity of the business.

But through nine months, I thought adjusted EPS was $0.23 versus $0.33 or $0.22 versus $0.32, that's not correct?

Adjusted through three months is $0.28.

Okay. Got you. $0.28. Okay, super. So to get to the $0.39 and to have profitable growth, you need $0.40. So $0.28 – okay, at least $0.12. Got you. All right, thank you, guys. Good luck.

Thank you.

Thanks, Gary.

[Operator Instructions] There are no further questions in the queue at this time.

All right. Thank you, everybody, again for joining us for our third quarter 2019 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. As Phil mentioned, we have updated our investor presentations on our website, so please check it out. Thanks very much, and have a great day.

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