Good day and thank you for standing by. Welcome to the Ultralife Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening. Please go ahead.

Thank you, Jada, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the second quarter of fiscal 2023. With us on today's call are Mike Manna, 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, 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 contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include supply chain disruptions, potential reductions in revenue from key customers, acceptance of our new products on a global basis and uncertain global economic conditions. 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. The management considers to be useful metrics and 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. Welcome to the call on Ultralife's Q2 2023 operating results. Let me first say I'm very proud of our internal team and valued supplier network, which after a slow start to the quarter due to the lingering impact of the previously reported Q1 cyber-attack, the teams rallied. Both businesses delivered strong Q2 performance with revenue up 33% and operating profit increasing over 360% year-over-year, highlighting the leverage of our business model. We increased gross margin for the total business over Q1, even with a slow start to the period. I am pleased that even with the strong revenue, our total backlog was not only replenished, but increased to the highest in company's history exiting Q2. I will now turn it over to Phil to talk through the Q2 financial results.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our second quarter results for the quarter ended June 30, 2023. We also filed our Form 10-Q with the SEC and updated our investor presentation, which you can find in the Investor Relations section of our website. I'd like to thank all those that help make this happen. Before starting the financial review, I want to point out that our business interruption insurance claim resulting from our first quarter cyber-attack is still in process. I look forward to sharing with you the details of our claim once the settlement has been finalized and funded, after which we will include the settlement amount in our financial results. Consolidated revenues for the 2023 second quarter totaled $42.7 million compared to $32.1 million for the second quarter of 2022, an increase of 32.9%. Government defense sales increased 111.5% and commercial sales increased 9.2% compared to the year earlier period. Our total backlog exiting the second quarter increased 2.6% over the first quarter to $110.9 million, the highest level in the company's history and representing a 40.1% increase over the comparable period last year. The backlog is diverse in nature across our commercial and government defense customer base and we expect approximately 70% of the backlog to ship during the second half of 2023. Revenues from our Battery & Energy Products segment were $33.9 million compared to $30.1 million last year, an increase of 12.3%, reflecting strong year-over-year growth in our three major markets that together accounted for approximately 83% of the segment revenues. Government/defense sales increased 26.6%, medical battery sales increased 25.2%, and oil & gas sales increased 17.9%. These increases were partially offset by an 18.8% decline in other commercial sales primarily in China due to the timing of certain…

Thank you, Phil, for the detailed breakdown on the Q2 performance. As mentioned, we continue to focus on executing our backlog and improving gross margin. Several operational initiatives are in process to smooth production flow, better manage inbound and outbound materials, which improves cash flow. We realized some improvement in gross margin in Q2, but many of our initiatives are in the early stages of implementation, so I expect to see further improvement throughout this year and into 2024, subject to the stable mix of customer demand. Supply chain improved in Q2 where we were able to produce and procure parts needed to execute our ship backlog, except for some specialty parts that still have excessively logged lead times. Customer forecasts and orders remain strong, allowing us to order parts within lead time windows and eliminate expediting fees, which is expected to generate some cost side improvement by the end of the year. Direct labor remains tight in all locations, both internally and within our supply chain, but we were able to increase our headcount in Q2. To recap the top initiatives in progress, we continue price realization activities, experiencing some benefit in gross margin in Q2 and continue initiatives to improve and stabilize our gross margin performance for both businesses. Communication Systems, specifically as a backlog of contracts that are priced in some cases over a year earlier, which results in margin pressure from pricing than award to actual delivery. We expect to complete this heightened pricing initiative this year and return to normal cadence price reviews while transitioning focused to internal cost down activities. We continue our journey of extending the time horizon of our sales and operations planning process with both customers and suppliers, improving our end-to-end forecasting. This process is being refined, and we've experienced strong…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Josh Sullivan of The Benchmark Company. Please go ahead.

Hey. Good morning. Impressive results here.

Good morning, Josh.

I know you're still working through the cyber-attack paperwork. But can you talk about how you were able to recover so quickly. And then any residual impact we should think about going forward at all?

Well, it's really a testament to our whole team and the external resources that we use to help us basically get through the event and back on our feet as quickly as we did. There's still some pockets of recovery going on. For the most part, the attack did not disrupt any of our technology or our manufacturing systems. It was mostly documentation and other things that can be recreated over time. And luckily, the team did a great job. Phil, do you have anything to add?

Yeah. We talked about the lingering effects of the cyber -- the Q1 cyber-attack. The lingering effect is that we -- both businesses and together, we regrouped in the month of April to figure out a course going forward. So the April results were -- what we did in April really helped drive a more successful May and June and more level loading, and that depth certainly is our hope going forward. But bottom line is the team is working 24/7 to recover the data, recover the systems and ultimately push the business in the right direction.

And then on the supply chain as things begin to ease, and I know we're in a new reality, but any detail you can provide where bottlenecks are starting to ease and allowing you to deliver on some of these backlogs?

Well, I think as we commented, I mean, we've got a pretty strong backlog now and have had for a couple of quarters where it's really allowed us to get out in front of a lot of our supply chain problems, where things were out over 52 weeks. Now they're typically in the 24 to 36 weeks, which is manageable. I'm not going to say it's perfect, but it allows us to at least execute. Part of it, I will say, the cyber event from supply chain side might have helped us a little bit because we didn't ship everything we thought we would in Q1. So we had an inventory surge that we needed to plow through and execute and get out of the building. There's still some pockets of parts like especially on the RF side that pretty long lead, and there's not a lot of vendors. So you're pretty hostage to whom you're using and most of them are in qualified products where you really don't have an easy option to change. But other areas, MOSFETs and some of the things that were really difficult previously, seem to at least be within a 26-week lead time now.

And then just on the operating investments you've made, it sounds like hiring is getting a little easier at least. Can you help us think about the leverage going forward? And just how we might frame that?

Sure. I'll look at it purely on the financial side and the most important number ingrained in my brain is for each 100 basis point increase in gross margin, it's worth $0.07 of EPS and that's calculated on a GAAP tax basis, which we know isn't a reality for us. So it really comes down to just the basics, keep the revenue stream going, which I think we've been very successful at, improved gross margin. And when we say improved gross margin, we have a whole series of different actions that we're attacking that we meet -- when I say 3 times to 4 times a week, that's probably an understatement, but we're after that next 100 basis point increase in gross margin, and we can't get that soon enough, but these actions have to get to the root cause. They can't be Band-Aids, and that's what our focus is really all about the spending. Well, the spending we control. That's really what it comes down to. So when you look at the difference in the quarter, we went up 33% in sales, a 38.5% increase in gross profit, which defines to us leverage and then keeping operating expenses flat. So -- and then we look back, Josh, and we say, "Well, if this happened or that happened or these things happen." There's always things that you know that could happen that could have helped us out. But it really comes down to the basics. Improving operations and efficiencies that are sustainable and then going on to the next batch of issues.

Got it. And then maybe just turning over to some end market comments, up 25% in battery in the medical side. What are you seeing there? I mean, is that a supply chain getting easier? Is that demand coming through? Maybe just some comments on the medical supply market while that was so strong.

It's a combination of factors, Josh. Really the supply chain coming through has been a big piece of it. We've got some customers in the medical side that have been -- that have launched products and they're starting to see their market penetration and growth start back up now that we're through the COVID time and some of the supply chain issues that they've had as well. We're seeing some pull-through -- we have 1 major OEM that I know is benefiting from increased volume due to a competitor's recall situation. That, I think, has benefited us pretty dramatically. And then there's also some recurring revenue coming into that stream just for replacement products, where some of these products we put out in early COVID are due to have batteries replaced just by the normal course of maintenance. So I think it's been strong on a couple of different fronts.

Got it. And then the oil & gas sales of 18%. I mean are you seeing the offshore rig activity translate into demand for your products?

Yeah. We've seen a lot of international business. We've seen a lot of offshore business. We're kind of in a unique spot where we're servicing a lot of the bigger players and a lot of the smaller players. So we're kind of level loaded there. We -- hopefully, the natural gas price rebounds a little bit here in the fall because I think that may even help. But right now, that segment continues to be pretty strong. I mean, there was a few players that announced over the last couple of days, earnings that have been pretty strong, and their forecasts have looked pretty positive. So we're hoping that, that stays solid.

Got it. And I'll just wrap up on government/defense. I mean, really impressive here. I mean, how should we think about that going forward? And then you mentioned, as we think about the next round of defense backlog growth, what are some of the opportunities there and just what we're seeing in defense?

Well, on the defense side, obviously, in the Communications Systems side, there's been a substantial backlog for a while that we've been wanting to get out the door and execute on, that really was a supply chain bottleneck. We think that revenue is going to continue. They're embedded in some pretty long-term contracts that have year-over-year buys and named programs for either the U.S. government or others. On the Battery and Energy side of the business, a lot of our military sales right now have been direct OEM sales and pass-through sales. Our sales direct to DLA and others for products like the 5390 and others that we've talked about in the past have actually been very low. And we are in IDIQ contracts that could assist with some additional revenue if they were to actually have an order awarded.

Great. Well, again, congratulations on the quarter, and then thank you for the time.

Thank you, Josh.

Thank you. [Operator Instructions] There seems to be no further questions. I would now like to turn it back to Mike Manna for closing remarks.

All right, everyone. Thanks for listening to today's call. We look forward to talking to you next time at the Q3 earnings call. Everyone, have a great day. Bye now.