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Edited Transcript of ULBI earnings conference call or presentation 3-May-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Ultralife Corp Earnings Call

Newark May 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Ultralife Corp earnings conference call or presentation Thursday, May 3, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jody Burfening

Lippert/Heilshorn & Associates, Inc. - MD and Principal

* Michael D. Popielec

Ultralife Corporation - CEO, President & Director

* Philip A. Fain

Ultralife Corporation - CFO, Treasurer & Corporate Secretary

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Conference Call Participants

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* Gary Steven Siperstein

Eliot Rose Asset Management, LLC - Founder, Managing Member, and President

* Samuel Bergman

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Presentation

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Operator [1]

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Good day, and welcome to this Ultralife Corporation First Quarter 2018 Earnings Release Conference Call. This call 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.

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Jody Burfening, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Gina, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the first 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, 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. These include potential reductions in U.S. military spending, uncertain global economic conditions and acceptance of the company's 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 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 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.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [3]

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Good morning, Jody, and thank you, everyone, for joining the call. Today, I'll start by making some overall comments about our Q1 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, then, open it up for questions.

We were encouraged to start the new year with multiyear quarterly highs in revenue, operating profit, and earnings per share. For Q1 of 2018, we were very pleased to deliver another solid quarter of year-over-year revenue and operating profit growth, with revenue up 5% and operating profit up 28%, and leading to a basic earnings per share of $0.14.

We also achieved an important milestone. As by generating an operating profit of $2.4 million on revenue of $23.1 million, our operating margin rate crossed over the 10% threshold of our "30-5-5-10=10" business model. Total company Government/Defense sales grew 6%, driven by strong communication system shipments and total company commercial sales grew 3%, driven by higher Battery & Energy Products, medical sales.

These organic revenue increases combined with solid gross margins from favorable mix and continued disciplined expense control led to double-digit leverage earnings growth for Q1 2018. Our ongoing efforts at commercial and international revenue diversification and new product development now supplemented by an emerging recovery in the Government/Defense markets, have positioned us well for 2018.

In a few minutes, I'll give you further information about our revenue initiatives, but first I'd like to ask Ultralife CFO, Phil Fain to take you through additional details of the first quarter 2018 financial performance. Phil?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [4]

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Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the period ended April 1, 2018. We also filed our Form 10-Q with the SEC this morning and have updated our investor presentation in the Ultralife website. I would like to thank folks that helped make this happen.

For the first quarter, consolidated revenues totaled $23.1 million, representing a $1.0 million or 4.7% increase from the $22 million reported for the first quarter of 2017. And is the highest level of quarterly sales reported in over 5 years. In our 2 primary served markets, we experienced year-over-year revenue growth with Government & Defense increasing 6.0% and commercial increasing 2.9%. Although the sales breakdown between the 2 sectors was unchanged at 58% Government & Defense and 42% commercial.

Revenues from our Battery & Energy Products segment were $17.2 million, compared to $17.5 million last year, with gains in commercial offsetting lower Government & Defense sales. Sales to our medical customers increased 18.9% over 2017 and represented 60% of commercial sales, 33% of Battery & Energy Products segment sales and 25% of total company sales. The increase in medical sales more than offset lower shipments of our 9-volt batteries compared to last year, primarily due to timing of shipments to a large non-U. S. defense contractor, and the U.S. Department of Defense, Government & Defense sales decreased 6.5%. As a result, the Battery & Energy Products sales split between commercial and Government & Defense was 56-44 compared to 54-46 for the 2017 period.

The geographic distribution of our Battery & Energy Products sales was a domestic international split of 55-45 compared to 54-46 for the 2017 first quarter. Revenues from our communication systems segment were $5.8 million, an increase of $1.3 million or 28.3% over last year. The year-over-year increase is attributable to shipments of our vehicle amplifier adapters for the U.S. Army's Special Force Assistant Brigades under a contract awarded in December 2017, and higher shipments of our core 20-watt amplifier and Universal Vehicle Adapter products, which increased 49% over the prior-year period.

Our consolidated gross profit was $7.3 million compared to $6.9 million for the 2017 period, an increase of 5.7%. As a percentage of total revenues, consolidated gross margin was 31.6% versus 31.3% for last year's first quarter. The 30 basis point improvement in gross margin reflects the increased mix of high value proposition medical and Communications Systems products. Gross profit for our Battery & Energy Products business increased 2.2% from $4.9 million in 2017 to $5.0 million, reflecting the higher mix of medical shipments.

As a result, gross margin was 29.2%, an increase of 100 basis points over the 28.2% reported last year. For our communication system segment, gross profit was $2.2 million, an increase of $0.3 million or 14.6% from the year-earlier period. Gross margin was 38.4% compared to 43.0% reported for last year's first quarter, reflecting sales mix. Operating expenses totaled $4.9 million compared to $5.0 million last year, a decrease of 2.4%. As a percentage of revenues, operating expenses represented 21.4%, an improvement of 150 basis points from the 22.9% reported for the first quarter of 2017. The improvement reflects our continued tight control over discretionary spending, while highlighting the leverage of our business model.

Operating income for the first quarter of 2018 was $2.4 million compared to $1.8 million for the 2017 period, a 27.9% gain on 4.7% revenue growth. The operating profit generated in the first quarter is the highest level reported in over 5 years. Operating margin was 10.2% for the 2018 period, an increase of 180 basis points over the 8.4% for the first quarter of 2017, and is the highest level reported in over 7 years. The 180 basis point improvement is comprised of the 30 basis point increase in gross margin, and the 150 basis point leverage in our operating expenses to sales.

Said differently, the $1 million revenue increase resulted in a $500,000 operating profit improvement for the 2018 first quarter, offering a clear demonstration of the leverage of our business model.

First quarter noncash operating expenses, including depreciation, intangible asset amortization and stock compensation expenses, amounted to $0.7 million, the same as for the year-earlier period. This brings us to adjusted EBITDA, defined as EBITDA, including noncash stock-based compensation expense of $3.0 million or 12.9% of sales versus $2.5 million or 11.2% for the first quarter of 2017.

Accordingly, adjusted EBITDA for the trailing 12-month period is now $10.1 million, representing an EBITDA margin of 11.7%. Other expenses, primarily comprised of interest expense in foreign currency transactions, increased from $93,000 to $133,000, primarily due to strengthening of the pound Sterling to the U.S. dollar over the prior year. Our tax provision for the first quarter was $55,000 compared to $87,000 for the 2017 period, reflecting the elimination of the alternative minimum tax under the Tax Cut and Jobs Act.

Our NOLs remain fully eligible for offset against our future profits for tax purposes going forward. Driven by our solid operating performance, net income was $2.2 million or $0.14 per share compared to $1.7 million or $0.11 per share for the same period last year.

On a trailing 12-month basis, basic earnings per share increased to $0.52, including $0.40 from our operating performance and $0.12 relating to the favorable tax benefit from the new tax legislation reported in the fourth quarter of 2017. Also, driven by the solid operating performance, the company's liquidity remain strong. With cash on hand of $18.3 million, no debt, working capital of $51.7 million and a current ratio of 5.3.

In summary, the actions we are taking to drive profitable growth are apparent in our 2018 first quarter results. Our intent remains on driving volume and sales through further organic and synergistic initiatives to unleash the full leverage potential of our business model.

I will now turn it back to Mike.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [5]

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Thank you, Phil. For 2018, we are keenly focused on increasing our revenue opportunity set through market and sales reach expansion, new product development, and potential acquisitions. For the Battery & Energy Products business, the strategy for market and sales reach expansion has been to diversify more into the global commercial markets and international government defense markets, thereby lessening our historical concentration in the U.S. Government defense market.

For the first quarter of 2018 commercial and international government defense revenues represented 60% of our total B&E sales. The largest portion of our global commercial revenue comes from sales into medical applications, which in the first quarter represented 33% of the total B&E revenue. During Q1 2018, overall medical revenue was up 19% year-over-year. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown at a compounded annual growth rate of 45%, including the contribution of the Accutronics acquisition in January of 2016.

Q1 2018 transactional activity with existing and new medical device customers remained high, with recent shipments of our battery and charger products-serving applications, such as breathing devices, infusion pumps, medical carts, automated external defibrillators, digital imaging and surgical robotics.

Our role is to provide a technical expertise to our medical device customers as they do the detailed engineering of the battery and/or charger solution for their specific performance requirements. And which also an intellectual property contribution that continues through the manufacturing process.

In addition to medical, we also continue to pursue other commercial end markets, including industrial equipment, safety and security, majoring in sensors, asset tracking, in-transport entertainment, drones and UAVs, and the Internet of things.

Specific nonmedical commercial and international government defense activity in Q1 2018 consisted of: a steady stream of new 9-volt orders for safety and security applications; continued shipments of our China ultra ThinCell and 3-volt products for Internet of Things and safety and security applications; shipments of 2-Bay smart tactical chargers to Scandinavia; primary and rechargeable battery shipments to non-U. S. North American government difference OEM and channel partners; and several new orders from international government defense customers, including our new Sealed Lead Acid replacement batteries, other batteries, chargers and ancillary equipment.

Lastly, in B&Es U.S. Government Defense business, although Q1 2018 revenue was slightly below the prior year's first quarter, due to some larger U.S. Government Defense shipments a year ago, nonrecurring this year, we were pleased that the early revenue momentum we saw building in Q4 2017 continues into 2018. As Q1 2018 revenues were up sequentially from Q4 by over 40%.

Q1 2018 showed solid revenue contributions from DOA and our OEM Primes for a selection of different batteries for tactical communications, the ramping up of deliveries for the $3.3 million DOA 5390 primary battery award received in January, as well as for our multi-kilowatt modules for border surveillance applications.

The increasing activity levels from all the various Department of Defense contracting channels are encouraging indicators of potential U.S. Government Defense revenue growth again this year.

Regarding new product development revenue for B&E, in Q1 2018, revenue from products introduced less than or equal to 3 years ago was 31% of total B&E revenue. During the first quarter, activity continued on a wide range of new products, such as a rechargeable battery for use in a digital x-ray application; a Sealed Lead Acid replacement product for multiple medical device OEMs; a next-generation battery for military radio communications; a smart U1 battery for use with inverters and medical carts; the latest non-rechargeable BA-5390 and 5790 products that we received large multiyear contracts for in 2017; and a custom battery pack for a European drone customer.

We continue to provide value and strengthen long-term relationships by closely collaborating with key customers, in the development of new products, developing existing products through multigenerational product plans and by helping our customers expand their products competitive advantage.

Lastly, we continue to attack on 2 fronts: the development of the new products that will serve the Internet of Things applications; and the rapidly growing wireless devices market, as well as next-generation smoke alarms, asset tracking devices and metering. At our Newark, New York manufacturing facility, we continue with the development of a next generation premium 3-volt product, and a strategic CapEx investment to modernize manufacturing capability, low volume equipment production to support product qualification builds and partnership with customers will start during the first half of 2018, with higher volume U.S. production expected beginning around year-end and into 2019.

At our China facility, we completed a multigenerational product plan improvement to an existing China-produced lithium manganese dioxide 3-volt cell, began initial full production shipments, and have several customers currently evaluating their product for use in OEM applications. We're also moving forward with the MGPP improvement of our thionyl chloride cells for serving newly-identified commercial and industrial applications.

Our goal is to produce the highest value proposition, best quality, and safest products, in which every one of our global locations that best serves the supply chain of our end market and our OEM customers.

Regarding Communications Systems, in Q1 2018, new product development revenue from products less than or equal to 3 years old represent approximately 45% of sales. This includes initial shipments from the $3.9 million Q4 2017 award of the vehicle amplifier adapter for the U.S. Army's Security Forces System Brigades, radio power supplies to a major radio OEM, and Universal Vehicle Adapters in support of the various FOSOV programs.

Confirming what we thought we were starting to see last quarter, as a result of recent budget approvals, there continues to be an increase in the pace of defense market spending activity for the retooling of our Armed Forces. We believe we are well-positioned to serve this effort with technically-innovative products of proven performance that enhance the communications range and operational flexibility for the soldier.

Some of the active near-term domestic radio products include the Army's Leader radio program, HMS man pack, and the special operations command, STC radio program. Internationally, we see continued improvements in sales through channel partners with militaries of several NATOs and allied countries, as spending is increasing, as they also look to upgrade, modernize and improve overall war fighter readiness.

Communications Systems continues to strategically invest in new product development initiatives in close collaboration with global strategic partners and has focused on emerging radio platforms, vehicle integrated systems and multigenerational product planning of key legacy systems. We are also investing in engineering and manufacturing capability to support the execution of multiple concurrent programs, improvements in product life cycle management techniques, test technology and overall product robustness.

In closing, for Q1 2018, we were very pleased to kick off the year by achieving solid year-over-year organic revenue growth, leverage double-digit earnings growth, double-digit operating margin, and an over 25% increase in earnings per share. We are growing the revenue opportunities created by continued investment in market and sales reach expansion, new product development and strategic CapEx, and are positioned well for additional operating leverage, as global commercial and government defense market conditions improve.

A strong start to the year, backlog, and strict adherence to business model parameters, give us confidence that we will deliver another year of profitable growth in 2018.

Going forward, we are concentrating on at least 4 key catalysts for increasing revenue: the maturing of our medical market new product development; an aggressive push, into the Internet of Things market; more major government defense deals; and lastly, a meaningful acquisition.

Our clean balance sheet, efficient cash generation and access to capital, give us the flexibility to aggressively pursue both organic and inorganic growth opportunities.

Operator, this concludes my prepared remarks, and we'd be happy to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Gary Siperstein of Eliot Rose.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [2]

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My first question, I think, is for Phil. I might've missed this, Phil, but I think you -- along the way, you guys said that was the best sales -- quarterly sales in 5 years. With the operating margin over 10%, when was the last time we had an operating margin over 10%?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [3]

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Well that goes back into 2011, Gary.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [4]

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2011. Okay. And Mike, I know you, before, given the general category of safety and security, but you called out a specific order for border surveillance, is that -- was that domestic? And was that Canada or Mexico?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [5]

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I really can't comment as to where it is, but it's outside the United States, obviously, being a border security application, and it makes use of our multi-kilowatt module, with its proven robustness for those types of applications.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [6]

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Right. Is that particular area something new for us? Or does it have some upside potential, if Trump does more along the borders?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [7]

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You know I really can't speculate about what the President would do, but this is an existing relationship we have with an extremely successful OEM that's worked over a decade in pursuing these types of opportunities. We've been working with this OEM for multiple years, and fully supporting their existing pursuit of these types of applications. It's a great fit for our product line.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [8]

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Okay. And Mike, in the medical area, you called out infusion, breathing, robotics, carts, et cetera. As those mature, is there any one of those that could be, I guess, meaningful above and beyond what the other 3 categories might do? In other words is there a larger opportunity within one of those categories?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [9]

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I don't know if I'd characterize it that way, Gary. I mean, as we've talked before, these types of engagements will take 4, 5, 6 years sometimes, to get on board. They could be anywhere from $0.5 million to several million on an annual basis, but what we like about them so much is that they're very sticky. I mean, there's a lot of investment on our customer side to codevelop a product and application with us. And even though it takes a long time, and it may not be something you'd see in a press release, because it's not $3 million, $4 million, $5 million as a single order, we really like the fact that it's a multiyear sticky type of contract relationship. And when I talk about the maturity of the products, that's what this really means, is that you have a number of products that we've been working out with customers, different applications that we're getting to sort of the culmination of that validation period. And so really excited about how that adds to all of our revenue stream. These are sort of layering on a point here, a point there of medical device revenue that has a pretty long tail to it.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [10]

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Okay. And that includes digital x-ray as well?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [11]

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That's correct.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [12]

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Okay. And then, moving over to the drone situation. Is that something we've been doing for years? Or is that relatively new, first of all? And is that -- does that have multiyear opportunity for us?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [13]

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It's sort of a -- I wouldn't say it's a wait-and-see because we are pursuing some specific applications, but it's something that we review on a very regular basis as we look at new product development areas. I mean, we know that one of the pain points for our drone application for the service providers is life of the battery. And we're trying to find applications where we bring a specific value-add to the party, whether it's a unique design or a particular battery configuration -- battery protection scheme that may not just be some off-the-shelf type of application. So I have mixed feelings about it because there's a lot of small volume type of applications for very unique battery packs that we get asked about and we pursue some, some we don't. But we're not really extremely aggressively going into the drone space until we can see that there's a pure and substantial value add that we can play versus a commercial off-the-shelf product.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [14]

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Understood. Okay. And then, on the IoT, I think last quarter, you talked about working with 20 different companies in IoT. Can you tell us -- since this is 3 months later, new developments in that area? Are things moving closer to commercialization? Are some opportunities getting to RFP, that kind of thing? Plus the buildout, how you're doing on the buildout at your plant, on the IoT space?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [15]

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So to unpack that in a couple of phases. Certainly, the volume of potential revenue in a number of units is pretty attractive as we said from the initial business case to make this investment. We still have anywhere from a couple of dozen type of customers that were going through a validation process and sort of initial revenue streams from one of those customers could be $0.5 million or so, but as we get up to full production rates, and as the customer's product is fully up and running, it could be anywhere from a couple of million dollars to $8 million to $10 million per application. So we're extremely excited about those. We haven't lost any opportunities there. Those continue to mature. But given the qualification period, we want to make sure we're picking good applications. Relative to the overall investments, as I mentioned in my prepared remarks, we already have sort of a legacy product that we developed through a multigenerational product plan of a China-produced product that's out and about right now, making some decent quantities of shipments to go through actual customer validation and verification of the performance and those would be particularly well-suited for -- if there was an OEM located in China, we would like to have a supply chain point very close to where their manufacturing facility is. And at the same time, we continue to pursue the investment that we talked about over a couple of calls ago in United States, which is fully on-time and under budget, and we're looking to -- we are right now putting out some initial qualification testing type products as we speak, as we get towards the latter part of 2018, we'll be able to do that on a higher volume basis. And so we're really excited for the potential revenue increase that we would see, really, in the 2019, 2020 period.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [16]

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Super. Okay. And then, on the 3-volt situation, in terms of asset tracking and metering, has there been any maturity of those opportunities? And are some of those upsides, like you have with the IoT?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [17]

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Certainly, those continue to mature and expand in overall variety, but nothing right now I'd really want to comment about in terms of any specific dollar revenue.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [18]

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Okay. And can you give us the backlog at the end of Q1?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [19]

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Gary, we generally don't provide the backlog during the interim periods. At the end of last year, we mentioned that the backlog in our 10-K increased from $26 million to $39 million. It was a 49% increase. And my only comment is that we're very pleased with the level of backlog as we entered the first quarter.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [20]

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Okay. Great. And then, Mike, you gave some commentary around, I believe, NextGen, and tactical radios for troop modernization and Special Forces, and I think you talked about it being maybe a 2019 opportunity. So is that moving along at expected rate through the testing?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [21]

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Yes. It is. I mean, we're very active on all fronts. Like I said, we want to be friends to all the radio OEMs, and we have active projects with each and every one of them.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [22]

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Okay. Because I've seen some industry commentary out of DOA, and then, some company-specific communication about the tactical radio opportunity growing. And I think, if I recollect correctly, it was a couple-billion-dollar contract that I think started out with 3 vendors and it's down to 2. I don't know if it concludes VIPER and ManTech, but the stuff I've been reading in transcripts seems to indicate it's moving forward, and I think even one of the sub-contractors mentioned the expectation up from contract awards later this summer. Is that what you are hearing? Or anything different?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [23]

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Yes. We've mentioned, I think on previous calls, is that we went through a couple of years. We were very skinny overall Defense Department spending on tactical communications. And so, when we see the industry leaders, the OEMs for radios and various platforms getting some of these large IDIQs, that's a good thing for us. We supply batteries. We supply amplifiers. We supply integrated systems. And so if there's no radio program, there isn't a high demand for some of our products. So it's a good thing, as we see those contracts being awarded, and it takes a little while sometimes to trickle down to us as one of the ancillary equipment suppliers. But generally speaking, we're optimistic about the potential for the future.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [24]

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Okay. Good. And my last question, I'll give someone else a chance. Any -- since last quarter, obviously, there's been nothing announced, but can you give us any -- a little more color on what you're seeing on the M&A front?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [25]

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Still extremely involved, continue to go through a lot of one-on-one type of discussions. And we're just trying to make good decision about bringing other entity on with ours that is a good fit. I think we have a good cash position. We have good access to external capital to pursue some of those opportunities, but want to make sure it's a really good fit. I mean, we know there's no perfect acquisition, but we're actively involved and it's at the highest levels of the company that are involved in those types of discussions. And as soon as there -- if there'd be just something to announce, we would definitely put it out there for you to digest.

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Operator [26]

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And we'll take our next question from Sam Bergman of Bayberry Asset.

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Samuel Bergman, [27]

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Couple of things. Can you talk again about -- I know Gary asked about the backlog, that was the number given at the end of December. Should one assume that much of that backlog is going to be manufactured and shipped in the second half? Because the battery division did not seem to have such a great quarter.

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [28]

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I don't think that's a correct assumption because you really have to look at what was shipped versus what was manufactured and the expected timing of those shipments. So when we look at the $39 million, my comment there is that, for the most part, it's spread throughout -- it spread throughout the full year.

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Samuel Bergman, [29]

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So I think the standard being spread throughout -- go ahead.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [30]

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No, go ahead Sam.

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Samuel Bergman, [31]

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So I can understand there being spread out throughout the year, but what was the percentage of battery increase for the quarter?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [32]

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The Battery business was down 1.5% quarter-over-quarter.

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Samuel Bergman, [33]

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Right. So if you look at the backlog, can you tell us what the breakout of that backlog is, in terms of what divisions have what for backlog? Year-end or not?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [34]

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Yes, we disclosed that in our 10-K. So I'm happy to -- I'm happy to share that with you. What we reported in our 10-K was the backlog was $39.1 million, and we broke it out between the commercial sector and the Government & Defense sector in the 10-K. And I would be happy to provide you with those. The commercial sector was $9.3 million, and that was up from $13.6 million. So that was a 42% increase. Government & Defense was $19.9 million, up from $12.6 million. So that was a 57% increase, resulting in the overall increase of 49% year-over-year.

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Samuel Bergman, [35]

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Okay. Going back to the building and space that you're adding on, when's the conclusion? And when is that finally going to be built out?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [36]

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The overall majority will be built out through the end of 2018.

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Samuel Bergman, [37]

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And when do you expect production to start there?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [38]

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As I mentioned in the prepared remarks and some of the Q&A responses, we've already started low volume production, and we expect the higher volume production to start in 2019.

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Operator [39]

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(Operator Instructions) And it appears there are no further question in the queue. At this time, I will turn the call back over to Michael Popielec, for any closing remarks.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [40]

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Well, great. Well, thank you, once again, for joining us for our first quarter 2018 earnings call. We look forward to sharing with you the quarterly progress on each quarter's conference call in the future. We also have updated, on our website, our latest investor presentation with some of the new information on a TTM basis. So we encourage you to check that as well. Have a great day everyone.

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Operator [41]

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This concludes today's call. Thank you for your participation. You may now disconnect.