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Edited Transcript of ULBI earnings conference call or presentation 7-Feb-19 3:00pm GMT

Q4 2018 Ultralife Corp Earnings Call

Newark Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Ultralife Corp earnings conference call or presentation Thursday, February 7, 2019 at 3:00:00pm 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

* William Lauber

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Presentation

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Operator [1]

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Good day, and welcome to the Ultralife Corporation Fourth Quarter 2018 Earnings Release Conference Call. At this time, for opening remarks and introductions, I would 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, Andrea, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the fourth 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 at www.ultralifecorp.com, where you'll find the release under investor news in the Investor Relations section.

Before I turn the call over to management, I would like to remind everyone that some statements made during this conference call contains 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 revenue 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 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 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 this morning. Today, I'll start by making some overall comments about our Q4 and total year 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, talk about some focus areas for 2019, then open it up for questions.

Over the fourth quarter of 2018, our Battery & Energy Products revenue grew 8% year-over-year from increases in both our commercial and government/defense markets with medical sales up 14%. However, at Communication Systems, after 4 consecutive quarters of double digit revenue growth, fourth quarter sales decreased year-over-year due to modifications to production and initial shipment schedules for the $19 million in delivery contracts we received in October 2018 for the U.S. Army.

Despite the softer Q4, for the total year of 2018, we were pleased to deliver for the fourth consecutive year total year top line revenue growth and an operating profit increase. With modest top and bottom line growth and prior to the favorable tax benefit, total year earnings per share came in at $0.40, an increase of 8% year-over-year. Our year-end cash balance increased by more than 40% year-over-year driven by earnings and strong working capital management including a 13% reduction in inventory.

We ended the year with a backlog of over $50 million, a 30% increase over the beginning of 2018, which includes $19 million in large contracts won by our Communications System business and announced during the fourth quarter.

In a few minutes I will give you further information on our revenue initiatives. But first I'd like to ask Ultralife CFO Phil Fain to take you through additional details of the fourth quarter and total year 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 fourth quarter and total year results for the year ended December 31, 2018. We also filed our Form 10-K with the SEC this morning and have updated our investor presentation in the Ultralife website. I give my sincere thanks to all those who helped make this happen.

For the fourth quarter, consolidated revenues totaled $20.9 million, representing a $1.6 million or a 7% decrease from the $22.5 million reported for the fourth quarter of 2017. The commercial, the government and defense sales split was 53-47 versus 42-58 for the year-earlier period reflecting 12.6% revenue growth in the commercial sector and lower year-over-year sales for Communications Systems. Revenues from our Battery & Energy Products segment were $18.2 million, an increase of $1.4 million or 8% with gains in both commercial and government and defense sales.

Commercial sales of $11 million grew $1.3 million or 12.6% over the prior year driven primarily by a 13.7% increase in medical sales partially offset by lower 9-volt sales. Government and defense sales of $7.1 million increased 1.5% over the 2017 period due to higher demand from our U.S. customers consistent with the recovery in domestic defense spending while international defense revenues continued to lag prior year due to timing differences of large orders from the allied countries. The U.S. portion of our government and defense sales was 73% versus 68% last year. As a result, the Battery & Energy Products sales split between commercial and government and defense was 61-39 compared to 58-42 for the 2017 period.

The geographic distribution of our Battery & Energy Products sales was an international to domestic split of 53-47 compared to 55-45 for the 2017 fourth quarter. Revenues from our Communications Systems segment were $2.8 million, a decrease of $2.9 million or 51.3% from last year. 2017 revenues included shipments of Vehicle Amplifier-Adaptors under a large VIPER contract. Our consolidated gross profit was $5.7 million compared to $6.9 million for the 2017 period. As a percentage of total revenues, consolidated gross margin was 27.3% versus 30.5% for last year's fourth quarter.

Gross profit for our Battery & Energy Products business increased 2.3% from $4.8 million to $4.9 million. Gross margin was 27%, a decrease of 160 basis point from 28.6% reported last year due to product mix between legacy and new products. For our Communications Systems segment, gross profit was $0.8 million, a decrease of $1.3 million or 61.3% from the year-earlier period. Gross margin was 28.8% compared to 36.2% reported for last year's fourth quarter reflecting sales mix.

Operating expenses totaled $4.6 million compared to $4.8 million last year, a decrease of 3.6%. As a percentage of revenues, operating expenses represented 22.2% compared to 21.4% for the fourth quarter of 2017, reflecting the year-over-year decline in Communication Systems sales.

Operating income for the fourth quarter of 2018 was $1.1 million compared to $2.1 million for the 2017 period, a 48% decrease and operating margin was 5.1% for the 2018 period versus 9.1% last year.

Fourth quarter non-cash operating expenses including depreciation and tangible asset amortization and stock compensation expenses amounted to $0.8 million compared to $0.7 million for the year-earlier period. This brings us to adjusted EBITDA defined as EBITDA including non-cash stock-based compensation expense of $1.9 million or 9.2% of sales versus $2.8 million or 12.6% for the fourth quarter of 2017. Accordingly, adjusted EBITDA for the 2018 12-month period is now $9.9 million representing 11.4% of revenues, a 3.2% increase over the $9.6 million or 11.2% of revenues reported for the same period last year.

Our tax provision for the fourth quarter prior to accounting for the favorable impact of reverse deferred tax asset valuation allowance was $47,000 compared to $200,000 for the 2017 fourth quarter.

In recognition of the sustained profitability we have demonstrated over the past several years and solid prospects of profitable growth going forward, we have reversed the valuation allowance of our U.S. deferred tax assets, commonly referred to as DTAs. These DTAs include approximately $87 million of net operating loss carryforwards, tax credits and tax intangible amortization. This has resulted in a one-time tax benefit of $18.7 million in our fourth quarter income statement, substantially increasing our net income

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2018. The corresponding increase on our balance sheet has also increased our net tangible book value per share by a like amount, a $1.17 per share. Various factors have put us in a position at the end of 2018 to conclude that it is more likely than not that we will fully utilize these DTAs, including another year of solid earnings, a significant increase in our backlog, and the progress made on numerous transformational growth opportunities.

Going forward, in accordance with generally accepted accounting principles, we will make a full tax provision of 21% on our reported U.S. pretax income. While we'll be taking a GAAP tax provision for U.S. taxes, we do not expect to pay cash taxes in the U.S. for the foreseeable future due to the utilization of these DTAs. Accordingly, beginning with the first quarter of 2019, we will be reporting net income and EPS on both a GAAP and an as-adjusted basis.

In summary, these deferred tax assets are valuable both in terms of their size and ability to offset taxes. And from our perspective, reversing the valuation allowance on these assets is an indicator of our positive sentiment about Ultralife's future profitability. In the fourth quarter of 2017, we recognized a one-time non-cash tax benefit of $1.9 million in compliance with the Tax Cuts and Jobs Act. Combining our operating performance in non-cash tax benefits, net income for the fourth quarter of 2018 was $19.7 million, a $1.24 per share compared to $3.8 million or $0.24 per share for 2017. Excluding the non-cash tax benefit for each year, our net income was $1.1 million or $0.07 per share compared to $1.9 million or $0.12 per share for the same period last year.

Earnings per share for the full year of $1.57 included $0.40 from our 2018 operating performance, which is an increase of 7.6% over the $0.37 reported for 2017. Also driven by our solid operating performance, the company's liquidity remains strong, with cash on hand of $25.9 million, the highest amount ever reported, no debt, working capital of $52.3 million and the current ratio of 4.5. The $7.6 million increase in cash on hand from a cash balance of $18.3 million at year-end 2017 also reflects a $3.5 million or 13.3% reduction in inventory, which helped fund our capital expenditures.

Our cash conversion ratio for 2018, representing cash provided by operations divided by operating profit, was 194%, reflecting our operating performance and working capital management. Our strong liquidity affords us the flexibility in making capital allocation decisions. Returning capital to shareholders is an important element of our capital deployment strategy as we look to create value both organically from investing in new product development to support organic growth and through the strategic use of our balance sheet for capital investments in accretive M&A. To that end, we have repurchased 372,774 shares at an average price of $7.21, since our Board of Directors authorized a 2.5 million share repurchase program effective November 1.

In summary, the actions we have taken to drive profitable growth are demonstrated by our 2018 full-year results and the 30.3% increase in shippable backlog as we enter 2019. Our intend 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. Building on 2018, for 2019, we will continue to focus on increasing our organic revenue growth opportunities set through diversification and expansion of markets and sales reach, new product development, strategic CapEx and also on potential acquisitions. For the Battery & Energy Products business, the strategy per market and sales reach expansion remains to diversify more into the global commercial markets, in international government/defense markets, while continuing to build off of our historical position in the U.S. government/defense market.

Taking a closer look inside our commercial revenue at our medical sales, for Q4 2018 global medical sales represented 29% of total B&E sales and was up 14% year-over-year. As with the first 3 quarters of the year, we continue to receive new delivery orders from blanket and our multi-year agreements from our medical customer base, leading to good visibility to our ongoing medical revenue stream.

Key medical device battery and charger product shipments were made in Q4 2018 under these agreements for applications including breathing devices, medical cards, infusion pumps, automated external defibrillators, digital X-ray and surgical robots. For the total year, our overall medical revenue increased by 8% year-over-year. We also continue working to layer onto our existing revenue streams by pursuing several new project opportunities involving battery and charger solutions for digital and portable X-ray OEMs, batteries for repowering wireless chargers and various other medical device battery packs.

Our role is to provide the technical and manufacturing expertise to help the customer develop the battery and/or charger solution that safely and reliably performs at the needed specification level for their medical device application. Since 2011, when we initially launched our commercial diversification strategy, our medical revenue has grown at a compounded annual growth rate of 38% including the acquisition of Accutronics in January of 2016.

Regarding non-medical commercial and international government/defense, Q4 2018 revenue was up 4% year-over-year with strong ThinCell and thionyl chloride cell commercial sales for the growing toll pass market in China, more than offsetting lower 9-volt sales manufactured in China for export and lower year-over-year government/defense sales in the U.K. In fact, Q4 2018 capped off one of our best years for the ThinCell product line, with annual revenues increasing 90% year-over-year, and we're continuing to pursue new ThinCell customers and expand the product line.

Other products noteworthy of fourth quarter 2018 shipments included Land Warrior batteries and chargers for an international prime for soldier modernization, high capacity 2590 batteries and chargers to a tech company for a portable video application, and MIDS, Land Warrior and high capacity 2590 batteries through an international government/defense channel partner for an Asian Pacific Ministry of Defense.

During Q4 2018, we also received $1.5 million in blanket orders for legacy 3-volt and 9-volt products from an OEM for safety and security devices and an European distributor, both to ship in 2019. For 2019, we will continue to aggressively utilize our global platforms to pursue expansion of our commercial business to drive revenue growth in targeted non-medical end markets such as industrial equipment, safety and security, meters and sensors, asset tracking, in-transport entertainment, drones and UAVs, and the Internet of Things.

Lastly, in B&E's U.S. government/defense business, we're pleased to see revenues increase 9% year-over-year in the fourth quarter driven by sales to the DOD, OEM Primes and a channel partner for energy storage applications. The strong fourth quarter kept up a total year 2018 B&E U.S. government/defense revenue increase of 19%. For 2019 with overall activity levels from the various defense department contracting channels and global OEM Primes remaining high, we're targeting B&E U.S. government/defense revenue growth again this year. We also continue to make progress towards the first article testing and production readiness for the next generation 5390 and 5790 primary batteries so that we're in a position to start receiving delivery orders against the approximately $72 million in multi-year DLA-IDIQ awards that we received in 2017.

New product development and multi-generational product planning remain a fundamental part of our organic growth strategy. Not only does this keep our products current with the market needs, it also gives us the opportunity to remain close with our customers and provide value add. Looking at Battery & Energy Products from a new product development perspective, in Q4 2018 22% of revenues were from products introduced less than or equal to 3 years ago.

Recent activity from the fourth quarter of 2018 included development work on a non-military communications battery, U.N. testing and initial sample delivery of a next-generation large format energy storage battery, starting the multi-generational product planning and improvements of our ER product line and the associated facilities upgrade in China, launching a new battery pack as a backup power supply for ATMs, and pursuing opportunities in the robotics market with samples provided to 6 different applications.

In 2019, we will continue our close customer collaboration to develop new products and evolve existing products through multi-generation product plans aimed at helping them achieve their product performance goals and expand their competitive advantage.

In terms of strategic CapEx, we continue to move forward on the new products and manufacturing capabilities that will serve Internet of Things applications for wireless, metering and asset tracking devices as well as for the next generation 3-volt smoke alarms. At our Newark, New York facility, automation equipment for use in high volume production of a premium 3-volt primary battery product line under the previously announced $4.3 million capital investment began arriving during the fourth quarter and we expect to have the equipment installed throughout the first half of 2019.

We anticipate beginning to supply product produced initially on our low volume U.S. equipment to the customers for qualification testing, with higher volume U.S. production ramping up around mid-year. These new products will provide customers with world-class product performance, safety and a competitive price value proposition as well as a supply chain proximity of a U.S. manufactured product.

In China, our new locally manufactured lithium manganese dioxide 3-volt cell is ready for customer sampling and production volumes are now being produced. Taken together, our new product development goal is to produce the highest value proposition, best quality and safest products at which every one of our global locations best service supply chain of our end market and OEM customers.

Regarding Communication Systems, in Q4 2018 new product development revenue from products less than or equal to 3 years old represent approximately 38% of Communication Systems revenues. Shipments in the quarter included engineering evaluation unit for 2 Q1 2019 new product releases as well as the typical 20-watt, 50-watt amplifiers, universal vehicle adapters, power supplies and radio mounts.

In Q4, we began work on the 2 separate delivery orders previously announced, valued together at $19.2 million for the vehicle amplifier adapter and mounted power amplifier systems in support of the U.S. Army's network modernization initiatives. These systems when integrated with a specific handheld radio from an OEM defense partner, provide the solider with highly improved communication range, enhanced digital voice and data connectivity and improved operational flexibility and readiness.

During Q4 2018, we delivered units for (inaudible) validation on these vehicle platforms as required by the U.S. Army and expect foray production beginning in Q1 of 2019. During Q4, we also received an initial year 1 2019 delivery order valued at $1.6 million against the $9.5 million IDIQ contract announced from an undisclosed U.S. DoD unit for vehicle communication kits including our radio universal vehicle adapter.

Additionally, we delivered engineering verification models of a new radio ancillary device to a major radio OEM for test and acceptance, and we look forward to completing the production readiness transition with initial shipments in Q1 2019. For the coming year, we will continue to leverage our vehicle amplifier adapter and/or universal vehicle adapter product lines into new and follow-on program requirements for the U.S. Army's Handheld, Manpack and small Form-fit program focused on a leader handheld radio and generation 2 Manpack radios as well as for the special operation forces tackle communications program.

In closing, for the fourth quarter of 2018 we were very pleased with the solid quarterly revenue growth in the Batter & Energy Products business and the awards announced by our communications systems business including large contracts for VAAs, mounted amplifiers and universal vehicle adapter kits.

For 2019, Communications Systems starts the year with a total value of in-hand present year shippable backlog almost 30% higher than their total 2018 revenue. At B&E, we're focused on meaningful revenue capture from completion throughout the year of several maturing new products and programs including the new 3-volt cell, a world-class ER product line, smart U1 batteries, multiple medical market expansion opportunities, the government/defense 5390 and 5790 primary batteries, OEM, STC and leader radio and public safety radio battery packs, numerous 2590 rechargeable battery prospects and acquisitions.

As a total company, we aim for year-over-year revenue increases each quarter with leveraged earnings and we fully expect to deliver a year of profitable growth in 2019. We continue to focus on prospect development for future revenue growth from the medical and industrial markets, Internet of Things market and from the U.S. government/defense market.

And finally, our strong balance sheet, solid cash flow from operations and the disciplined execution of our business model by our management team afford us the opportunity to simultaneously pursue organic revenue growth through new product development, invest in strategic CapEx for competitive advantage, seek out bolt-on acquisitions and return value to our shareholders through stock repurchases.

Operator, this concludes my prepared remarks. We would 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).

We will now take our first question from Gary Siperstein from Eliot Rose Wealth Management.

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

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Congratulations on another solid year and the fourth year in a row of increasing revenues, increasing operating income, increasing cash, increasing earnings per share. My first question, Mike, deals with, I think we were expecting a little more out of the fourth quarter and you mentioned in the earnings release the delay, some production delays on the $20 million, $19 million orders. Can you explain what those production delays were and why you're confident you will begin shipping them in Q1?

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

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Sure, sure. I mean, as you may recall, this project, those projects were awarded in October 2018 and they are a little different than our previous VAAs in that they included a VAA as well as a mounted power amplifier for 2 channels operation. So they are a little more complex and we had initially targeted fourth quarter 2018 shipments. I think I mentioned it in our last call. It was aggressive, but since we had done VAAs before, we were -- we're doing our best to try to get some out the door in the fourth quarter. During our design finalization and getting ready the supply chain, we definitely experienced some elongated supply chain lead times. As economy is getting better, a little harder to get some of the electronics. Nothing major but more than just one thing. And it was exacerbated a little bit by some slight design tweaks that we made, which together pushed the completion and initial shipment schedule into the Q1 of 2019. I mean, obviously frustrating due from the fact that it was the year-end and the fourth quarter, but we don't cut corners. And our goal is really to deliver safe and reliable products that meet the customer requirements. And so we move forward and we expect that units will start shipping in the first quarter of 2019 and continue on through Q2 and maybe a little bit into Q3.

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

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Okay. So it could be a blessing in disguise. It will make 2019 a little better than it otherwise would have been if you did get some out in Q4.

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

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We think that was a strong year.

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

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Mike, so I think you just said the shipments will be completed by Q3. Is that for the entire $19 million?

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

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Yes, contractually right now the shipment schedules would expect us that those delivered by the end of the second quarter into Q3, yes.

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

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Wow, okay. So can you give us any color then on the cadence? Is it $2 million or $3 million in Q1 and $6 million to $8 million or $10 million in Q2 and then the balance in Q3? How do you think it will go?

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

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It will be difficult to do by quarter, but it would be certainly be weighted towards the first and second quarter.

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

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Okay. Wow, super, okay. And then on the IDIQ, you mentioned the $72 million in IDIQs that are moving forward through with testing. When does -- if I recall, I think those were all 5-year IDIQs. When do you expect testing to be completed and then what do you think the cadence -- I know you don't know until you get the order, but is it conservative for us to estimate just divide the $72 million by 5 or if the testing, let's say, takes the first half and you start shipping in Q2, maybe take half of that, half of the divide by 5 and then go from there? What's a reasonable guesstimate?

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

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It's really hard to say. I mean, as far as the testing goes, the first part of your question, we hope to be starting into some of the first article testing next week of the 5390s that you see a couple months progress to get that testing done. And that's for the 5390. For the 5790, we lag by probably about 4 weeks, the 5390 schedule. So this is something obviously we've been working on for last year, year-and-a-half or so. So those milestones I think are important and we're starting to get into this first article testing time period. If we go through the testing, we have some government entities that go to that with us and (inaudible) things and sign off on things. So we don't entirely control the timing of those activities, but certainly it was a milestone that I thought was worth mentioning. In terms of what the dollar value we should expect, in the case of the first one, I believe, was a 3-year plus 2-year option and that was 5390s, the second one was just a 5-year IDIQ. I wish I could predict and the backlog numbers that we quote do not include those IDIQ numbers because we don't really have firm delivery orders for those yet, but just as an order of magnitude feeling, I believe in 2018 we had around $4.5 million or so of 5390s just of the legacy product line. So it can be lumpy at times back and forth, but I have in this call before announced a couple $2 million or $3 million type of award. So it feels like the 5390 number, it's in the $3 million, $4 million, $5 million a year type of range, but we don't really have a lot of visibility to the 5790s at this point.

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

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Okay, that's great. But it's not included in the backlog. So whatever comes in will be gravely above and beyond that 30% increase in backlog.

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

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Yes, and we are not trying to be so wordsmith like in our releases and even our prepared remarks. But as a general approach, we only put things in our backlog that actually has a firm delivery order. So we don't put any revenue associated with the IDIQ unless there is a delivery order against it in our backlog number that we put in our documents.

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

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Okay, that's fine. And in your script you mentioned that you got a $1.5 million award in Q4 that will ship in the Q1 of 2019. Is that in the backlog because of the shipping in 2019?

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

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Yes, yes, sir, it would be.

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

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Okay. And also the $1.6 million IDIQ, that's supposed to be from a non-disclosed prime defense contractor, that's also in backlog and should ship in Q1?

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

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It ships, that $1.61 million that was done against that $9.5 million IDIQ. To answer your first question, yes, it is in our backlog number that we quoted since it is firm delivery order, but the delivery is scheduled throughout the entire year 2019.

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

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Okay. And then just back to the $72 million in total IDIQ. So if we divide that by 5 years, that's like $4.5 million a year -- I'm sorry, that's like, what is it, $14 million a year or something like that, $15 million a year. So just taking what you did last year at that $4 million to $5 million level, so that would be a conservative level and you would think there will be upside unless the $72 million goes beyond the 5 years?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [19]

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It's really hard to predict, Gary. I mean, it's so much based on and we don't have visibility to what the consumption side of it is, military deployments, what does DOA have on the shelf, what the life of those units are. It's just so hard to predict. But we want to get it to the point where the [first] testing is done and we are ready to go so that if there is delivery orders to be had, that were in a position of receive those.

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

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Okay, got you. And Mike, what's the difference, I think if I recall in terms of description of the different contract awards, maybe in '17-'18, a lot of them were called readiness orders and now '17 and '18-'19 I think they are called modernization? Can you just explain the difference to me?

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

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Gary, I honestly don't have a distinct difference in the definition of those 2, probably just a more creative way to say each one. But we try to track the press releases that the Department of Defense makes in readiness, modernization. Those are the things that tend to pop up in their press releases and we are just trying to mimic what they say.

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

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Okay. And I'm sure some of the contracts we just discussed involve the, especially the -- I guess, the $19 million, the new generation, the leader radio and then the VAAs and the VIPERs for the new generation of 2-channel radios. So as that testing completes, then that should go into full production?

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

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That's correct.

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

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Or is it already in production? Okay. And that should complete around mid-year, is that what are you saying?

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

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We expect to be done with the testing and in full production starting in Q1. And delivering on those contracts primarily through Q1 and then Q2, it may go over a little bit into Q3.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [26]

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Okay. And isn't that -- if my understanding is correct, isn't that a multi-billion -- for the primes, it was a multi-billion dollar award to 2 prime contractors. I think it was Harris and Thales. And doesn't that go out many years, so we have the ability get follow-on business once these initial contracts are completed?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [27]

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Yes, that's what at the top level, the OEM primes battle it out at that level. And relative to the parts that we provide, our understanding is and I think some of the press releases that the defense department put out said that they were awarding these first initial contracts and then subsequent awards for the stuff that we make will be competed in each individual time that they go out for another lot of equipment. So our goal is in this first tranche, if you will, do the very best job we possibly can and make sure that the end users love it and that we are competitive and our supply chain is wet and ready to go so that in those subsequent contracts which we expect to be competed again, we are in our best position to win some of those as well.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [28]

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Okay, super. Now I understand it a little better, thank you. And in terms of the cash, now that interest rates have backed up to I guess 3% on CDEs, 2.5% on treasuries, Phil, how is the cash invested right now?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [29]

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I can assure you and the other shareholders, Gary, that we're getting the maximum income on the cash that we have in hand. And the easiest way for the investment community, the shareholders, to see that is to look at the line called interest expense where interest income is offsetting interest expense, bank charges and stuff.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [30]

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Okay. And at 2.5% to 3% on $26 million, I think that's approaching a nickel a share. I know it's not all invested, you needed some cash readiness for the buyback, et cetera. But all of a sudden it's starting to contribute to EPS, so that's nice. In terms of the tax rate now going forward, so you mentioned a 21% provision. So just to be clear, so we still have a $7 million in NOL carryforwards that they recognized on the balance sheet. The book value is booked up to [$6.40]. We still will not generally be paying tax (technical difficulty). But the provision will produce GAAP income, but you're going to go, going forward you're going to highlight non-GAAP income and GAAP income, so we can see how operating earnings and EBITDA are trending?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [31]

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Yes, absolutely, Gary. That certainly is our game plan going forward because of course we have to follow GAAP, we have to show a tax provision of U.S. pre-tax income at 21%. But at the same time knowing that we're going to utilize the NOLs and not pay any taxes, we have to show the true economics that are being yielded by our business. So we will show net income and EPS on a GAAP basis and on an as-adjusted basis with the reconciliation between the GAAP and as-adjusted so all of the shareholders will see all of the details on that.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [32]

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Okay. So with that backlog and with your commentary and Mike's script, we'll be able to clearly see if indeed 2019 proves to be the fifth year in a row of improving sales and improving operating income and EBITDA with that. Any --

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [33]

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But we're always transparent and we will continue to be so.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [34]

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Okay. And any impact in Q4 or so far year-to-date from the government shutdown or Brexit?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [35]

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No, no, no, nothing, nothing at all from our end.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [36]

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All right. So Brexit hasn't affected Accutronics really in any material way? And despite the government shutdown, you are able to collect your receivables from the government from DLA?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [37]

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Absolutely.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [38]

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Okay, super. And, Mike, going forward on some of the newer initiatives that could provide a future material revenue stream for us, as things stand now when you look at robotics and you look at Internet of Things and you look at the 3-volt and metering and next generation smoke detectors, based on the customer interest and demand out there, what do you think is going to emerge as -- I know they all are additive to us, but what do you think is going to emerge as the new revenue stream that has some materiality, medical, et cetera?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [39]

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I mean, I think that the 3-volt sort of being a pure organic new product in a very high growth, the segment's growing at double digits. And given our 20-plus histories in 9-volt and whether it be for smoke detectors or other devices, I'm excited and can't wait to get our new 3-volt product out there because I think it could make a big difference in terms of our overall revenue stream. I think the thionyl chloride cells, the more we be looking to that, we see more of an opportunity for growth. And we've been doing this primarily into China at this point. But as we look around globally, we think we have a unique spot that we can exploit for that new cell as well. So those 2 areas, just pure organic growth from a new revenue stream that we haven't been playing too deeply and those are extremely exciting. On the battery pack basis, a lot of these things are under the radar. There are -- sometimes there are $600,000, $700,000, $800,000 a year which is a point of organic growth, but doesn't get up to a press release and there's just a plethora of those. But I would sort of put it in those areas with the 3-volt cell, the ER cells and just a bunch of different medical battery packs and other industry battery packs.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [40]

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Okay, super. And last couple of questions, I'll get someone else a chance. On the M&A side, anything new you can share with us in terms of the color of the environment out there for M&A with the government shutdown and Brexit and the rate pricing, that interest rate [separates] and what's it look like out there?

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [41]

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I mean, we're still actively involved. We're disappointed that we haven't concluded something at this point. We talked about that on previous calls. We still have a disciplined process. But we expect to be turning the wakeup a little bit. We're generating a lot of cash. We had dry powder there. We're very confident in our ability to integrate and once revenue comes in, to make the most amount of profit from it. And so we think we're in a great position to do an acquisition and we hope to do something sooner rather than later. But unfortunately we don't talk about it till the deal is concluded. So it's hard to give much more color on it at this point.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [42]

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Okay, that's fair. And, Phil, last question. Anything new going on in investor relations? Are you getting out to meetings or considering conferences so we can get analyst coverage?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [43]

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We consider a lot of different alternatives when we put our schedules together. And the key is based on where do we get the most, the highest return on investment with our time. And working with some very experienced terrific people, we have determined that that is the highest ROI is on working on one-on-one potential investor and existing investor meetings. As you can see from our shareholder list, we have a great listing of institutional shareholders. As we continue to have these meetings, we can look on that list and we can -- it's our score card that we can document, we see documentation of how we're doing. And we know that the individuals that we're meeting with are very well connected, very well networked and the Ultralife story certainly makes its way out. So that's going to continue to be our focus and we feel that we've been quite successful with that.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [44]

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And lastly on the buyback, yes, I guess you guys take it over in 48 hours, but you have that plan in place. So I'm assuming they are buying back some stock today with the stock reacting negatively to the Q4 numbers?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [45]

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Well, according to the 8-K that we issue, we gave the timelines on when the length of time that the 10b5-1 is in place. We're back at the controls early next week and like any investor out there, we weigh all the different factors and you can see by the numbers that were presented, 373,000 shares at $7.21. We buy when we think the stock is a good value and that's guided us thus far and in previous programs. So I think the numbers, the quantitative amount speak for themselves.

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Gary Steven Siperstein, Eliot Rose Asset Management, LLC - Founder, Managing Member, and President [46]

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Yes, absolutely. You were very active in the quarter.

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Operator [47]

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(Operator Instructions). We will now take our next question from Bill Lauber from Sterling Capital Management.

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William Lauber, [48]

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Phil, I'm glad right there at the end that you repeated the buyback, 373,000 shares. So you spent about $2.6 million. And factoring that in, the cash balance at the end of the year was how much?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [49]

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$25.9 million.

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William Lauber, [50]

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Okay. And do you all like -- I can't remember from the past, do you all give any estimates on CapEx for the year, for this year or for the going forward?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [51]

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The only thing that we've mentioned in the past is we mentioned the scope of the 3-volt program and that was included in Mike's script. But you'll see in the 10-K that was published today, you can see that $4.2 million was cash paid on capital programs in 2018. And with the activity that Mike had mentioned in his script, I'm looking at that to be the continuing running rate in that neighborhood for the next couple of years, strategic CapEx.

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William Lauber, [52]

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About little over $4 million?

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Philip A. Fain, Ultralife Corporation - CFO, Treasurer & Corporate Secretary [53]

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Yes.

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Operator [54]

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I would now like to hand the call back to Mr. Mike Popielec for any additional closing remarks.

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Michael D. Popielec, Ultralife Corporation - CEO, President & Director [55]

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Great. Well, thank you very much, everyone, for joining us for our fourth quarter 2018 earnings call. We look forward to sharing with you our quarterly progress on each quarter's conference call in the future. As Phil mentioned earlier, we also updated investor presentation in the website and got a number of other documents out today. So please check them out. And everybody have a great day. Thank you very much for participating.

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Operator [56]

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