Good day, and welcome to the Ultralife Corporation First Quarter 2020 Earnings Release Conference Call. As a reminder, today’s 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.

Thank you, Kareen, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation’s earnings conference call for the first quarter of fiscal 2020. 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. 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 the Investor Relations 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 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 reflect the company’s analysis only as of today’s date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these 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 reports on Form 10-K and the latest quarterly report on Form 10-Q. 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 supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Good morning, Jody, and thanks to everyone, for joining the call. Today, I’ll start by making some overall comments about our Q1 2020 operating performance, including the impact of COVID-19, and then 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 2020 revenue initiatives, then open it up for questions. For the first quarter of 2020, total company revenue increased 37% year-over-year, driving leveraged operating profit up 171% and GAAP earnings per share, up 151%, despite a significant headwind from the COVID-19 pandemic, which caused an extended shutdown of our China operations and other supply chain disruptions. The teams delivered a Q1 organic revenue growth rate of 8% in the core business, led by Communication Systems, executing existing contracts under the U.S. Army’s Network Modernization initiatives. At Communications Systems, first quarter revenues were up 75% year-over-year. And at B&E, revenues were up 30% year-over-year, with B&E SWE acquisition contribution more than offsetting the core revenue softness in China. The increase in Communication Systems’ revenue and favorable mix, combined with the addition of the SWE acquisition and overall company-based cost operating leverage, resulted in the approximate 2.5 fold increase in operating profit and earnings per share year-over-year. As we continue to monitor the evolving impact of the COVID-19 pandemic, we have taken the necessary steps to safeguard the health and well-being of our employees in accordance with the protocols established by federal health organizations and state and local public health departments, while ensuring an uninterrupted flow of our mission-critical products, serving our medical device, first responder, public safety, energy and national security customers. Based on several state and federal government mandates, Ultralife Corporation falls under the criteria of being an essential supplier of its products and services, and thus has maintained normal work operations across all its locations during the COVID-19 emergency response. In a few minutes, I’ll give you further information on our revenue initiatives. But first, I’d like to ask Ultralife’s CFO, Phil Fain, to take you through additional details of the first quarter 2020 financial performance. Phil?

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our first quarter results for the quarter ended March 31, 2020. We also filed our Form 10-Q and Form 8-K with the SEC this morning, and have updated our investor presentation, which you can find in the Investor Relations section of our website. I would like to thank all those that helped make this happen. For the first quarter, consolidated revenues totaled $25.8 million, representing a $6.9 million or 36.7% increase over the $18.9 million reported for the first quarter of 2019. Overall, commercial sales increased 47.9%, boosted by Southwest Electronic Energy Corporation, or SWE, which we acquired on May 1, 2019. Government and defense sales increased 24.1% on favorable performance by our Communications Systems business. Excluding the contribution from SWE, sales grew 7.9%. Revenues from our Battery & Energy Product segment were $20.8 million, an increase of 29.8% over last year, attributable to a $5.4 million revenue contribution from SWE, which offset a $0.6 million reduction in our core commercial business, driven by the month-long shutdown of our China facility and supply chain disruptions caused by COVID-19. Including SWE, the sales split between commercial and government and defense was 71/29 compared to 63/37 for the 2019 first quarter. And the domestic to international split was 55/45 compared to 47/53 last year, due primarily to higher domestic sales of medical and public safety batteries as well as the addition of SWE. Revenues from our Communications Systems segment were $5.1 million, an increase of $2.2 million or 75.2% over last year. The increase primarily reflects shipments of vehicle amplifier-adapter systems to support the U.S. Army’s Network Modernization initiatives announced in October 2018, and shipments of vehicle amplifier mounts to an allied country prime defense contractor. On a consolidated basis,…

Thank you, Phil. As a reminder, our strategy is to drive revenue growth opportunities through diversification, expansion of markets and sales reach, new product development and strategic CapEx and potential acquisitions. Looking at the Battery & Energy Products business, market and sales reach expansion has been about diversifying more into the global commercial markets and international government defense markets to lessen our revenue fluctuation as a result of lumpiness in the U.S. government defense markets. As an example, just one year ago, we acquired Southwest Electronic Energy Corporation, or SWE, which serves the oil and gas exploration and production and subsea electrification markets. For the recently completed Q1, its third complete quarter as part of the Ultralife portfolio, the SWE acquisition was once again EPS accretive and provided 26% of total B&E sales. This compares to B&E’s other end markets of medical, which represent approximately 25% of total Q1 B&E sales, and U.S. government defense, which was about 27% of total Q1 B&E sales. These end markets share a focus on mission-critical niche applications, competitive differentiation based on quality and reliability and long-term high-value proposition customer relationships. We like the individual end market risk mitigation, the fairly equal weighting of overall sales mix, each of these key markets brings. In addition to the diversification play, another key benefit of the SWE acquisition was that we obtained a highly valuable technical team of battery pack and charger system engineers and technicians to add to our new product development-based revenue growth initiatives in our commercial end markets. As part of our integration plan, we launched a global engineering council to more fully leverage our worldwide technical and manufacturing capabilities, to share best practices, solve common technical problems and accelerate customer responsiveness. Now a current crisis caused catalyst, like the COVID-19 pandemic, has…

Thank you, sir. [Operator Instructions] We will take our first question from Gary Siperstein with Eliot Rose Wealth Management. Please go ahead.

Hi, Mike and Phil, good morning.

Good morning, Gary.

Congratulations on a strong first quarter. Mike, can you give us some color on – I couldn’t write as fast as you talk, so it seems like you guys are very busy. There’s a lot going on in a lot of areas. So the – you mentioned that SWE got a $1.4 million respirator order. I didn’t know if SWE was doing anything on the medical side, can you give us a little more color on that?

Sure. When we did the original acquisition, one of the things we were so excited about were all the additional people that we were bringing on board, the people that were the experts in the battery management systems and charger systems, et cetera. And knowing that our overall medical business continue to grow, one of the things we stated that, even though we recognized oil and gas business was cyclical, that at long as it wasn’t in the exact same cycles that the government defense business is, that would be an overall good thing for smoothing our overall revenue. So we’ve been involved, as I mentioned in my prepared remarks, in sharing technical capability and best practices throughout the engineering teams. The team there is very used to doing very sophisticated battery packs. If you think about the conditions that they’re used to having to perform under extremely high pressures, extremely high temperatures, shop and buy, and all these kinds of things. When we saw this opportunity, there was a battery pack that had a short-cycle delivery, it seemed to be a perfect opportunity to have our SWE business operate on that contract. And so we’re really excited. Lots of time, people talk about having flexibility from facility to facility. But I think this COVID-19 situation caused that catalyst that created a strong pull as well as a push in terms of expanding our capability to do medical battery packs in more than just our existing facilities. So I’m very excited about seeing how SWE performs in this. It’s a reasonably simple battery pack. Goes through all the same testing and quality checks that we have anywhere else we make it. But it just is really a good thing to be able to have a flexibility to build things in different facilities.

Super. That’s good to know. You also mentioned that backlog, I guess, increased close to 20% sequentially. You mentioned, I think, $5.2 million in new orders in the second quarter. Of that $5.2 million, how much was due to this medical crisis? And how much was this base business?

That’s a good question. We got – every quarter, we try to comment about that quarter’s orders against annual agreements, but they’d be blanket or other type of awards. I remember correctly and I could be wrong, normally, it seems to be like it’s in the $2 million to $3 million range. So this came across as being a higher level than what we’d seen in previous quarters for the similar type of annual increases and blankets or other purchase orders. And then, without giving specific information, we’re going through a lot of exercises with our medical customers. They’re asking us, what’s the most we can do? And they give us high numbers. And then they go and check all the other members of the supply chain, and then they figure out what they – are they able to produce in their facilities? And whether they’re able to get part and support from other suppliers, not just us? And that’s resulted in a nice uptick of the overall revenue for us, and that’s helped us increase our backlog. Some of the companies are going to have higher revenue this year than it did last year just purely based on the COVID-19 type response. I think it’s too early to give specific numbers of what that incremental amount will be. We’re somewhat balancing sort of the surge request from medical, which, I think, is having some favorability against some of the pushouts as the medical industry is seeing elective surgeries and those kinds of things being delayed. There is a little bit of subtraction on the medical side. But overall, we view it as a net gain, but I think it would be premature to really give you some kind of quantitative amount for what that exactly be at this time. It’s just in a positive direction.

Okay. Okay. And then you talk about the 2 IDIQs, the $21 million and the $49 million starting testing, I guess, the $21 million, you mentioned, in May and the $49 million in June. Historically, how long does this – for those products, how long does the testing last before it goes into production and the government starts exercising those IDIQs?

That’s a good question. I think we originally got these contracts in 2017. So it seems like it’s taken forever. I have mentioned in previous calls how we have been receiving spot-buys along the way. One thing about these kind of contracts is that certainly, technically, the government, the military push the envelope. So this testing is extremely important. Many times you go through a couple of rounds of testing, and you’re proving your concepts out and you have some successes, you have some failures, and then you sort of go back to the drawing board, make some changes and then go through testing again. And what I’m trying to represent in the comments I made today was that we feel like we’re sort of in that last round of testing. If we could finish that testing starting in May and June, through the next quarter or two, and pass all the other requirements, then we’d sort of be in the batter’s box for any future delivery orders against those contracts. And that’s the stuff that you want to get to. You do all this work just to get to where that – you’re in a position to be allowed to execute on delivery orders. In the meantime, especially as it relates to the 5390, I also mentioned, you may recall, in December last year, we received a spot-buy for 5390s. We had hoped to start shipping some of that stuff in the first quarter. There were some delays due to some global supply chain disruptions. That will ship in Q2 and Q3. So if you think about it, if we ship those in Q2 and Q3, we would – and we can finish the first article testing and get the totally signed off, it could be a really good timing for the next-generation 5390, and we would hope that the 5790, which is a CFX blend version of our 5390 type battery, would be available shortly thereafter. So we’re excited about finally getting those into the position to where we might be able to get some revenue against those contracts.

Okay. Okay. Yes. So that was from 2017 from the initial award and...

I’m pretty sure it is. Yes.

And the final test – basically the final testing for the rest of this year, so that the possibility you could get all signed off and that could be 2021 revenue going forward and then starting the five-year process?

Yes. Yes.

Okay. Super. And then earlier this week, I think it was Tuesday, L3Harris announced a $95 million LRIP award on the radios from that $12.7 billion IDIQ. This is the – so this is the third – according to the news release, this was the third LRIP award and continued testing. So again, I know you’re not the prime, they’re the prime, but is that – and it said specifically in the release, this third LRIP award testing on the $95 million of radios will inform going into – instead of LRIP production, I guess, high-RIP production, I don’t know what the acronym is for going into full production. But can you give us any color on that?

Like we said before, we keep those specific details of individual customer relationships very private and confidential. We’re dealing with a number of the different OEMs in the marketplace, and so out of respect for their privacy and their confidentiality, we don’t discuss those. But I will make a general comment that we do make batteries for handheld radios, we make batteries for manpack radios, we make amplifiers for radios. As a matter of fact, if there’s no radios, there’s no need for the amplifier. So anytime one of the large global OEMs gets a good contract like that, it’s a good day for us.

Okay. That’s fair. And well, how about this, based on history, after referred LRIP orders, does that usually lead to regular production? Because you guys specifically said this will inform final production in the news release. And then secondly on that, they talked about it being worth $12.7 billion with a five-year IDIQ and five years following. So if you assume it goes to full 10 years, and if you assume the government buys the entire $12.7 billion, that’s – over a decade, that’s $1.2 billion a year. And my understanding is it’s just two contractors, L3Harris and Thales. So are you seeing from what’s public, I know you don’t want to talk about what they tell you privately, but from what’s already out there public, does that usually lead to full production after this last test? And then finally, I saw the release on the $95 million for L3Harris. I haven’t seen anything on releases for Thales. So have they similarly gotten similar orders from the government if they’re the co-supplier?

Yes. It really wouldn’t be appropriate for me to comment on any of those details. I don’t have access to a lot of the transactional details. And I just know from my our own experience, and as we just talked about, with some of these IDIQs, it takes a long time to go through all the different processes to get things through low-rate production, the high-rate production. The only thing I could say as an outside layman and observer, is it seems like we’re making it through the important milestones of get it closer to having high-rate production and meaning revenue streams. But other than that, I really couldn’t comment, Gary.

Okay. No, that’s fair. And just turning to the balance sheet. So is [indiscernible] your line of credit in the quarter?

No, there was no use of the line of credit, additional use of the line of credit. And if you go to the Q, the Form 10-Q, you’ll see in the statement of cash flows that we paid down the term loan in the neighborhood of $343,000. So no increase whatsoever. It’s going to start going the other way.

Okay. And so in the script, you mentioned – I think it looks like you finished the quarter with $35 million in accounts receivable. You mentioned in the script that there were some collections in April, and you can use that to pay down the long-term debt. It was $2 million? $3 million? Can you give us any color on that?

Gary, I would absolutely love to, but I’ll leave you in a bit of suspense, and you’ll have to wait for our next conference call. And – for you to see our success with this.

Okay. And then in terms of inventories, they were flattish around $29 million. Is that the expectation of a proper level? I mean with backlog up 20% and all these different projects, and Mike’s talked about in his script. What should we look for going forward? Is that fair? Can you dent it any more despite higher sales? Or is that going to start to trend up with the higher sales?

Gary, I would never publicly say that our inventory is at an ideal level. You always want to take the inventory lower. But when we look at the components of the – for example, that make up raw material, again, you’ll see in our 10-Q that the 63% of our inventory is raw materials, and then we – we then go through what those raw materials are. And based on what the backlog is, it’s one of those situations where you can say, thank God. So feel pretty good about where we are overall with the components in our raw materials. I think they’ll do us well to service the backlog, but also it gives us opportunities, some pretty good opportunities, to continue to reduce inventory levels, which, certainly, is our ultimate goal.

Okay. And also in the script, you mentioned that the China shutdown and COVID disruptions cost the first quarter $0.03, is that correct?

That’s exactly what I said, yes.

So on an adjusted basis, the first quarter without that, would have been $0.11? So that’s pretty good. Congratulations on that. And then not to be a – not to repeat myself, but – and I know it’s a different environment out there with the social distancing and the lockdowns, but have you guys looked to do anything on the IR front that’s new and different? Because we haven’t had any success in the past getting any analyst coverage. And with you guys being fully opened and doing well and having a quarter where earnings were up over 100% and backlog is up 20%, plus all the things Mike talked about. With the 6.75, 6.85 book and $0.40, $0.45 in trailing adjusted earnings, it just seems like we have a very cheap stock price. So it’d be nice to tell the world about that.

Gary, I agree with your assessment of our stock price when compared to the net tangible book value, your numbers are spot on. And what I will say is that we are getting numerous calls and we’re making numerous calls. So it’s not like we’re not doing anything on the IR front. We have been very active. We continue to be very active. And you always look forward to getting more and more – being more and more transparent, getting more and more information out there to satisfy the ultimate goals of IR, which are to increase shareholder value.

All right. That’s all I got. Thanks, guys. Congratulations again on a strong quarter, and keeping everyone healthy and safe.

Thanks, Gary.

Thank you, Gary.

[Operator Instructions] And at this time, we have no further questions. I’ll turn the conference back over to Mike for any additional or closing remark.

All right. Thank you very much. Well, thank you once again for joining us for our first quarter 2020 earnings call. We look forward to sharing with you our quarterly progress in each quarter’s conference call in the future. As Phil mentioned, I also like to mention that the updated investor presentation is on the website, so check it out. And everybody please have a very safe day. Thank you very much for your participation.

Thank you. And ladies and gentlemen, that does conclude today’s conference. We thank you for your participation. You may now disconnect.