Good day, and thank you for standing by. Welcome to the Ultralife Corporation Third Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jody Burfening, Managing Director, Alliance Advisors Investor Relations. Please go ahead.

Thank you, Didi, and good morning, everyone. And thank you for joining us this morning for Ultralife Corporation's earnings conference call for the third quarter fiscal 2024. With us on today's call are Mike Manna, Ultralife's President and CEO; and Phil Fain, Ultralife's Chief Financial Officer. The earnings press release was issued earlier this morning. And if anyone has not yet received a copy, I invite you to visit the company's website, ultralifecorp.com (sic) [ ultralifecorporation.com ] where you'll find the release under Investor News in the Investor Relations section. Before turning the call over to management, I would like to remind everyone that some statements made during this conference call contain forward-looking statements based on current expectations. Actual results could differ materially from those projected as a result of various risks and uncertainties. The potential risks and uncertainties that could cause actual results to differ materially include uncertain global economic conditions, reductions in revenues from key customers, delays, or reductions in U.S. and foreign military spending, acceptance of our new products on a global basis, disruptions or delays in our supply of raw materials and components due to business conditions, global conflicts, weather or other factors not under our control. The company cautions investors not to place undue reliance on forward-looking statements, which reflect the company's analysis only as of today's date. The company undertakes no obligation to publicly update forward-looking statements to reflect subsequent events or circumstances. Further information on these factors and other factors that could affect Ultralife's financial results are included in the company's filings with the Securities and Exchange Commission, including the latest Annual Report on Form 10-K. In addition, on today's call, management will refer to certain non-GAAP financial measures that management considers to be useful and differ from GAAP. These non-GAAP measures should be considered supplemental to corresponding GAAP figures. With that, I would now like to turn the call over to Mike. Good morning, Mike.

Thank you. Good morning. Welcome to our call on Ultralife's Q3 operating results. Earlier today, we reported Q3 sales of $35.7 million and operating income of $0.5 million, resulting in $0.02 of EPS. Battery & Energy Products sales increased 1.9% over the prior year's Q3, with Communication Systems sales decreasing 58% to $3.2 million as we continue to diversify that business. Our top 3 initiatives for the year: material cost deflation, lean productivity and sales funnel improvement continued progress in Q3, with multiple lean events completed in both businesses and captured future material cost deflation in several important areas, including lithium metal and printed circuit boards. We are seeing sales funnel opportunity growth, especially in ThinCell and thionyl chloride products and are focused on closing long-term supply agreements with several customers in our target spaces. I will turn it over to Phil to talk through the detailed numbers.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our third quarter results for the quarter ended September 30, 2024. We will be filing our Form 10-Q with the SEC in the next few days and have updated our investor presentation in the Investor Relations section of our website, which includes a summary and status of our transformational new products and a recap of our most recent acquisition, Electrochem. Consolidated revenues totaled $35.7 million compared to $39.5 million for the third quarter of 2023. Revenues from our Battery & Energy Products segment were $32.5 million compared to $31.9 million last year. Sales to our government/defense customers increased 28.9%, in oil and gas market sales increased 1.5%. These increases were, for the most part, offset by declines in medical battery and industrial market sales of 12.4% and 10.9%, respectively. The sales split between commercial and government/defense for our battery business was 69-31 compared to 78-22 reported for the 2023 full year, and the domestic to international split was 56-44 compared to 49-51 for the 2023 full year, demonstrating the heightened domestic demand for our U.S. government defense products. Revenues from our Communications Systems segment of $3.2 million declined 58.2% from the $7.6 million we reported last year, primarily attributable to large shipments in the 2023 period of vehicle amplifier adapter orders to a global defense contractor for the U.S. Army and of integrated systems of amplifiers and radio vehicle mounts to a major international defense contractor for which shipments had been delayed from earlier periods due to supply chain constraints. The year-over-year comparison was compounded by the timing of a follow-on Leader Radio order expected in the third quarter of 2024 that was not received until October. On a consolidated basis, the commercial to government/defense sales split was…

Thank you, Phil, for the detailed review of the Q3 results. As I've mentioned on previous calls, we have 3 major 2024 priorities to accomplish. First, continued material deflation. In Q3, we favorably negotiated our lithium metal contracts in several of our printed circuit boards and expect to realize savings in the hundreds of thousands of dollars per year. We continue to work on Kanban and pull systems with key suppliers to smooth material and cash flow and positively impact inventory turns, which was hampered in Q3, with customer pushouts and inventory build for a large order shipping partially in Q4 and the remainder next year. Second, lean productivity. We continue to reduce waste and inefficiencies in all of our processes throughout the business. We completed high-value lean events at our Newark, Virginia Beach and Houston facilities in Q3, with an expected cost improvements of 2% to 3% in each area. These target areas produce items we ship at a regular cadence, and we expect to see benefits as we go into Q4 and next year. Lastly, sales funnel improvement. We are seeing sales funnel growth, especially in ThinCells and thionyl chloride, and are currently reviewing how we best deploy our business development resources to align sales assets to the target markets of medical, government/defense and oil and gas, especially with the Electrochem acquisition now completed. I expect there will be some realignment of the team in Q4 to better focus and drive growth. Next, I will give updates on the organic growth projects and new product development underway for the businesses, which are key to future sales and market expansion. On our Communications Systems business, continues to ship EL8000 server cases to several customers, we have several alternate systems in the development pipeline to better service a broader range…

[Operator Instructions] And our first question comes from Josh Sullivan of The Benchmark Company.

As far as within the Battery & Energy Products segment, if you were to bucket how much of the headwinds you're talking about were due to the supply chain versus the order delays, how would you frame that?

I would frame that, Josh, probably almost 50-50, I would say. And in this day and age, you don't expect things to happen. You think that everything after post-COVID and after all the bumps in the road and all that in the supply chain that things are ironed out. But certainly, I'll just say stuff does happen, and it hit us during this quarter, but it's now rectified. And also, we're in an interesting position because when you look at our customers, we're part of their large supply chain. We're one component of many in the supply chain, and we may be all set and ready and willing to go, with ready to ship our products and recognize the revenue, but there may be a delay in other components that they're experiencing or something going on with their customer. So at the end of the day, Josh, it's this. We try to control everything that we can control. We try to significantly influence everything we can't control. But then again, there are certain things that happen that you just can't control. But that's why our inventory has gone up. But I would say to answer your question, it's probably in the 50-50 range.

Got it. And as far as the delays, was it related to any one industry? Or was it kind of broad-based?

It was pretty broad-based. I mean, we had some medical customers push out. You saw that was a little soft this quarter on the battery side of the business. On the Communication Systems side of the business, there were a handful of orders we expected to have in Q3 that we had material to provide and actually service, which is another reason our inventory kind of went up. But then the orders just didn't come in time to actually service them. And then we had a -- I'm not going to throw a whole bunch on the Helene thing, but we had like labels on a FedEx truck in Helene that we couldn't get and we couldn't ship. I mean, it was like little things like that, which I'm not going to excuse it that it's going to change the whole outlook of the quarter, but it's those little things that you pull your hair out and it might have added a cent that you can't do, and it's like frustrating, obviously.

And I think it's important to say, we have not lost any orders.

Yes. We don't lose orders typically. It's just, can we get them out the door based on their timing and our timing?

Got it. Got it. And then as far as the ThinCell opportunity, where are your medical customers as far as the approval timeline, do you think? Or what can you share there? And then the customers you mentioned added to the funnel, what products might those be?

Well, on the ThinCell side, it's such an exciting area right now because there's so many opportunities coming at us and some of them are just shake your head volumes. But the one -- the first opportunity we've been talking about for years is still tied up in a whole qualification and software and AI loop, trying to really make sure that the back-end part of the system that we're part of and supporting is actually functioning properly. And it's a pretty complex puzzle that our customers is trying to work through and get qualified and make sure they're checking all their boxes. But beyond that, there's a bunch of different opportunities coming at us in electronic shelf labeling, some RFID tracking. And we've had a couple really large medical wearable opportunities come at us that probably are still a couple of years out, but the sheer volumes potentially are pretty exciting.

Got it. And then just on the EL8000 direct -- vehicle opportunity, how big of an opportunity do you think that is?

Well, we've come out of this a couple of different ways. And you've got your commercial piece, which if you're -- there's definitely a lot of rugged applications out there just in the commercial space, which for us, we think is in that $5 million to $10 million type of area as far as opportunity there in just that piece. And then on the military side, we're looking at it probably $20 million to $30 million. So, we're in that $10 million to $50 million type of available marketplace. I will say this last quarter, we had some delays, nothing in our control with server blades actually being available to us in time. So, I think the market is there. It's pretty strong. I think it's just starting. I mean, we're kind of on that tipping point where AI is really starting to really go. And then the DC power supply that we're in validation with right now is really the enabler to get it on the vehicles and forward operating bases where they have DC-only power typically. So as soon as that pops through, I think that opens up a whole another channel for that product line.

And it's nice to know that we're the only authorized supplier for the EL8000 cases.

Yes. And as we expand into a couple of different case sizes for different uses, I expect us to have a pretty rounded out portfolio of offerings there that could be -- it's only going to help to the aperture of the opportunity, right?

Got it. That's great. And then just any early customer indication on Electrochem and what the capabilities might be? Is it driving any early interest?

Well, we've definitely had a lot of customer congratulations and a lot of excitement around the acquisition internally and externally. They're another lithium metal primary battery company that has kind of been living in a -- I'm not going to say displaced parent, but they've been kind of orphaned in that business, and they didn't really have some of the synergies that we can bring them worldwide, not only in the manufacturing efficiency side and supply chain side, but as you start looking at the whole picture of how do you sell product in our space, its cells packs and then all the ancillary devices around it. And they've been pretty much a cell provider with a little bit of pack business. And we really think they're going to really add to our portfolio because we can add a lot of, I think, pack business. And then we have some integration plays. I mean, we are also buying a small quantity of their product for our use. We think we have a pretty good opportunity to shift a much larger quantity of our purchases internally to them. So, there's a good vertical integration synergy. And as we collaborate, I'm sure we're going to find a lot more things that we'll get pretty excited about, I hope.

Our next question comes from John Deysher of Pinnacle.

Just a couple of quick questions. You mentioned, I think, an order that you expected to ship in third quarter that was pushed out to shipping in the fourth quarter. Could you give us an idea of how large that order was?

Yes. For the Comm Systems business, that was -- the total order was just under $2.5 million. So it was sizable, and that's just one of the items. And there's always a shuffling between quarters and sometimes you gain, sometimes you lose on a specific quarter. That's why the way Mike and I look at this business is we look at it over the longer term. We look at it because of all the different moving pieces and realizing that we are one of many components that go into the end product and a lot of things can happen. We look at things over a 12-month basis and sometimes even a bit longer.

Okay. Great. That's helpful. On the Electrochem acquisition, were there other bidders for that property?

There were or at least we've been told there were. And we do know that our bid was not the highest, but we could execute the transaction in the timeline that it wanted to be done. And there was a lot more synergies with us versus the other business is what we've heard.

Okay. So it was an auction process, you're saying?

It didn't go to auction. It went to targeted...

Yes. Targeted participants.

Targeted participants before it may have gone to auction if it was decided.

But you never reached the auction process?

It never reached the auction process. Correct.

Okay. Fair enough. And on the disclosure, the coming disclosure of Electrochem, I think, by January 16, that will include audited financial statements for 2023. And will it include year-to-date perhaps through September of 2024, even if it's unaudited?

What's going to happen is -- you're absolutely correct in the first part. The first part will be audited financial statements. Now being a very, very small component of Integer Holdings Corporation, it was never audited. It was well below materiality levels. So, we certainly have our work cut out and not an expensive proposition to do the carve-out and to get the audit done and all that stuff. And it's interesting because I know what you're looking for with regard to your next question. That will be -- that will happen as we complete our future filings. But in Integer's report, let's see, on October 30, they indicated that expected sales in their model was, I believe, $36 million, with EBITDA of $5 million. So, that was Integer's disclosure on this. And we, of course, wait until we've done a lot of work and due diligence. We wait until -- the audit is a key part, because the audit for us is also an enabler with the opening balance sheet as well.

Okay. So, will we see stand-alone results for 2024 for Electrochem?

Well, at some point, you certainly will, yes.

Okay. As a carve-out...

Later when we announce the Q4.

Okay. That will be very helpful to see. '23 as well as '24.

Yes. There is pro forma. It's -- we have to show what our results would have looked like in future filings if we -- let's see, if we acquired Electrochem earlier.

Okay. The more disclosure, the better, I think. So it sounds like you're on the right track.

Yes. We're totally transparent. We're happy, and we will be disclosing the information. Absolutely. We're very proud of the work that was done going into this acquisition.

And our next question comes from [ Stefano Bolas ], individual investor.

Congratulations for the progresses in the product pipeline and the acquisition. The first one is about the backlog reduction end of the quarter. So, this reduction is mostly due to a post-COVID normalization rather than the timing of expected orders, you said?

Yes. We think -- I mean, if you look at our back -- in our investor presentation, we have a series of backlogs per year going back even before COVID. And we've been historically in that $40 million to $50 million range with backlog. And then over the last couple of years, it's been much higher due to the COVID kind of bump. The other slight piece in going from Q3 to Q4 is we do have some, what I will say, yearly POs that start filling in towards the end of the year as they deplete off the volume throughout the year. So, we do expect to see some additional POs in Q4 for next year's volume from those particular customers.

And I'll just say this, the information that we've reported on Page 15 in our investor presentation, it's as of a single day. So, just as an example, a week later after a week into Q4, it went up from $78 million to $83 million. So it depends on what you're looking at it because of a more continual flow of POs.

Okay. I have a second one on Electrochem acquisition. So, you have already given some characteristics now in the call, but what is the one thing about the company that made you say this is the one?

Well, for us, it's a key piece of the -- one of the gaps we identified in our portfolio with the thionyl chloride chemistry. And we've been looking at Thionyl for the last 10 years, and we've invested pretty heavily in, what I will call, the smaller cell, lower temperature cells over the past 3 years to 4 years to really target the metering applications and some of the telemetry RFID type of products. And we looked at the high temp, high-reliability large cells like DDs, CCs, as a 5- to 10-year development cycle and adoption for the marketplace. So it really became a make versus buy. And for us to make it, it'd be a 10-year enterprise. So it was really who could we buy that has the premier product in the world in this chemistry. And you look at the Electrochem business dating back to 1979, they're it. I mean, they're the top dog. So, that's what we wanted.

[Operator Instructions] I'm showing no further questions at this time. I'd like to turn it back to Mike Manna for closing remarks.

Thanks, everyone, for listening to today's call. We look forward to you during the 2024 Q4 conference call and earlier in December for those of you that may be attending The Benchmark event. We'll see you then. That's it. Thank you for...

This concludes today's conference call. Thank you for participating, and you may now disconnect.