Good day, and thank you for standing by. Welcome to the Ultralife Corporation Fourth Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jody Burfening. Please go ahead.

Thank you, Latanya, and good morning, everyone, and thank you for joining us this morning for Ultralife Corporation's earnings conference call for the fourth quarter of fiscal 2022. With us on today's call are Mike Manna, Ultralife's President and CEO; and Phil Fain, Ultralife's Chief Financial Officer. The press release regarding the earnings 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 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 the impact of COVID-19 and related supply chain disruptions, potential reductions in revenues from key customers, acceptance of new products on a global basis and uncertain global economic conditions. The company cautions investors not to place undue reliance on forward-looking statements, which 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 cause Ultralife's financial results is included in Ultralife 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.

Good morning. Thanks for joining the call on Ultralife's Q4 2022 operating results. This being my first call as President and CEO, I will start with some of my background. I am a Rochester Institute of Technology Graduate. I've been part of Ultralife since 1993 when Ultralife first started working on the rechargeable lithium-ion polymer battery program. I have experience in everything from testing, cell design, battery pack design, new product development, operations, sales and most recently, President of the Battery & Energy business for over three years, where I led the business to an average 8% net organic growth rate, and including Excell, grew top line revenue from $84 million to $120 million, a 43% increase delivering operating profit of approximately $10 million, while navigating through pandemic inflation and supply chain challenges. We won the largest contract award in the history of the battery and energy business, the conformal wearable battery, with an initial possible value of $165 million and additional option years that could add another $350 million. Ultralife has been my life's work. I am passionate about the business and the products and have a strategy for growth that diversifies the business across multiple markets and increases value for our employees, our customers, our suppliers and our stockholders. As for my current assessment, we have subject matter experts and professionals in both our battery and communications divisions providing us unique expertise that our customers value and require. We need to support these individuals and increase spending strength to achieve our future growth plans. We have unique products that target demanding applications and deliver superior performance. By nature, these products are designed to meet rigorous standards and requirements, which can result in multi-stage product development that consumes resources and interim designs that can incur higher manufacturing costs. We have multiple facilities that provide proximity to customers and localized support, allowing us room and flexibility for anticipated growth without large increases in costs, and also giving us redundancy in case of site interruptions. We're beginning to implement back-office synergies to increase the utilization of our personnel across the various sites. I feel our brand is vastly underutilized, and I think it can be leveraged in new ways to enhance wallet share and value and help with other intangibles like recruitment and retention. Our variable cost productivity projects were drastically reduced due to the pandemic and part shortages as resources were needed to source parts due to customer commitments. Now we are in the process of reinvigorating these activities with a focus on cost-down efforts and secondary sourcing of key components. I will now turn it over to Phil to talk to the Q4 numbers.

Thank you, Mike, and good morning, everyone. Earlier this morning, we released our fourth-quarter results for the quarter ended December 31, 2022. We also updated our investor presentation, which you can find in the Investor Relations section of our website and plan on filing our Form 10-K with the SEC in the next few weeks before the filing deadline. We're reporting our quarterly results later than our customer reporting practice due to illnesses experienced by some members of our accounting finance team, causing delays in the year-end closing and audit. I would like to thank the members of the accounting finance team for their dedication and hard work. Before starting my review, I want to point out to everyone that our fourth quarter includes a $0.8 million one-time charge for severance costs associated with the company's former President and CEO, who has announced on November 22, 2022, is no longer with the company. The majority of the cost will be paid in 2023. I will present our fourth-quarter operating results with and without this one-time charge. Now I'll take you through our fourth quarter results. Consolidated revenues for the 2022 fourth quarter totaled $36.1 million, the highest quarterly sales reported in over 10 years compared to $23.8 million reported for the fourth quarter of 2021, an increase of 51.9%. Government defense sales increased 84% with strong growth in both business segments driven by order flow and the commencement of deliveries of some long lead time components. Commercial sales increased 38.1%, reflecting the contribution of Excell and solid organic growth in oil and gas end markets. Excluding Excell, total organic sales increased 23.1% from the prior year period. Our total backlog exiting the fourth quarter grew to $111 million, the highest level in our company's history, representing an increase of $4.8 million or 4.6% over the comparable backlog exiting the prior quarter and an increase of $47.3 million or 74.2% over that exiting the fourth quarter of 2021. During the quarter, supply chain disruptions persisted, including increased lead times on components from suppliers impacting both our internal and customer manufacturing delivery schedules, resulting in continued delays in our shipments to future periods. Mike will address our go-forward actions in his comments that follow. Revenues from our Battery & Energy Products segment were $32.1 million compared to $22.1 million last year, an increase of 45.4%, with $7 million of the $10 million variance attributable to Excell and $3 million of net organic growth, comprised of increases of 67.5% in government defense sales and 26.9% in software and oil and gas market sales, partially offset by a 17.2% decrease in medical sales due solely to component shortages to fulfill increased demand from a large international medical device OEM. Net organic sales for this segment increased 13.9%. The backlog for our Battery & Energy Products business of $88.6 million, representing 74% of our 2022 total year sales is an increase of $0.4 million or 0.4% over the comparable amount exiting the third quarter. The sales split between commercial and government defense for our battery business was 71-29 compared to 75-25 for the 2021 fourth quarter, and the domestic to international split was 55-45 compared to 50-50 last year, reflecting growth in U.S. government defense sales and the continued success of our global revenue diversification strategy. Revenues from our Communications Systems segment were $4 million compared to $1.7 million last year, an increase of 138.1%, reflecting the receipt of components to commence the fulfillment of a large international order and to continue the fulfillment of a large U.S. order with some spillover into 2023. The backlog for our Communications Systems business of $22.4 million, representing 190% of our 2022 total year segment sales, is an increase of $4.5 million or 25.1% over the comparable amount exiting the third quarter. On a consolidated basis, commercial to government defense sales split was 63-37 versus 73-27 for the year earlier quarter, again reflecting the growth in government defense sales. Our consolidated gross profit was $8.1 million for the 2022 fourth quarter, up 52.8% over the 2021 period. As a percentage of total revenues, consolidated gross margin was 22.4% versus 22.3% for last year's fourth quarter. Gross profit for our Battery & Energy Products business was $6.9 million compared to $4.8 million last year. Gross margin was 21.6%, a sequential increase of 290 basis points over the 18.7% reported in the third quarter and a decrease of 20 basis points from 21.8% reported last year. The sequential improvement was primarily due to our closer matching of customer price increases with the continued cost inflation of certain raw materials and key components, including various electronic components, PC boards, chipsets and certain metals. For our Communications Systems segment, gross profit was $1.1 million compared to $0.5 million for the year earlier period. Gross margin was 28.7% compared to 28.1% last year, reflecting higher factory throughput leading to higher cost absorption tempered by inefficiencies associated with delays in receipts of components. Operating expenses were $7.9 million compared to $6.5 million last year, an increase of $1.4 million or 20.7%. The increase was primarily attributable to the one-time severance charge of $0.8 million and incremental expenses, including intangible amortization of $0.7 million due to the timing of the Excell acquisition on December 13, 2021. As a percentage of revenues, operating expenses were 21.8% or 19.6% when excluding the one-time severance charge compared to 27.4% for last year's fourth quarter, reflecting a 780 basis point improvement. Operating profit was $0.2 million, inclusive of the $0.8 million one-time severance charge compared to an operating loss of $1.2 million last year. Our tax benefit for the fourth quarter was $0.2 million, the same as that reported for the 2021 quarter computed on a GAAP basis. Including the one-time charge and the impact of interest expense to help finance the Excell acquisition and foreign currency losses associated with the strengthening of the pound sterling to the U.S. dollar, net loss was $0.2 million or $0.01 per share, compared to a net loss of $1.1 million or $0.07 per share for the 2021 quarter. Adjusted EBITDA, defined as EBITDA including non-cash stock-based compensation expense, was $2 million or 5.6% of sales for the 2022 quarter compared to a loss of $0.1 million for the prior year quarter. Turning to our balance sheet, to proactively influence our position to service our substantial backlog, we increased inventory by $0.4 million or 1.1% over the third quarter. This represents an increase of $8 million or 24.1% over year-end 2021. We ended the 2022 fourth quarter with working capital of $50.1 million compared to $47.6 million for last year. Debt to capital at quarter end remained low at approximately 0.18. Going forward, with our backlog diversified, end markets, growth initiatives and ongoing actions to improve our gross margins, we remain tenaciously dedicated to realizing the full leverage potential of our business model. Before turning it back to Mike, there is one other matter I will share with you. On January 25, 2023, our information technology team discovered an unauthorized entry into our information technology systems for our Newark, New York and Virginia Beach locations during daily morning information technology security procedures. The accounts in question were immediately disabled by our IT team, and the company's information security committee met promptly, taking swift action, including the immediate notification of our cybersecurity insurance carrier. Shortly thereafter, with recommendations from our cybersecurity carrier, we engaged external incident response professionals to assist with our assessment, recovery, and response. On February 7, the company received an electronic communication allegedly from a third-party known for nefarious ransomware attacks, claiming responsibility for the incident, and discussions with the third-party commenced through experienced cybersecurity professionals engaged by the company. This incident caused a partial disruption of our business operations at both locations, which resulted in production and shipping downtime of approximately two weeks. The company has now restored its information technology systems, and production has resumed in both locations. We do not believe that any other company locations were affected by this incident, and these other locations have continued their normal operations. The full scope of the cost and related impacts of this incident on Q1 2023 results, including the extent to which the company's cybersecurity insurance will offset the cost of the professionals we engaged and of the interruption to our business, is currently under review. The company's deductible for its cybersecurity insurance is $100,000. Based on the recovery of our systems and the review of the files affected, as well as the company's prompt response to assess the incident, no ransom or other amount has been or is expected to be paid to the third party. We continue to monitor our information systems for any irregularity. I will now turn it back to Mike.

Thank you, Phil, for the detailed breakdown of the Q4 results. For 2023, we are focused on executing our backlog and improving the gross margin of the businesses. We've been working through headwinds and supply chain disruptions and inflationary pressure over the last 12-plus months. We are starting to see some improvement over the last quarter, but expect continued cost pressure through 2023. With a strong backlog and known product mix going forward, we can work on leveraging purchasing of components and lean activities. An important piece of our business is electronics, which, with the recent supply chain delays and part shortages, we're using all the available parts to meet existing customer demand and did not have resources to develop second sources of supply or lower-cost suppliers. Now if supply chain starts to keep pace with needed demand, we can again work on these important variable cost improvements as well as three other important pieces. First, continuing price realization activities that offset cost pressures we are seeing throughout the supply chain and internally with increasing labor and expense costs. Second, we are adding sourcing resources and extending the time horizon of our sales and operations planning process with both customers and suppliers, improving our end-to-end forecasting. This will reduce additional fees for expedited parts and logistics, reduce manufacturing inefficiencies, both internally to Ultralife and within our supply chain, which in turn helps working capital reduce over time and improves inventory turns. Third, we're improving the process of launching our new products and transitioning them to higher volume production, aligning resources to focus on lean principles and process capability improvement activities. Next, I'd like to review an important piece of our organic growth strategy, which is product development and the major focus projects currently underway. First, on the battery and energy side of the business, our new X5 medical cart system shipped over $1.2 million in Q4. Demand remains high, and we continue to develop additional variants based on customer feedback and needs. Our thin-cell product line continues to grow in the medical wearables and tracking product spaces. We will invest CapEx in 2023 to support forecasted demand by our customers for these products. We expect the wearable telemetry device usage to increase, as several of our technologies may be key enablers for the required run times. On the UB123A Cell product line serving the IoT market space, we are commencing the first production shipments of this product this quarter after a lengthy qualification process, which is a critical milestone. The XR123A, our carbon monofluoride blend version of this cell, which offers 20% to 30% more energy in the same size, is going through UL and IEC testing this quarter. For both the UB123A and the XR123A, we continue to explore multiple opportunities for cell sales, but ultimately believe battery pack assembly business will be a critical piece of this product line, where custom solutions can offer added value and deeper customer relationships. We have multiple partners now evaluating our improved final chloride product line, targeting industrial monitoring and telemetry applications where this technology can power items across an extreme temperature range for up to 20 years. We have several ongoing commercial negotiations and will have several new final products launching in 2023. The development of the conformal wearable battery, which is used to power advanced dismounted soldier equipment, continues to make progress. We are currently expecting to start first article testing of the battery in the back half of 2023. This is an indefinite quantity, indefinite delivery contract with uncommitted volumes, and we are balancing internal resources for this project with other known revenue generating and cost-reduction projects. Our SeaSafe subsurface batteries continue to gain initial customers in various applications, which we believe will be a growth market as offshore projects increase. We have some unique capability as our products can operate at incredible pressures and depths while providing needed power to the equipment on the ocean floor. Secondly, on the communications side of the business, we are through the qualification testing with multiple partners for our EL8000-server case and power system. We anticipate initial production orders for this product this year, supporting our strategic server partners. This will help diversify this business in the commercial spaces and add further scale to the business. We continue to work on advanced amplification and power products with multiple partners to support air ground and sea communications, primarily military in nature. We are investing in the next generation of gallium nitride amplifier and power architectures to continue our leading position in the portable amplification space. As noted earlier, we are reviewing how we can expand brand and product line recognition of the businesses and how we can position ourselves with targeted marketing efforts, which will drive customer capture for future revenue growth. Lastly, on growth, I am working on developing strategy and relationships and how best to take advantage of the electrification and 5G market spaces, looking for niche applications and investments that will bring us a competitive advantage, leveraging our cell design expertise and power system capabilities. We will invest CapEx in prototyping equipment for rechargeable sales and future technologies this year to allow us to evaluate possible future investments. We have had multiple partners approach on this front due to our cell assembly expertise and the ability to extrude and work with metallic lithium. We have a unique aqueous thick electrode coating technology that could be advantageous in large rechargeable cells. This could support a wide variety of potential applications in the energy storage or specialized mobility markets. In closing, I expect 2023 to be a traditional year back to profitable growth. Execution is the main priority for both businesses, with Communication Systems increasing scale to achieve profitability and Battery and Energy converting on multiple growth initiatives while driving gross margin improvement. I'd like to take a moment to recap Phil's comments on the cyber event earlier. We experienced facility interruptions and recovery expenses at the Newark and Virginia Beach locations during the first quarter of 2023. None of our other locations were impacted, and all locations are operational at this time. And as stated, there will be some undetermined time gap between the insurance reimbursement related to this event, which is still being quantified at this time. Finally, I would like to welcome Janie Goddard to the Board of Directors. I believe Janie's background will be a welcome addition. I look forward to working with her in this next phase of Ultralife's history. Thanks, everyone, for your attention. That concludes the prepared remarks, back to the operator for questions.

Certainly. And our first question comes from Josh Sullivan of Benchmark Company. Your line is open.

Hi, good morning.

Good morning, Josh.

Good morning.

So Mike, now that you've been in the seat for a couple of months, what are some of the initial more tactical opportunities we might see you execute on externally? I know you mentioned a couple in the prepared remarks there. And then maybe what do you see just on the more long-term strategic level as well?

On the tactical side, there's just some internal heavy lifting we need to get gross margin back to where it needs to be. We definitely touched on it in the prepared remarks. We need to focus on lean activities. We need to work on our cost down initiatives and execution is key. The backlog is in sight; it's not like we're guessing what's coming at us. We just need to execute and get it out the door. On the strategy side, we're still developing a lot of things. There are many relationship things I'm working on. We'll see how those play out.

Got it. And then I mean as far as the backlog, can you just help us understand the breakdown between the industries where the growth has been recently? And then I understand the supply chain issues, but how durable is the backlog? Any risk of customers bleeding out given the time?

Actually, I'm pleased to say that it's really been across the board. We've seen government defense increases, obviously. In medical, we've had a lot of backlog somewhat just due to some parts supply issues that we would have loved to have liquidated, but due to the supply chain lead times, we just couldn't. Our oil and gas areas remain strong. Our industrial markets remain strong. Our medical card products seem to have a lot of good backlog. So right now, there's no real area I can point to that's declining.

Got it, got it. And then as far as the supply chain in general, there's some commentary, the industry might see some opening up here in the second half. And as far as the raw material inventory, you guys have been holding above historical levels to mitigate some of that. One, how should we think of your overall working capital needs as the supply chain does improve or when it improves? And then two, what do you see as far as the timing of supply chain improvements?

I'll take the supply chain piece, and I'll let Phil handle the working capital piece. On the supply chain piece, it's still very spotty. We have a lot of different components in our batteries on the electronics side. Some microprocessors seem like they're opening up and we're able to get them easier, but there are some other critical parts like MOSFETs and other components where if there's a fire in a packaging plant, all of a sudden the lead times extend by another 12 weeks, and they were just starting to get better. It's difficult to navigate that and provide a good time horizon on when everything will return to normal. I expect it's probably Q3 or Q4 before we start seeing anything resembling normal.

Regarding, Josh, the working capital, if you remember at the end of 2021, I looked at the balance sheet and I said, $33.2 million of inventory. Here we are with $41.2 million of inventory, up $8 million, which is effectively a small acquisition that we've invested in inventory. In many cases, it's cash in advance, for the cells and for the key components that, with the backlog in hand and the firm purchase orders, we have much better visibility. We want to bring the working capital down starting with inventory. We just don't want to sustain that. Our focus is throughout the full breadth of the products.

Absolutely. And then just with regard to inflation, benefited from price this quarter. Can we expect you to continue to match price with inflation on labor and cost going forward? Is there any timing gaps we should think about ahead?

Absolutely. Last year, we had over six price list changes in the Battery & Energy business alone. We have to increase prices to maintain our position, to service our customers and provide the value, engineering and quality support in our markets. We have to be proactive. With that, there's always a time gap between when you increase the price and when you actually see it realized, especially on some of our longer-term backlog. For the communications systems side of the business, some contracts were made in place for over a year, while our costs have risen substantially over the last 12 months, but there's really no mechanism to recapture those costs. There will be erosion of our margin in those old contracts. We're going to bid correctly on the next one, but there's just a gap between those events and when you actually ship the product.

Regarding the labor and overhead, just to touch on the backlog: We ended Q3 with a backlog of $106 million and shipped $36 million in Q4. We were expecting the backlog to decrease, but it instead went up. So, we have $111 million of backlog with more opportunities coming at us. It's important for execution, which requires not only the right inventory but also having the right people. The labor market is tight, and it leads to inflation because we often have to purchase labor from alternative sources. We must take advantage of our various locations to source people effectively before we raise prices significantly.

Good, well thank you for all the time.

Thank you, Josh.

Thank you.

One moment for our next question, and our next question comes from John Deysher of Pinnacle. Your line is open.

Good morning, thanks for taking my question, and welcome aboard to you, Mike.

Thank you.

I had just a couple of quick questions. One on the cyber event: it's good to hear there was no ransomware paid, and it sounds like you'll be circling the cost as we go forward. I'm just curious, do you anticipate any further cyber event-related costs going into the second quarter?

Our goal is to work closely with our insurance carrier. We know the out-of-pocket costs and have a good idea of the direct costs related to experts we've brought in. The complex part is the business interruption costs. We've been able to restore operations quickly, and our focus is on isolating those costs into Q1. Thus, we expect to see the hit in Q1, with reimbursement occurring at a later date.

I would add that there could be a small additional cost related to environment hardening in Q2. We're working with external professionals to ensure we prevent this from occurring again.

Okay good, that's helpful. And then one income statement related question. There's other expenses totaling almost $600,000. Can you tell us what that is for the quarter?

Yes, absolutely. In Q4, interest expense is around $350,000, and foreign currency will show a hit in the P&L for the fourth quarter due to the pound strengthening against the U.S. dollar. So this makes up the difference in the $600,000.

Okay, good. And what was interest expense for the year?

Yes, interest expense for the year is $951,000.

And where does that show up on the income statement for the year?

That will show up in other income and expense, offset by around $400,000 of currency income, resulting in a net of just over $500,000.

Okay good. That's what the other expense was for the year. Okay good.

Yes, our goal in reducing the inventory is the quickest, cheapest way of getting cash and applying that against bringing the debt down.

Any idea of how you want that to be a year from now?

Yes, we paid off SWE earlier in 32 months. My goal is to extinguish acquisition debt in a three to four-year period. We want to bring that down swiftly.

Okay good, that makes sense. That's all I have. Thanks and good luck.

Okay, thank you, John.

And I am showing no further questions. I would now like to turn the conference back to Mike Manna, CEO, for closing remarks.

All right, thanks for attending today's call. We look forward to seeing everybody in the Q1 2023 earnings call. Have a great day. Bye, everyone.

And this concludes today's conference call. Thank you for participating. You may now disconnect.