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Arotech Corporation (ARTX)

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Arotech Corporation (NASDAQ:ARTX)

Q1 2017 Earnings Conference Call

May 0, 2017, 9:00 am ET

Executives

Yaakov Har-Oz - SVP General Counsel and Corporate Secretary

Dean Krutty - Acting Chief Executive Officer and EVP of North America Operations

Thomas Paup - Senior Vice President Finance and Chief Financial Officer

Analysts

Michael Crawford - B. Riley & Company

Alex Gates - Clayton Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Arotech's First Quarter 2017 Earnings Results Conference Call. All lines have been placed in a listen-only mode and the floor will be open for questions following the presentation.

[Operator Instructions] At this time, it is my pleasure to turn the floor over to Yaakov Har-Oz, General Counsel of Arotech. Sir, the floor is yours.

Yaakov Har-Oz

Thank you, Jane. I would like welcome everyone to Arotech's First Quarter 2017 Earnings Call. Hosting the call today are Dean Krutty, our Executive Vice President and acting CEO; and Tom Paup, our Chief Financial Officer.

Before I turn the call over to Dean and Tom, I'd like to remind everyone that this conference call may contain projections or other forward-looking statements regarding future events or the future performance of the company. These statements are only predictions and there can be no assurance that they will, in fact occur. Arotech does not assume any obligation to update that information. Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand and the competitive nature of Arotech's industry, as well as the other risks identified in the documents filed by the company with the Securities and Exchange Commission.

In addition, certain non-GAAP financial measures will be discussed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this conference call will be provided on a non-GAAP basis.

Full reconciliations from non-GAAP to GAAP financial measures are included in the earnings release. At this time, I would like to now introduce Arotech's Executive Vice President and Acting CEO, Dean Krutty. Dean, the call is yours.

Dean Krutty

Thank you, Yaakov. Good morning, everyone, and thank you for joining us today. During the first quarter of 2017, Arotech realized $22.3 million of revenues and $1 million in EBITDA, a slight improvement over the previous quarter. This revenue result was in line with our first quarter expectations and we expect revenues will improve in the second half of the year based on the business that is in our pipeline to end the year within our stated annual guidance range.

We continue to spend significantly on business proposal and research and development activities in the first quarter due to the many opportunities we're seeing for our technologies. We are pleased this quarter to receive the sole-source follow-on VCTS contract we have been expecting. The five-year contract will extend the capabilities of the US Army's Virtual Clearance Training Systems.

This important technology has already been fielded at 28 training sites and with the $41.1 million in updates now expected over the five-year period performance, VCTS will remain one of the Army's premier training devices. The expected funding profile for this program will give our Simulation Division a growing military vehicle revenue footprint through 2020.

Our Vehicle Simulation Group during the first quarter did significant research and development to improve our simulation baselines in support of existing contract efforts for a military prime contractor as well as upcoming opportunities within the US Army. Our Simulation Division has seen very strong demand for our Air Warfare Weapon Simulation products and our MILO Range use-of-force products in the first quarter.

In addition to the previously announced award by the US Air Force of $9.5 million IDIQ to support F-16 launched on software, we received a similar award for continued F-15 launched on support. This $4.9 million award covers three years of additional development for F-15 weapon employment software.

On strength of these and other first quarter awards for international efforts and continued support for our training – traditional training range products, we anticipate that 2017 will be a new high watermark for this important segment of our Simulation Division. We continued the hiring of engineering staff that we began last year in support of demand for these technologies.

Our MILO group is coming off of record sales year in 2016 and our first quarter sales for 2017 are currently at a pace that could lead to another record year. Especially encouraging, is recent success in capturing awards from the previously announced IDIQ with the US Department of State, which contributed nearly $900,000 to the quarter's bookings.

Our diligence in addressing the needs of this market last year, we believe will allow us to continue to succeed in capturing awards under this IDIQ.

In our Power Division, we are getting expected strong results from our battery companies in Israel. In particular, our new battery plant in Sderot, Israel set a new standard for battery line efficiency unique order and is now achieving exceptionally low failure rates after some earlier difficulties. This bodes well for the large backlog of battery orders we expect to deliver from that plant this year.

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