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Arotech Corporation (ARTX)

Q2 2017 Earnings Conference Call

August 9, 2017 9:00 am ET

Executives

Yaakov Har-Oz - SVP General Counsel and Corporate Secretary

Dean Krutty - Executive Vice President and Acting CEO

Tom Paup - Chief Financial Officer

Analysts

Michael Crawford - B. Riley & Company

Alex Gates - Clayton Partners

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Arotech's Second Quarter 2017 Earnings Results Conference Call. All lines have been placed on listen-only mode. [Operator Instructions]

At this time, it is my pleasure to turn the floor over to your host Yaakov Har-Oz, Senior Vice President and General Counsel of Arotech Corporation. Sir, the floor is yours.

Yaakov Har-Oz

Thank you, Angelica. I would like to welcome everyone to Arotech's Second 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 of 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 second quarter of 2017 Arotech recognized $21.5 million in revenue and $1 million in adjusted EBITDA. This result was below our second quarter expectation, due primarily to the timing and awards on our U.S. Power and Simulation Divisions, as well as further investment in a strategic product development within our U.S. Power Division.

Our Training and Simulation Division delivered $10.2 million in revenue while our power division delivered $11.3 million in revenue. Power division revenue were nearly evenly split between our U.S. and Israeli power companies. We have booked important orders recently and believe that our second half will improve markedly as forecast to bring 2017 annual results to within our previously provided guidance of $93 million to $103 million in revenues and $7.5 million to $8.5 million in adjusted EBITDA. We do expect that our less than anticipated second quarter results will make the low end of earnings guidance more likely than the high end.

Our operating expenses in 2017 are down from a year ago, due primarily to significant reductions in corporate expenses. We do however continue to make needed investment in important divisional selling and marketing and internally funded research and development efforts. As highlighted in our press release, our Training and Simulation Division, we see the contract from the Army National Guard for FAAC's operator driving simulators.

This contract from the National Guard bureau is valued at $10.5 million with a period of performance in just over two years. This award will build upon FAAC's previous Army National Guard efforts which began in 2006 and have resulted in the fielding of the total of 27 training system as to 25 different states.

The current effort requires nine new mobile systems and provides capability enhancements for 16 of the previously fielded systems. This program has been long anticipated by our team and should help drive revenue improvement in the second half of 2017 and in 2018.

Within our Simulation Division, we are well on our way to a record sales year for our MILO Range use-of-force product line. To this end, we recently received a $1.5 million award from the Police Department of Hong Kong. The Hong Kong PD has an extensive training program that includes our MILO use-of-force product in live fire training exercises. This new order will bring eight additional systems to a customer who receives 34 systems from us several years ago. Additionally, our MILO team continues to secure meaningful awards from the Department of State under the $40 million five-year ID/IQ Contract that we announced last year.

We have reversed a somewhat disappointing award array from this customer last year, by actively addressing customer needs and by performing well on our deliveries. Our Simulation Division continues to see very strong demand for our weapon simulation based products in Q2. We have successfully hired 10 new engineers this year to support the demand and we'll continue our hiring in the second half of 2017.

Within this division, we're also supporting our previously fielded Boom operator trainers for the Air National Guard with operators, maintenance and training. The U.S. Air Force extended our support for those trainers with a $4.1 million award during the second quarter. In our Power Division, we continue to deliver strong results from our battery companies in Israel.

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