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Arotech Corporation (ARTX)

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Arotech Corporation (ARTX)

Q3 2017 Earnings Conference Call

November 9, 2017 09:00 ET

Executives

Yaakov Har-Oz - Investor Relations

Dean Krutty - Executive Vice President and Acting Chief Executive Officer

Tom Paup - Chief Financial Officer

Analysts

Mike Crawford - B. Riley/FBR

Alex Gates - Clayton Partners

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Arotech Corporation Third Quarter 2017 Earnings Results Call. All lines have been placed on a listen-only mode. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Yaakov Har-Oz. Sir, the floor is yours.

Yaakov Har-Oz

Thank you, Jen. I would like to welcome everyone to Arotech’s third 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 would 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’ industry, as well as 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.

And with that, I would like to now introduce Arotech’s Acting CEO, Dean Krutty. Dean, the call is yours.

Dean Krutty

Thank you, Yaakov. Good morning, everyone. For the third quarter of 2017, Arotech reported $25.9 million in revenues and $2.3 million in adjusted EBITDA. These results reflect an improvement over each of the first two quarters of 2017 as our revenues and earnings increased in the third quarter as expected. Our Training and Simulation Division achieved $14.6 million in third quarter revenue, while our Power Systems division delivered $11.3 million in revenue in the third quarter.

As highlighted in our press release, our backlog is improving as we continue to win important new contracts in both of our divisions. Our Power Systems division continues to execute on its Distributed Power Control and Monitoring System efforts with SAIC is now on contract for Low Rate Initial Production efforts for the next ‘18 Amphibious Assault Vehicle electrical system upgrades for the U.S. Marine Corps. We expect the LRIP effort to add 30 more vehicle upgrades and continue through calendar year 2018 leading to full rate production beginning in the summer of 2019.

Our Power Systems division in the U.S. continues to make progress on the MEHPS hybrid power development for the U.S. Marine Corps. We delivered 4 units to the Marine Corps in the third quarter and plan to complete the remaining 4 systems in the fourth quarter. This development is taking more time and effort than previously anticipated and has required additional investment, which continues to weigh on earnings. We continue to believe, however, that the market for these hybrid power systems will justify the effort and the investment we are making. Our goal in this effort is to be able to serve the hybrid power needs of deployed military personnel over a wide range of power load levels. The smaller expeditionary hydropower solution we developed for the Marine Corps prior to MEHPS, our GREENS system brought new orders in the third quarter totaling $3.7 million. These systems will be used for surveillance equipment for the U.S. Army and represents a new customer broad range product.

Aerotech’s Power Systems division in Israel continues to hold the dominant market position for water-activated life-vest lights, is now receiving orders for its newly certified LED based product. We are quickly scaling production at our electric fuel subsidiary to sell orders for the new design. Also in Israel, we have ramped up production of the MR-2790 battery that gained customer certification in Q2 have now delivered nearly 17,000 batteries against a 60,000 piece order.

Turning to our Training and Simulation Division, the third quarter provided expected revenue gains as we increased our activity on Phase 1 of our virtual clearance training system follow-on and a recently awarded Army National Guard operator driving simulator contracts. The Guard program continues our long-term support of the National Guard Bureau’s light, medium and heavy truck and unwrapped vehicle driver training programs. Our MILO Range group continues to improve on what is our record sales year in 2017 having already surpassed the previous high watermark set last year.

Third quarter bookings were very strong and represented broad-based support for our use-of-force and judgment skills products from 132 third quarter customers. Third quarter awards are highlighted by $1.7 million in new orders from the Department of State ID/IQ contract back-hauls. In addition that same contract vehicle was used to procure police pursuit driving simulators resulting in $2.7 million in new orders for our commercial vehicle simulation group. Our Air Warfare Simulation Group continued to see very strong demand for our weapon simulation-based products in Q3 and added a $5.8 million contract for its onboard weapon software. This adds to a strong backlog for these products that will continue to support our growth efforts.

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