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Arotech Corporation (ARTX)

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Arotech Corporation (ARTX)

Q4 2017 Earnings Conference call

March 15, 2018 9:00 AM ET

Executives

Yaakov Har-Oz – General Counsel

Dean Krutty – Chief Executive Officer

Tom Paup – Chief Financial Officer

Analysts

Mike Crawford – B. Riley

Alex Gates – Clayton Partners

Presentation

Operator

Operator Greetings, and welcome to the Arotech Corporation Fourth Quarter 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Yaakov Har-Oz, General Counsel of Arotech Corporation. Please go ahead, sir.

Yaakov Har-Oz

Thank you, Stacy. I would like to welcome everyone to Arotech’s fourth quarter 2017 earnings call. Hosting the call today are Dean Krutty, our 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 could 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 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’d like to now introduce Arotech’s CEO Dean Krutty. Dean, the call is yours.

Dean Krutty

Thank you, Yaakov. Good morning, everyone. For the fourth quarter of 2017, Arotech reported $29 million in revenues and $3.2 million in adjusted EBITDA. These results reflect an improvement over each of the first three quarters of 2017 as our revenues and earnings increased in the fourth quarter as anticipated.

Our Training and Simulation Division achieved $15.1 million in fourth quarter revenue, while our Power Systems Division delivered $13.9 million of revenue in the quarter. Our Training and Simulation Division reversed a slow start in the first half of 2017 to finish the year with strong momentum and backlog as we enter 2018. The Air Warfare Simulation segment of this division booked $6.5 million in new orders in the fourth quarter, continuing the strong demand we’ve seen all year for this cornerstone business area.

Our MILO force options and judgmental training products recorded a second consecutive year of record sales, contributing $14 million in revenues in 2017 and $17 million in bookings. This is partially driven by our continued success in winning funding on the $40 million IDIQ contract we hold with the Department of State, but also comes from broad support both domestically and internationally for our state-of-the-art products.

Our vehicle simulation group is well positioned to grow in both the commercial and military segments in 2018. The previously highlighted awards from the Army National Guard as well, as our U.S. Army Virtual Clearance Training Suites program, should provide an increased revenue base in 2018 as we look to add further military training and simulation programs.

Our commercial vehicle simulation segment is also carrying important backlog into 2018, with significant active programs from a diverse customer base, including the Department of State, the San Francisco Metropolitan Transit Authority and the region of Waterloo in Canada. These customers all came to our FAAC subsidiary with significant awards in the third or fourth quarter last year and are anticipated to contribute $3.5 million of revenue in 2018.

We believe stronger performance by our vehicle simulation group and continued momentum from our air-warfare and MILO products should lead to improved performance in 2018 for our Training and Simulation Division. Arotech’s Power System subsidiary in Israel executed well on its battery production contracts for the MR-2790 and MR-2791 batteries for the IDF in the fourth quarter and is poised to complete these deliveries in the first quarter of 2018.

However, our expectations with respect to weaker 2018 battery orders at Epsilor will lead us to close our leased facility in Sderot, Israel by the end of the first quarter and once again produce all of our military batteries in our larger and longer-standing plant in Dimona, Israel. While we had hoped that new battery orders would have allowed the Sderot plant to continue, this has not happened.

In the fourth quarter, we started a new development program for the Israeli Defense Forces under a subcontract to Israel Aerospace Industries that will deliver a large battery design for an unmanned, autonomous underwater vehicle program. We expect this development as well as other ongoing developments to continue to increase the breadth of our product offerings. Another important new product development is our 6T lithium-ion tank battery. This promising development is now undergoing field trials with the Israel Defense Forces.

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