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Arotech Corporation (ARTX)

Q3 2018 Results Earnings Conference Call

November 7, 2018 09:00 AM ET

Executives

Dean Krutty - CEO

Kelli Kellar - CFO

Yaakov Har-Oz - General Counsel

Analysts

Mike Crawford - B. Riley

Presentation

Operator

Greetings, and welcome to the Arotech Corporation Third Quarter 2018 Earnings Restuls Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Yaakov Har-Oz, General Counsel. Thank you, Mr. Har-Oz, you may begin.

Yaakov Har-Oz

Thank you, Jerry. I would like to welcome everyone to Arotech’s third quarter 2018 earnings call. Hosting the call today are Dean Krutty, our Chief Executive Officer; and Kelli Kellar, our Chief Financial Officer.

Before I turn the call over to Dean and Kelli, I’d like to remind everyone that this conference all 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 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, thank you for joining us. For the third quarter of 2018 we reported $23.8 million in revenue and $2.4 million in adjusted EBITDA, bringing our year-to-date adjusted EBITDA to $6 million, an increase of 36% over the first nine months of 2017.

Our Training and Simulation Division reported $14.7 million in third-quarter revenue while our Power Systems Division reported $9.1 million of revenue last quarter. Our third quarter 2018 results showed continued strength from our Simulation Division but our Power Systems Division performance reflects some unexpected market challenges.

In September the US Marine Corp canceled its Amphibious Assault Vehicle Survivability Upgrade effort with SAIC. The Marine Corp reported that it will focus investment on new vehicles instead of upgrading the legacy AAV. Our US power company in South Carolina, UEC, was performing an electrical upgrade as a subcontract to the SAIC in support of this effort. We are working through a settlement with SAIC and the US Marine Corp for our work to-date and are busy replacing our loss-featured revenues with new revenue streams.

To that end, UEC announced that at the end of August it’s placed as one of the five companies on an indefinite delivery/indefinite quantity contract from the Space and Naval Warfare Center or SPAWAR. The contract is for cyber mission systems, kitting and supplies and carries a $950 million ceiling. SPAWAR expects to procure systems that provide wireless communications, detection, collection and exploitation of electrical and electronic equipment to support the [war fighter]. Related services such as sustainment, maintenance and disposal may also be procured under the scope of this contract. UEC secured its position on the contract vehicle based on our history of successfully performing similar work for SPAWAR over the last decade. The new vehicle is expected to serve SPAWAR for five to seven years.

UEC continues to support the US Marines with testing of the Hybrid Power Solution known as MEHPS which we delivered late last year. Our smaller systems MEHPS-Lite have completed testing and the Marines are now focusing on testing the larger MEHPS medium systems. In the third quarter, we sold a Hybrid Energy Solutions similar to MEHPS to the US Army. It is scheduled to be delivered in the spring and the Army will test the system for suitability for their mission with the stated need of 160 units.

Our Training and Simulation Division announced in the third quarter that they received Phase 2 funding for its Virtual Clearance Training Suite contract with the US Army in the amount of $10.2 million. This is the second of three phases intended by the Army and will be delivered over the next two years. The US Marine Corp also exercised nearly $1 million in options and our Combat Convoy Simulators contract announced earlier this year. The increased funding and VCTS and CTS is expected to grow this segment of our Training And Simulation Division in 2019. Also within this division, we announced this quarter two US Air Force purchases of our MILO use-of-force training solutions. Significant awards from the Air Force Global Strike Command and the Pacific Air Forces combined with other orders in individual airbases totaled over $4 million.

The Air Force will receive a variety of training solutions taking advantage of the breadth of offerings from our MILO Range brand to include the fully immersive MILO Range Theater 300. The training systems will be used to train US Air Force Security Forces around the globe and are scheduled for delivery through the first quarter 2019, with extended product support through 2024.

Read the rest of this transcript on seekingalpha.com