U.S. Markets open in 8 hrs 37 mins

Edited Transcript of ARTX earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 Arotech Corp Earnings Call

Ann Arbor Aug 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Arotech Corp earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Dean M. Krutty

Arotech Corporation - President & CEO

* Kelli L. Kellar

Arotech Corporation - VP of Finance & CFO

* Yaakov Har-Oz

Arotech Corporation - Senior VP, General Counsel & Corporate Secretary

================================================================================

Conference Call Participants

================================================================================

* Michael Roy Crawford

B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Arotech Corporation's Second Quarter 2019 Earnings Results Conference Call.

(Operator Instructions)

At this time, it's my pleasure to turn the floor over to Mr. Yaakov Har-Oz. Sir, the floor is yours.

--------------------------------------------------------------------------------

Yaakov Har-Oz, Arotech Corporation - Senior VP, General Counsel & Corporate Secretary [2]

--------------------------------------------------------------------------------

Thank you, Tom. I would like to welcome everyone to Arotech's Second Quarter 2019 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 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 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 in 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 M. Krutty, Arotech Corporation - President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Yaakov.

Good morning, everyone, and thank you for joining us. For the second quarter of 2019, we reported $23.3 million in revenue and $1.8 million in adjusted EBITDA. Our Training and Simulation Division reported $15.4 million in second quarter revenue, while our Power Systems Division reported $7.9 million of revenue last quarter. Our second quarter 2019 results show our performance improving over the first quarter as we build towards what we believe will be a stronger second half of 2019.

Our Training and Simulation Division continue to see strength from its commercial vehicle segment as demand for our simulators remain strong, highlighted by the purchase of both bus and police simulators by the city of Detroit in the second quarter.

In addition to closing new sales, this segment is successfully delivering on our robust first quarter sales to include the on-time delivery of the 12 police systems sold to the U.S. Department of State and delivered to Mexico.

Within our military vehicle simulation segment, the Virtual Clearance Training Suites team is progressing as expected on a Phase 2 design work and was rewarded with an additional requirement to add the Army's new multifunction video display, or MVD, into the VCTS crew stations. The added work came through an engineering change proposal to the Phase 2 requirement, valued at $1.8 million.

Also within the Simulation segment, our Combat Convoy Simulation team received an intent to award notice for several contract line item options on existing contracts worth $2.3 million. The U.S. Marine Corps systems command intends to exercise the options that will allow the 2 CCS trainers operated by the U.S. Navy to receive the same overhaul we are currently developing for the Marines.

Also within the Simulation Division, our Air Warfare Group expanded its owner log with 2 separate awards that each -- are each valued at over $6 million once fully funded. These awards will build upon our long history supporting the warfighter with accurate weapon employment information.

Within our Power Systems Division, we have agreed to part ways with the President of our UEC Electronics subsidiary in South Carolina and have begun an external search for his replacement. We have some significant opportunities ahead of us at UEC, and we will be prioritizing candidates that can help us realize our potential. Our opportunity to significantly increase revenues through our Cyber Mission solutions IDIQ contract continues to move along slowly at the Naval Information Warfare Center, but a first task order is being competed currently with an award expected in the third quarter of the calendar year. This initial opportunity is for the procurement and installation of security systems at U.S. naval facilities and is valued at tens of millions of dollars per year.

Our power division subsidiary in Israel, Epsilor-Electric Fuel, has continued to work at expanding its commercial and international presence as we seek to diversify our customer base. Our 6T battery development continues to be promising and gather additional military customers, but has also made a breakthrough with a commercial customer as the global sports league, SailGP, purchased our 6T batteries to provide the battery power required by the cutting-edge catamaran sailboats that it races.

Our international marketing efforts have led to significant proposals to Thales in France for batteries, adapters and chargers; and to Leonardo in Italy to provide batteries and chargers for communications devices and imaging systems. We are hopeful that our penetration into these new markets will lead to customer relationships and a customer base that augment our traditional markets within Israel.

Our sales of tactical batteries in Israel have been greatly diminished since January of 2018 after many years of robust sales, but we now expect to see a request for proposal from the Israeli Ministry of Defense in the third quarter, signaling a revival of this important business area.

Finally, our relationship with Novocure, the medical products company with a novel cancer treating solution, continues to become more meaningful as their successful expansion continues. Novocure is expecting significant growth as their product gains acceptance and they're awarded approvals to treat more types of cancers. We are working with them to be sure our ability to meet their battery requirements keeps pace with their growth.

Based on our visibility after the first quarter, we have maintained our 2019 full year revenue guidance to include revenues of $95 million to $105 million, but narrow our earnings guidance to the lower end of our previous estimate and now expect EBITDA in the range of $7 million to $7.5 million.

With that, I'd like to now turn the call over to Kelli.

--------------------------------------------------------------------------------

Kelli L. Kellar, Arotech Corporation - VP of Finance & CFO [4]

--------------------------------------------------------------------------------

Thank you, Dean. Good morning, everyone. I will now discuss our second quarter financial results.

Revenue for the second quarter of 2019 were $23.3 million compared to $21.9 million for the corresponding period in 2018. This is an increase of $1.4 million or 6.4%. This year-over-year increase was primarily due to higher revenues in our Training and Simulation Division, driven by a larger military contract. We had increased sales in our Power Division, primarily related to higher battery and charger sales in our Israeli subsidiary which was partially offset by lower sales in our U.S. power subsidiary related to the termination of the Amphibious Assault Vehicle Program by its customer, SAIC, as a result of the United States Marine Corps' termination for convenience.

Gross profit for the second quarter of 2019 was $7.6 million or 32.8% of revenues compared to $6.6 million or 30.2% of revenues for the same period in 2018. The year-over-year increase was primarily due to higher revenues and improved margins in our Power System Division related to programs that ended in 2018 that had lower margins, and we had -- also had improved product mix in 2019.

Operating income for the second quarter of 2019 was $929,000 compared to operating income of $562,000 for the same period in 2018. Operating expenses were $6.7 million or 28.8% of revenue in the second quarter of 2019 compared to operating expenses of $6 million or 27.6% of revenue for the same period in 2018. Operating expenses were slightly higher year-over-year, primarily related to higher sales and marketing costs related to business development and the company's Power Systems Division and costs incurred related to an implementation of our corporate enterprise resource planning system during 2019.

Total other expenses, which is comprised mostly of interest expense and foreign currency transactions, was $381,000 in the second quarter of 2019 compared to total other expenses of $302,000 for the same period in 2018. The company's net income for the second quarter of 2019 was $392,000 or $0.01 per basic and diluted share compared to net income of $83,000 or 0 earnings per share for diluted and basic for the same period in 2018. Our adjusted net income per share for the second quarter of 2019 was $0.03 compared to $0.03 for the prior year, and our adjusted earnings before interest, tax, depreciation and amortization, adjusted EBITDA, for the second quarter of 2019 was approximately $1.8 million compared to $1.5 million for the same period of 2018.

We believe that information concerning adjusted EBITDA and adjusted net income per share enhances overall understanding of our current financial performance. We compute adjusted EBITDA and adjusted net income per share, which are non-GAAP financial measures. Both of these calculations as well as the reconciliations to the GAAP measurement are reflected in the tables of yesterday's press release.

Now I will turn to the balance sheet. As of June 30, 2019, we had $3.9 million in cash and cash equivalents compared to the prior year 2018 when we had $4.4 million in cash and cash equivalents. As of June 30, 2019, we had total debt of $19.7 million, consisting of $12 million in short-term bank debt under our credit facility and $7.7 million in long-term loans. This is in comparison to December 31, 2018, when we had total debt of $14.1 million, consisting of $5.5 million in short-term bank debt under our credit facility and $8.6 million in long-term loans. The primary reason for the increase in our short-term bank debt are the funding of certain long-term contracts, where milestone payments were not available in our Training and Simulation Division, along with the termination of the AAV program in our Power Division, which has not been fully settled.

As of June 30, 2019, we had $5.9 million in available unused bank line of credit with our primary bank under our $15 million revolving credit facility, and we had $3 million in available unused bank line of credit under our $6 million Revolver B agreement with JPMorgan Chase.

We had a current ratio, which is current assets divided by current liabilities, of 1.7 compared with December 31, 2018, current ratio of 2. At the end of the second quarter of 2019, Arotech had a backlog of $70.3 million versus $64.8 million at the end of the fourth quarter of 2018. The Simulation Division had a backlog of $49.2 million at the end of second quarter 2019 versus $47.3 million at the end of the fourth quarter of 2018, and our Power System Division had a backlog of $21.1 million at the end of second quarter 2019 versus $17.5 million at the end of the fourth quarter of 2018.

This concludes our prepared remarks. Before we open the call up for Q&A, I'd like to remind all participants that Dean and I are regularly available to the investment community. And throughout the year, we look to participate in relevant conferences and investor events.

Operator, you may now open the call up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you, ma'am. (Operator Instructions)

We'll take our first question from Mike Crawford with B. Riley.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [2]

--------------------------------------------------------------------------------

Dean, what prompted the change in South Carolina?

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [3]

--------------------------------------------------------------------------------

Well, as you know, Mike, we've been having performance issues, meeting our targets down in South Carolina, bringing our Power Division's revenue and earnings not in line with our own expectations. And we decided just that we needed to change in order to get things moving and get a fresh look. You're well aware, I know, of the very significant opportunities that we have in South Carolina. We want to make sure that we get someone in who can help us realize those opportunities.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [4]

--------------------------------------------------------------------------------

Okay. And in that regard, what is the kind of trajectory you see for the Marine electric hybrid power system?

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [5]

--------------------------------------------------------------------------------

So last quarter, we talked about the Marines had come out with an RFI, where they asked some questions about the industry's abilities. But they also confirmed their intended production contract size with over 400 systems. We still expect, talking to the Marines, that they will come out this quarter with the request for proposals for that production effort. And our best guess right now is that early spring -- I'm sorry, spring or early summer for an award based on our discussions with the Marine Corps.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [6]

--------------------------------------------------------------------------------

Okay. And then can you just repeat or expand upon what you talked about with regarding security systems at U.S. naval facilities? And how many people you might be bidding against regarding that opportunity?

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [7]

--------------------------------------------------------------------------------

Right, so the Cyber Mission Solutions contract, which we used to refer to as Cyber Missions Kitting, but the customers made a little bit of a change in the name, a very large IDIQ, as you know, with almost $1 billion and competed amongst 5 businesses who won the right to compete for business on that contract. So we expect that likely all 5 will bid. As you know, we have 18 subcontractor teammates on that contract. So our entire team now is working very hard to put some of the best solutions to win, but it wasn't a competition. And as we discussed last quarter, the Navy is very slow in getting opportunities presented on this contract. We're very happy to see the first one finally out. And there's commitment to get awarded this quarter still, which is great. But we do see now the other opportunities behind that, which are also quite substantial in size taking shape, and we believe there will now be a much steadier flow of opportunities on an IDIQ.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [8]

--------------------------------------------------------------------------------

Okay. And then just one more. How would any additional cash settlement related to the AAV flow through your financials, including the income statement?

--------------------------------------------------------------------------------

Kelli L. Kellar, Arotech Corporation - VP of Finance & CFO [9]

--------------------------------------------------------------------------------

So Mike, this is Kelli. So the way that currently on our balance sheet, and it's been disclosed in our financial statements, there was $4 million of receivables and unbilled sitting on our financial statements at the time that our contract was terminated for convenience. So what would happen is, is the $2 million, you would see it in cash. It would be an offset to the accounts receivable area or unbilled area. And then upon final settlement you would -- if it was below the $4 million, you would recognize a loss. If it was above the $4 million, you would recognize a gain in your income statement at that time. Does that make sense?

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [10]

--------------------------------------------------------------------------------

Sure. So just to be clear, the remaining cash you expect to come in related to this is around that $4 million that's estimated on your balance sheet?

--------------------------------------------------------------------------------

Kelli L. Kellar, Arotech Corporation - VP of Finance & CFO [11]

--------------------------------------------------------------------------------

Well, the $4 million is existing receivables that we had. So this was for materials and labors incurred, right? We've incurred, as a result of the termination for convenience, we've had additional expenses related to the termination for convenience. That's been flowing through our income statement. So we've requested from the government, basically, that we get reimbursed for some of these costs.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [12]

--------------------------------------------------------------------------------

Okay. That's fine. Instead of going in and beat you on that. So finally, it is nice to see the plus-ups on the VCTS. It sounds like the Phase 2, though, is a little bit slower to ramp. So we still have some more kind of, I guess, expansion as you still work on Phase 1 and then start to layer in more Phase 2 on that one? Is that correct?

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [13]

--------------------------------------------------------------------------------

I think both of our VCTS and CCS, Mike, we expect to be ramping up in the second half as we prepare for deliveries on Phase 2 of VCTS as well as begin -- we don't actually deliver CCS in the second half, but we begin building all of the stuff that will be delivered in the second half. There'll be a lot more material flowing through our shop as we prepare for deliveries in next year.

--------------------------------------------------------------------------------

Michael Roy Crawford, B. Riley FBR, Inc., Research Division - Senior MD, Co-Head of The Discovery Group & Senior Analyst [14]

--------------------------------------------------------------------------------

Okay. And then final question is just on the top gun-type of weapons deployment software solutions you provide, is that something that you see as actually these amounts talked about in your press release, does that team have continued growth there or more kind of a sustainment of the same?

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [15]

--------------------------------------------------------------------------------

I think best to look at it as continued slow growth and great stability. There's not going to be a huge pop from the new contracts, but years of stability.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) Mr. Krutty, there are no further questions at this time.

--------------------------------------------------------------------------------

Dean M. Krutty, Arotech Corporation - President & CEO [17]

--------------------------------------------------------------------------------

Thank you, Tom. I'd like to again thank everyone for calling in today, and that will conclude our call.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect at this time, and have a great day.