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Edited Transcript of ARTX earnings conference call or presentation 9-May-19 1:00pm GMT

Q1 2019 Arotech Corp Earnings Call

Ann Arbor May 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Arotech Corp earnings conference call or presentation Thursday, May 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Michael Roy Crawford

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Arotech Corporation First Quarter 2019 Earnings Result Conference Call. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host for today, Mr. Yaakov Har-Oz. Sir, the floor is yours.

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

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Thank you, Jess. Good morning, everyone. I'd like to welcome everyone to Arotech's First 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 and 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 believe 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.

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

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Thank you, Yaakov. Good morning, everyone, and thank you for joining us today. For the first quarter of 2019, we reported $20.8 million in revenue and $52,000 in adjusted EBITDA. Our Training and Simulation Division reported $14 million in first quarter revenue, while our Power Systems Division reported just $6.8 million of revenue last quarter. Our first quarter 2019 results continue to reflect some challenges we are facing at our Power Systems Division.

Last September, the U.S. Marine Corps terminated for convenience its Amphibious Assault Vehicle Survivability Upgrade effort with SAIC, who in turn canceled the contract that we held to replace the electrical system on those vehicles. We announced then that we expected that our new contract with the Navy Information Warfare Center, or NIWC, which was previously known as the Space and Naval Warfare Center would make up for the lost revenue beginning in 2019. The contract is for Cyber Mission Systems kitting and supplies and carries a $950 million ceiling.

Our U.S. power company, UEC, is 1 of 5 recipients. NIWC expects to procure systems that provide detection, collection and exploitation of electrical systems as well as wireless communications to support the warfighter beginning this year. Unfortunately, the Navy has been slow in releasing task orders under this contract, causing us to adjust our expectations downward for 2019 to reflect the delay.

Additionally, and unrelated to this concern, we fail to win a follow-on contract with Raytheon that we expected to bring short-term revenue to the early part of 2019 at UEC. As a result, our first quarter was weaker than we had expected, and we have accordingly adjusted our guidance downward for the year.

Despite the slow start, we still feel strongly that our place on a NIWC contract will pay dividends over the next 5 years, and we and our subcontractor teammates are working hard to maximize our work share on the opportunities that are now taking shape. We are ideally located to serve the Naval Information Warfare Center located in Charleston, South Carolina, and we and our partners have a long history of providing contract and support to this demand.

For the last several years, our UEC subsidiary has been working with the Marine Corps to develop a hybrid power solution called MEHPS, or Mobile Electric Hybrid Power Supply. We are pleased to see MARCORSYSCOM release an expected RFI and performance specification for MEHPS 2 weeks ago, in preparation for anticipated request for proposals in the third quarter of 2019. The Marine Corps RFI anticipates a procurement quantity of 421 systems to be fielded and expected full rate production tempo of 9 to 15 units per month.

While we work to try to win a Marine Corps production award, we've also been demonstrating the MEHPS system to the U.S. Army. In March, we completed a week-long demonstration at the Army's Technical Support & Operational Analysis event and generated positive press and further interest from the user group there. A MEHPS system was used to power a variety of loads, including a task operation center with demonstrated fuel savings and 0 faults or failures. We are currently participating a second test event in support of the U.S. Army. In addition to the test event, we delivered to the Army the hybrid power solution that they contracted for last year that would be tested for suitability to fill a specific mobile power requirement for existing surveillance system.

In our Israeli power subsidiary, we continue to improve our backlog in the first quarter through a steadily growing product portfolio and customer base. We are especially encouraged by the progress we are making and garnering interest in our military vehicle battery, the lithium-ion 6T. In addition to selling test quantities into Europe and Asia in the first quarter, we were able to secure a funding commitment from the Israeli Ministry of Defense to support our further development of this technology as well as to help fund the construction of our 0 production capability for this battery.

Our simulation division is pleased that we are able to continue our support of the Department of State international training initiatives with the recent sale of driving simulators from Mexico and MILO Theater systems for Pakistan and Honduras. The sales totaled $2.9 million and were placed under the $40 million U.S. Department of State IDIQ contract vehicle awarded in 2016. This order as well as the newly awarded train simulator from Bombardier and 2 other significant purchases from our public safety line of simulators in the quarter set the stage for what we hope will be a strong year for our commercial vehicle simulator products.

Similarly, our Air Warfare Systems group landed significant contracts in the quarter to drive continuing support for our traditional fighter aircraft weapon launch on products as well as development work associated with new weapon systems. Included in the recently awarded efforts is a new application for our weapon launch zones that will provide situational awareness for non-fighter aircraft and expands our customer base for these products. We have made important technical stride on our 2 largest contracts during the quarter that will allow us to move on to the next stage of the development and fielding.

Our Virtual Clearance Training Suites team has now begun fielding the baseline advancements that include important explosive device neutralization capabilities. Soldiers will now be able to train on a medium mine protected vehicles' added roller capability, the (inaudible) robot and new features on the Husky mine detector and Buffalo clearance vehicles. These enhancements are part of the first phase of our 3-phase, 5-year program with the U.S. Army.

Our U.S. Marine Corps Combat Convoy Simulator program team has worked with our customer on critical design details in the first quarter and is now ready to move forward with first article assembly as we progress to our production in the second half of the year. Based on our visibility, after the first quarter, we have decreased our 2019 full year guidance to include revenue of $95 million to $105 million with resulting EBITDA in the range of $7 million to $8 million.

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

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

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Thank you, Dean. I will now discuss our Q1 '19 financial results. Revenues for the first quarter of 2019 were $20.8 million compared to $27.2 million for the corresponding period in 2018. This is a decrease of $6.5 million or 23.7%. The year-over-year decrease is primarily related to the termination of our amphibious assault vehicle program by our customer, SAIC, as a result of the October 3, 2018 United States Marine Corps termination convenience with SAIC. Also impacting our first quarter revenue is the reduction in manufacturing of certain batteries for the Israeli Military of Defense contract in Q1 2018.

Gross profit for the first quarter of 2019 was $5.8 million or 28% of revenues compared to $7.7 million or 28.3% of revenues for the corresponding period in 2018. We incurred an operating loss for the first quarter of 2019 in the amount of $948,000 compared to operating income of $1.1 million for the corresponding period of 2018. The decrease in operating income is primarily due to the lower revenues in our Power Systems Division. Operating expenses were $6.8 million or 32.6% of revenues in the first quarter of 2019 compared to operating expenses of $6.7 million or 24.4% of revenues for the same period in 2018.

Total other expenses, which is comprised mostly of interest expense and foreign currency transactions, was $298,000 for the first quarter of 2019 compared to total other expense of $213,000 for the same period in 2018. The increase of $85,000 or 40% is due to higher effective interest rates in Q1 '19 related to the federal interest rate hikes that occurred during 2018 as well as higher utilization of our line of credit.

The company's net loss for the first quarter of 2019 was $1.4 million or $0.05 per share per basic and diluted compared to net income of $596,000 or $0.02 per basic and diluted share for the corresponding period in 2018. Our adjusted earnings per share, adjusted EPS, for the first quarter of 2019 was a loss of $0.03 compared to adjusted earnings per share of $0.05 for the prior year period. And our adjusted earnings before interest, tax, depreciation and amortization, adjusted EBITDA, for the first quarter of 2019 was approximately $52,000 compared to $2.2 million for the corresponding period of 2018. The decrease in our quarterly adjusted EPS and our adjusted EBITDA is driven by lower sales in our power division.

We believe that information concerning adjusted EBITDA and adjusted earnings per share enhances overall understanding of our current financial performance. We compute adjusted EBITDA and adjusted earnings 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 table of yesterday's press release.

Now turning to the balance sheet. As of March 31, 2019, we had $4.7 million in cash and cash equivalent compared to December 31, 2018 when we had $4.4 million in cash and cash equivalent. As of March 31, 2019, we had total debt of $17.9 million consisting of $9.7 million in short-term bank debt under our credit facility, and $8.2 million in long-term loans. This is in comparison to the prior year 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 loan.

The primary reasons 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 and the cancellation of the AAV program in our power division for which we have incurred costs but have not yet received the settlement. As of March 31, 2019, we had $1.7 million in available unused bank lines of credit with our primary bank under our $15 million revolving credit facility.

And on April 22, 2019, we had an additional $6 million available under our Revolver B agreement, as disclosed in Amendment 8 to our agreement with JPMorgan Chase. We had current ratio, which is current assets divided by current liabilities, of $1.8 million compared with December 31, 2018 current ratio of 2.0%. At the end of first quarter of 2019, Arotech had a backlog of $70.5 million versus $64.8 million at the end of fourth quarter of 2018. The simulation division had a backlog of $49.1 million at the end of the first quarter 2019 versus $47.3 million at the end of the fourth quarter. And the Power System Division had a backlog of $21.5 million at the end of the first quarter 2019 versus $17.6 million a quarter ago. 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Mike Crawford with FBR.

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

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A couple questions on some of these contracts. So are you now seeing task orders released for the cyber mission kitting?

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

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Mike, we've seen the first 3 task orders announced. We know of others that are in the works, but none of them actually been released yet. We expect the first ones to get released this quarter, Q2.

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

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Okay. Then on this last contract where you got simulators to Mexico and Honduras. That thing ought to be running -- heading towards depletion now and I imagine pretty soon. Is there a next -- an extension or another vehicle, but that work is going to transition to that you're tracking?

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

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I think we're just past the midpoint on a $40 million ceiling that still has quite a lot of room. So I think yes, this would be more a -- I don't have it in front of me, I think 2022 would be the end of it.

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

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Okay. Would you say that you're effectively splitting that with the other winner? Or do you think you're taking share?

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

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Yes. I think the -- if you look at the data, they had slightly more revenue. And that's influenced by one very large award you're aware of at the beginning of last year to Pakistan. But if you look at the numbers, I think that outside of that one, we're getting more than 50%.

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

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Okay. And then Dean, last year you gave us a pleasant surprise with that combat convoy simulator win, which was -- maybe I characterized it as a stretch bid that you won. Are there any other of those potential opportunities that you've -- where you've already made a proposal or you're tracking one?

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Dean M. Krutty, Arotech Corporation - President & CEO [9]

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Yes, we have a very detailed pipeline actually in all 3 of our subsidiaries. Each one of them has in it different opportunities that we don't advertise, obviously for competitive reasons. But certainly, at all times, Mike, there's stuff that we're hoping to get awarded that would provide positive momentum.

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

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Okay. And just a couple other quick ones. Any update on common driver training timing?

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Dean M. Krutty, Arotech Corporation - President & CEO [11]

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There's no update. We still expect that award this year. I believe Q3 is a likely time frame, the Army's been busily going through the proposal that they've received. They're in a radio silent phase right now, not allowed to talk to contractors. But we -- no reason to indicate there's been any change to their expected time line.

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

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Okay. And then with the AAV costs that were incurred, is there a level you can share that you're starting for potential recovery?

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

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We basically have costs incurred there in millions of dollars. The total is probably in the $4 million range.

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Operator [14]

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(Operator Instructions) And at this time, I have no other questions holding.

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

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All right. Thank you, Jess. Thank you, everyone, for joining us today.

And that concludes our call.