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Arotech Corporation (ARTX) CEO Dean Krutty on Q2

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Arotech Corporation (ARTX) CEO Dean Krutty on Q2 2018 Results - Earnings Call Transcript
Aug. 8, 2018 12:51 PM ET | About: Arotech Corporation (ARTX)
Q2: 08-02-18 Earnings Summary
Press Release 10-Q News
EPS of $0.03 Revenue of $21.87M (+ 2.0% Y/Y) misses by $-1.88M
Arotech Corporation (NASDAQ:ARTX) Q2 2018 Results Conference Call August 8, 2018 9:00 AM ET

Executives

Dean Krutty - CEO

Kelli Kellar - CFO

Yaakov Har-Oz - General Counsel

Analysts

Mike Crawford - B. Riley FBR

Alex Gates - Clayton Partners

Operator

Greetings, ladies and gentlemen, and welcome to the Arotech Second Quarter 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

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

Yaakov Har-Oz

Thank you, Jen. I would like to welcome everyone to Arotech’s second 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.

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 and thank you for joining us. For the second quarter of 2018 Arotech reported $21.9 million in revenue and $1.5 million in adjusted EBITDA. These results are stronger than the same period a year ago, but down from our first quarter.

Our Training and Simulation Division achieved $14.4 million in second quarter revenue while our Power Systems Division delivered $7.5 million of revenue in the quarter. Our second quarter and first half 2018 results show continued strength from our simulation division, but out Power Systems Division performance continue to present some challenges.

Our Training and Simulation Division was pleased to announce an award of the U.S. Marine Corps’ Combat Convoy Simulator monetization program this quarter. The contract is valued at up to $28.9 million with initial funding of $17.7 million. The Combat Convoy Simulators providing immersive training environment for convoy operations and allow trainees to practice command-and-control and crew reactions in a wide range of scenarios.

Our solution will leverage our capabilities in both vehicle simulation and weapons training to give the marines a modern and modular product that is easier to maintain and upgrade in the future. This program along with our ongoing military vehicle simulation programs for the U.S. Army and Army National Guard provide a solid footing for this segment of our Training and Simulation Division moving forward.

We also reported in the quarter that our simulation division appraised at level 3 of the capability maturity model integration framework developed by Carnegie Melon University. Level 3 process maturity is required by many U.S. Department of Defense contracts, especially for those involved software development. We believe this achievement will further cement our industry leadership position and military vehicle driver training and it is a testament our matured development processes.

Within our commercial vehicle simulation group, the second quarter saw the successful delivery of 13 driving simulators to Mexico under our International Narcotics and Law IDIQ contract. This group also continues to show strength in transit both simulator sales and deliveries and gross margins are improving when compared to a strong 2017 performance.

Also within our Training and Simulation Division, our Air Weapon Systems Group is performing ahead of year-to-date forecast, strength from our typical customer base serving the U.S. Air Force U.S. Navy fighter aircraft platforms allowing us to continue to grow our staff dedicated to this business area. We recently announced an international award from Taiwan to continue to advance their air combat training environment with weapon modeling capabilities, onsite training and software sustainment activities. The contract is valued at $1.9 million with a period of performance of three years and continues to nearly two decade long customer relationship.

Our Power Systems Division encountered difficulty in the quarter with delivery of its distributed power control and monitoring system kits under a contract to SAIC. These kits are part of the survivability in electronics upgrades being performed on the U.S. Marine Corps’ Assault Amphibious Vehicles. Our prototype design was not adequate for manufacturing and we worked significant overtime trying to meet the stringent testing requirement for the initial production vehicles. As a result, our revenue and margins are below our expectations for this segment.

Our Power Systems Group in Israel is showing improving backlog as we continue to generate interest in new commercial endeavors as well as foreign military sales. In the second quarter, we released a new lithium ion universal power supply product that we develop for customer in Israel and expect to be taking orders for it in the second half of the year. The new product is designed for use with outdoor camera or telecom systems at sites with unstable power or frequent power outages. We also showcased our lithium ion 16 military battery at the Eurosatory Show in Paris and continued to generate additional interest as we prepare our first [indiscernible] battery to be use of customer samples.

Our Power Systems Group in the U.S. recently completed deliveries of the David's Sling Weapon System Missile Firing Unit. It has been manufacturing under contract of Raytheon for use in Israel. The system was put to use for the first time on July 23rd to successfully defend Israel against inbound missiles from Syria, and we are proud to have contributed to this important defense program.

Our U.S. Power Group also picked up two supplier quality awards during the quarter, one from Boeing and another from Raytheon Integrated Defense Systems. Raytheon presented us with our first 5-star supplier excellent and mission assurance medal. Based on our visibility at midyear, our guidance for 2018 is narrowing to reflect expected revenues of $100 million to $105 million and adjusted earnings of $77.3 million.

With that, I’d like now to turn the call over to Kelli. Kelli, please go ahead.

Kelli Kellar

Thank you, Dean. Good morning everyone and thank you for joining our call today. I’m now going to discuss the second quarter results for the Company.
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And so we are told this is the golden age
And gold is the reason for the wars we wage U2
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