Simulation Contract begins to Contribute at Arotech
Ken Nagy, CFA
On November 14, 2011, Arotech Corporation (ARTX), a provider of defense and security products, reported financial results for its fiscal 2011 third quarter and nine months, ended September 30, 2011.
Arotech reported mixed results with year over year third quarter revenues growing $9.854 million or 60.2 percent to the Company’s highest ever quarterly revenue amount of $26.212 million. This compares to $16.358 million for the comparable quarter of 2010.
The jump in revenues was mainly a result of the Simulation Division’s winning of the U.S. Army VCTS contract that was announced this summer.
Still, the Company’s third quarter 2011 net loss increased nearly 38 percent or $418,478 to a net loss of $1.525 million from a net loss of $1.107 million during the three months ended September 30, 2010.
The increase in net loss was primarily due to lower gross margin as well as a $711,000 year over year increase in selling general and administrative expense for the quarter.
Gross margin decreased year over year from 25.1 percent to 19.4 percent for the three months ended September 30, 2011. The decrease in gross margin was primarily a result of lower margins for the U.S. Army VCTS contract. However, it should be noted that much of the initial part of the VCTS contract required that the Company purchase hardware from venders at a predetermined premium resulting in constrained margins.
Also, next year margins are expected to improve as Arotech begins to add in the software component to the VCTS contract.
Furthermore, the Company’s focus with its Battery Division has been on the development and introduction of new higher margin battery products.
Based on a weighted average number of basic and diluted common shares of 14.216 million, basic and diluted net loss per share resulted in $0.11 loss per share for the third quarter of 2011. This compared to basic and diluted net loss per share of $0.08 on a weighted average number of basic and diluted shares of 13.336 million during the three months ended September 30, 2010.
For the nine months ended September 30, 2011, year over year revenues decreased by 4.6 percent or $2.601 million to $53.810 million from $56.412 million for the comparable nine months of 2010.
Net loss for the nine months jumped to $6.240 million for the nine months ended September 30, 2011. This compares to a net loss of $655,816 for the comparable nine months of 2010.
The increase in net loss was mainly a result of lower gross margin and a year over year increase in selling, general and administrative expense in the first nine months of 2011.
Gross margin for the nine months dropped to 21.2 percent compared to gross margin of 27.6 percent for the nine months ended September 30, 2010.
Based on a weighted average number of basic and diluted common shares of 13.922 million, basic and diluted net loss per share resulted in a $0.45 loss per share for the first nine months of 2011. This compared to a basic and diluted net loss per share of $0.05 on a weighted average number of basic and diluted shares of 13.216 million during the nine months ended September 30, 2010.
Still, the Company’s backlog of orders jumped to approximately $99.2 million as of September 30, 2011. This compares to a total backlog of $42.2 million at September 30, 2010 and $44.0 million as of December 31, 2010.
Additionally, Arotech had $1.8 million in cash and $1.8 million in restricted collateral deposit as of September 30, 2011. This compares to $6.3 million in cash and $1.8 million in restricted collateral deposits and $399,000 in available for sale securities as of December 31, 2010.
However, the Company’s short- and long-term borrowings were $2.7 million at the end of the first nine months of 2011 which compares to $4.9 million at the end of 2010.
Furthermore, as of September 30, 2011, Arotech had $3.9 million in unused lines of credit available at the Company’s primary U.S. bank.
Also, management reaffirmed its guidance for its fiscal 2011 and fiscal 2012 full year results.
Management reiterated its previously provided guidance, expecting fiscal 2011 revenues to be in the range of $85 million to $88 million and fiscal 2012 revenues to be in the range of $95 million to $100 million.
The recently reaffirmed fiscal 2011 guidance would be a 17.3 percent year over year growth in revenues at the midpoint of the projected range while the reiterated 2012 guidance would be a 12.7 percent year over year growth in revenues over anticipated revenues for fiscal 2011 at the midpoint of the projected range.
Additionally, Arotech anticipates positive adjusted EBITDA for fiscal 2011 but no longer anticipates that adjusted EBITDA will approach last year’s $2.9 million. Similarly, Arotech lowered its estimate for adjusted EBITDA for fiscal 2012.
Management now expects fiscal 2012 adjusted EBITDA to be in the range of $3.75 million to $5.0 million which includes the possibility of reaching GAAP profitability. This compares to Arotech’s previous projection being in the range of $4.5 million to $5.5 million.
Arotech also reported that its new battery program, SWIPES (Soldier Worn Integrated Power Equipment System), is proceeding nicely and the Company anticipates that starting in 2012 it will be a multimillion dollar annual revenue business for Arotech.
Additionally, the Company stated that other new applications in the Company’s Battery Division such as submersibles, UAVs and Tank Starters have begun to gain traction.
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