Investors Would be Wise to Look Beyond Armor Delays (ARTX)

Ken Nagy, CFA

Investors Would be Wise to Look Beyond Armor Delays

On August 15, 2011, Arotech Corporation (ARTX), a provider of defense and security products, reported financial results for its fiscal 2011 second quarter, ended June 30, 2011.

The second quarter performance resulted in a 24 percent year over year decrease in revenue, with revenue dropping $4.608 million to $14.296 million from $18.904 million for the three months ended June 30, 2010.Net income came in weak as well, falling $2.431 million year over year to a net loss of $2.071 million. This compares to net income of $360,000 million for the comparable quarter of 2010.

The decrease in revenues for the three months ended June 30, 2011 was due to delays in armor orders which Arotech had noted and forewarned about in previously released statements. Nevertheless, the Company anticipates the formerly delayed armor orders to be shipped in the 2011 second half.

As a result of this expected shipping time frame, as well as a $63.4 million contract for the US Army, the Company continues to forecast full year revenues to improve over its fiscal 2010 results and has raised its guidance for both fiscal 2011 and 2012.

While year over year gross margin fell 4.9 percent during the quarter, the decrease in net income was likewise the product of a $500,000 Net Allowance for Settlements that was received in 2010. Additionally, Arotech had $115,757 of Other Expenses during 2011 compared to $473,298 in Other Income received in fiscal 2010.Gross margin fell from 29.7 percent, in the second quarter of 2010, down to 24.8% for the three months ended June 30, 2011.

Still, Arotech’s backlog was the best in the Company’s history, reaching approximately $109.1 million as of June 30, 2011. This compares to a backlog of $40.4 million at June 30, 2010 and $43.1 million as of March 31, 2011.

More recently, as a result of strong revenues during the Q3 month of July as well as payments received in August, the Company was able to pay down its bank line to $0 and currently has substantial cash on hand. In addition, the last installment of a long term loan was paid off and 530,000 warrants that were not exercised were recovered from the lender.

For the full year 2011, Arotech forecasts revenues to be in the range of $85 million to $88 million, up from the previous guidance of $79 million to $82 million. The recently increased guidance would be a 17.3 percent year over year growth in revenues at the midpoint of the projected range compared to a 9.2 percent year over year increase at the midpoint of the previously anticipated range.The Company continues to forecast fiscal 2011 adjusted EBITDA to approach last year's $2.9 million.
For the full year 2012, Arotech anticipates revenues to be in the range of $95 million to $100 million, up from the previous guidance of $85 million to $95 million. The recently increased 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 ranges. This compares to a 4.1 percent year over year growth in revenues over anticipated revenues for fiscal 2011 at the midpoint of the previously projected range.

As a result of the increased revenue projection for 2012, the Company also raised its fiscal 2012 adjusted EBITDA projection to be in the range of $4.5 million to $5.5 million, up from the previously guided range of $3.75 million to $5.0 million.

Nonetheless, this forecasted adjusted EBITDA includes the possibility of reaching GAAP profitability.

Furthermore, Arotech’s new battery program, SWIPES (Soldier Worn Integrated Power Equipment System), is proceeding nicely and the Company anticipates orders in second half of this year.Still, it should be noted that none of the SWIPES opportunities are included in the battery revenue guidance for 2011 or 2012.

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