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ARTX > SEC Filings for ARTX > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for AROTECH CORP


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve inherent risks and uncertainties. When used in this discussion, the words "believes," "anticipated," "expects," "estimates" and similar expressions are intended to identify such forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those set forth elsewhere in this report. Please see "Risk Factors" in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission.

Arotech™ is a trademark and Electric Fuel® is a registered trademark of Arotech Corporation. All company and product names mentioned may be trademarks or registered trademarks of their respective holders. Unless the context requires otherwise, all references to us refer collectively to Arotech Corporation and its subsidiaries.

We make available through our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to such reports and other filings made by us with the SEC, as soon as practicable after we electronically file such reports and filings with the SEC. Our website address is www.arotech.com. The information contained in this website is not incorporated by reference in this report.

The following discussion and analysis should be read in conjunction with the interim financial statements and notes thereto appearing elsewhere in this Quarterly Report. We have rounded amounts reported here to the nearest thousand, unless such amounts are more than 1.0 million, in which event we have rounded such amounts to the nearest hundred thousand.

Executive Summary

We are a defense and security products and services company, engaged in two business areas: interactive simulation for military, law enforcement and commercial markets; and batteries and charging systems for the military. We operate in two business units:

††† We develop, manufacture and market advanced high-tech multimedia and interactive digital solutions for use-of-force training and driving training of military, law enforcement, security and other personnel (our Training and Simulation Division); and

††† We manufacture and sell lithium and Zinc-Air batteries for defense and security products, including our Soldier Wearable Integrated Power Equipment System (SWIPES)™ power hubs, and other military applications (our Battery and Power Systems Division).

Between 2002 and December 2011, we were also engaged in the production of armored vehicles and aviation armor, through our Armor Division. In December 2011, our Board of Directors approved management's plan to sell our Armor Division in order to focus on the more profitable and growth-oriented aspects of our business. We completed the sale of our Armor Division in June 2012.

The discontinuation of the Armor Division for accounting purposes resulted in a one-time, pre-tax charge during the fourth quarter of 2011 of approximately $3.9 million, reflecting an impairment of goodwill and intangibles ($1.8 million), an impairment of other long-lived assets ($1.5 million), a write-off of a joint venture investment ($269,000), and costs associated with change of control provisions and other non-statutory severance expenses ($302,000). Almost all these charges are non-cash impacting items. In 2012, an additional pre-tax adjustment of approximately $829,000 was recorded to reflect a loss upon the sale.


Index

Overview of Results of Operations

Acquisitions

In the acquisition of subsidiaries, part of the purchase price is allocated to intangible assets and goodwill. Amortization of definite-lived intangible assets related to acquisition of subsidiaries is recorded based on the estimated expected life of the assets. Accordingly, for a period of time following an acquisition, we incur a non-cash charge related to amortization of definite-lived intangible assets in the amount of a fraction (based on the useful life of the definite-lived intangible assets) of the amount recorded as intangible assets. Such amortization charges continued during the first three months of 2013. We are required to review long-lived intangible assets and goodwill for impairment at least annually or whenever events or changes in circumstances indicate that carrying amount of the assets may not be recoverable. If we determine, through the impairment review process, that the carrying amount of these assets has been impaired, we must record the impairment charge in our statement of operations.

We incurred non-cash charges for amortization of intangible assets in the first three months of 2013 and 2012 in the amount of $276,000 and $301,000, respectively.

Restricted Shares, Restricted Stock Units and Options

In accordance with FASB ASC 505-50, we incurred, for the three months ended March 31, 2013 and 2012, compensation expense related to restricted stock units and restricted shares of approximately $98,000 and $63,000, respectively. Our directors received their annual restricted stock grants on April 3, 2013 in accordance with the terms of the directors' stock compensation plan.

Overview of Operating Performance and Backlog

Overall, our pre-tax income from continuing operations for the three months ended March 31, 2013 was $654,000 on revenues of $22.1 million, compared to a loss of $926,000 on revenues of $16.1 million during the three months ended March 31, 2012. Our overall backlog for the first quarter of 2013 totaled $76.3 million.

In our Training and Simulation Division, revenues increased from approximately $10.9 million in the first three months of 2012 to $15.7 million in the first three months of 2013. As of March 31, 2013, our backlog for our Training and Simulation Division totaled $59.8 million compared to $67.9 million in the first quarter of 2012.

In our Battery and Power Systems Division, revenues increased from approximately $5.2 million in the first three months of 2012 to approximately $6.4 million in the first three months of 2013. As of March 31, 2013, our backlog for our Battery and Power Systems Division totaled $16.5 million compared to $9.4 million in the first quarter of 2012.

The table below details the percentage of total recognized revenue by type of arrangement for the three months ended March 31, 2013 and 2012:

                                                    Three months ended March 31,
                 Type of Revenue                      2013                2012
   Sale of products                                        95.7 %              96.1 %
   Maintenance and support agreements                       2.8 %               3.2 %
   Long term research and development contracts             1.5 %               0.7 %
   Total                                                  100.0 %             100.0 %

Functional Currency

We consider the United States dollar to be the currency of the primary economic environment in which we and EFL operate and, therefore, both we and EFL have adopted and are using the United States dollar as our functional currency. Transactions and balances originally denominated in U.S. dollars are presented at the original amounts. Gains and losses arising from non-dollar transactions and balances are included in net income.


Index

The majority of financial transactions of Epsilor is in New Israeli Shekels ("NIS") and a substantial portion of Epsilor's costs is incurred in NIS. Management believes that the NIS is the functional currency of Epsilor. Accordingly, the financial statements of Epsilor have been translated into U.S. dollars. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Statement of operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported as a component of accumulated other comprehensive loss in stockholders' equity.

Results of Operations

Three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Revenues. Revenues for the three months ended March 31, 2013 totaled $22.1 million, compared to $16.1 million in the comparable period in 2012, an increase of $6.0 million, or 36.9%. In the first quarter of 2013, revenues were $15.7 million for the Training and Simulation Division (compared to $10.9 million in the first quarter of 2012, an increase of $4.8 million, or 43.4%, due primarily to several new, significant contracts); and $6.4 million for the Battery and Power Systems Division (compared to $5.2 million in the first quarter of 2012, an increase of $1.2 million, or 23.2%, due primarily to increased sales in the U.S.).

Cost of revenues. Cost of revenues totaled $16.8 million during the first quarter of 2013, compared to $11.8 million in the first quarter of 2012, an increase of $5.0 million, or 41.9%, due primarily to the increased revenue in our divisions and the higher costs associated with our VCTS and our battery systems. Cost of revenues were $11.4 million for the Training and Simulation Division (compared to $7.9 million in the first quarter of 2012, an increase of $3.5 million, or 44.5%, due primarily to several new, significant contracts); and $5.4 million for the Battery and Power Systems Division (compared to $3.9 million in the first quarter of 2012, an increase of $1.5 million, or 36.8%, due primarily to increased sales in the U.S.).

Research and development expenses. Research and development expenses for the first quarter of 2013 were $533,000, compared to $591,000 during the first quarter of 2012, a decrease of $58,000, or 9.8%, due primarily to reduced spending in our Training and Simulation Division offset by increased spending in the Battery and Power Systems Division for continuing research on new battery products in Israel.

Selling and marketing expenses. Selling and marketing expenses for the first quarter of 2013 were $1.2 million, compared to $1.3 million in the first quarter of 2012, a decrease of $48,000, or 3.7%.

General and administrative expenses. General and administrative expenses for the first quarter of 2013 were $2.4 million, compared to $3.0 million in the first quarter of 2012, a decrease of $613,000, or 20.4%, due primarily to a reduction of $728,000 in corporate consulting and legal expenses related to transactional activities. We have continued with our initiative to reduce general and administrative expense in all categories.

Amortization of intangible assets. Amortization of intangible assets totaled $276,000 in the first quarter of 2013, compared to $301,000 in the first quarter of 2012, a decrease of $25,000, or 8.3%, due primarily to decreased charges for fully amortized capitalized software in our Training and Simulation Division.

Financial expense, net. Financial expense totaled $189,000 in the first quarter of 2013, compared to financial expense of $37,000 in the first quarter of 2012, an increase of $152,000, due primarily to an increase in corporate interest and bank charges of $40,000.

Income taxes. We recorded $175,000 in tax expense in the first quarter of 2013, compared to $198,000 in tax expense in the first quarter of 2012, a decrease of $23,000, or 11.5%. This amount includes the required adjustment of taxes due to the deduction of goodwill "naked" credits for U.S. federal taxes, which totaled $150,000 in non-cash expenses in the both the first quarter of 2013 and 2012.

Net income. Due to the factors cited above, we went from a net loss of $(1.1) million in the first quarter of 2012 to a net income of $479,000 in the first quarter of 2013, an improvement of $1.6 million.


Index

Liquidity and Capital Resources

As of March 31, 2013, we had $378,000 in cash and $489,000 in restricted collateral deposits, as compared to December 31, 2012, when we had $1.6 million in cash and $186,000 in restricted collateral deposits. We have experienced fluctuations in available cash in the previous twelve months due to the funding requirements of our larger contracts. These fluctuations have not had a significant impact on our operations, due in part to the increase in our credit facility that was negotiated with our primary bank in 2012. We ended the quarter with $1.1 million in available, unused bank lines of credit with our main bank as of March 31, 2013, under a $15.0 million credit facility under our FAAC subsidiary, described below. Our cash position has improved in the thirty days following the end of the quarter primarily due to the collection of milestone payments for the VCTS program.

We and FAAC maintain a $15.0 million credit facility with FAAC's primary bank, which is secured by Arotech's assets and the assets of our other domestic subsidiaries and guaranteed by Arotech and our other domestic subsidiaries, at a rate of LIBOR plus 375 basis points. This credit facility expires May 31, 2015. The credit agreement contains certain covenants, including minimum Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), quarterly Maximum Increase in Net Advance to Affiliates of less than 90% of EBITDA and an annual Fixed Charge Coverage Ratio of not less than 1.1 to 1.0. At the end of the first quarter of 2013 and as of the filing date of this report, we met all required current covenants. The credit agreement carries an interest rate of 30 day LIBOR plus 375 basis points and an unused line of credit fee of 0.35%.

We used available funds in the three months ended March 31, 2013 primarily for working capital and investment in fixed assets. We purchased approximately $901,000 of fixed assets during the three months ended March 31, 2013. Our net fixed assets amounted to $5.1 million at quarter end.

Net cash used in operating activities for the three months ended March 31, 2013 and 2012 was $1.8 million and $104,000, respectively, an increase of $1.7 million. This difference was due primarily to the increased working capital funding requirements for our major projects at both the Simulation and Training Division and Battery and Power Systems Division. The timing of cash inflows and outflows has impacted us due to the substantial purchases of products to fulfill these contracts. Additionally, the increases in working capital were offset by a profit from continuing operations.

Net cash provided by (used in) investing activities for the three months ended March 31, 2013 and 2012 was $(1.2) million and $1.3 million, a net change of $2.5 million. This difference was due primarily to the change in restricted collateral deposits offset by the purchase of capital assets.

Net cash provided by (used in) financing activities for the three months ended March 31, 2013 and 2012 was $1.7 million and $(1.6) million, respectively, net change of $3.3 million. The change in 2013 of cash used in financing activities was due primarily to changes in short term borrowing under our primary line of credit.

As of March 31, 2013, we had approximately $12.0 million in short-term bank debt and $1.3 million in long-term debt outstanding. This is in comparison to $9.8 million in short-term bank debt and $1.9 million in long-term debt outstanding as of December 31, 2012.

Subject to all of the reservations regarding "forward-looking statements" set forth above, we believe that our present cash position, anticipated cash flows from operations and lines of credit should be sufficient to satisfy our current estimated cash requirements through the remainder of the year.

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