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Focused on training and
protecting both our soldiers and police officers with their simulators, armored vehicles
and battery businesses, Arotech has built a company that is necessary for today and
tomorrow
Industrial Goods
Industrial Electrical Equipment
(ARTX-NASDAQ)
Arotech Corporation
1229 Oak Valley Drive
Ann Arbor, MI 48108
Phone: 800-281-0356
Robert S. Ehrlich
Chairman, President and CEO
Interview conducted by:
Lynn Fosse, Senior Editor
CEOCFOinterviews.com
Published - March 1, 2007
BIO:
Robert S. Ehrlich has been our Chairman of the Board since January 1993 and our
President and Chief Executive Officer since October 2002. From May 1991 until January
1993, Mr. Ehrlich was our Vice Chairman of the Board, and from May 1991 until October 2002
he was our Chief Financial Officer. Mr. Ehrlich was a director of Eldat, Ltd., an Israeli
manufacturer of electronic shelf labels, from June 1999 to July 2003. From 1987 to June
2003, Mr. Ehrlich served as a director of PSC Inc. (“PSCX”), a manufacturer and
marketer of laser diode bar code scanners, and, between April 1997 and June 2003, Mr.
Ehrlich was the chairman of the board of PSCX. Mr. Ehrlich received a B.S. and J.D. from Columbia
University in New York, New York.
Company Profile:
Arotech Corporation provides quality defense and security products for the military, law
enforcement and homeland security markets, including advanced zinc-air and lithium
batteries and chargers, multimedia interactive simulators/trainers and lightweight vehicle
armoring. Arotech operates three business divisions: Battery and Power Systems;
Simulation, Training and Consulting; and Armored Vehicles.
CEOCFO: Mr. Ehrlich, what was your
vision when you started with Arotech and where are you today?
Mr. Ehrlich: “When we started in
October of 2002, we were on the verge of bankruptcy and decided we had to convert the
company into a defense and securities products company. We had a small battery-development
business in Alabama for the US Army, which blossomed into a business in part as a result
of the first Gulf war. We acquired an armoring company here in Israel that we thought we
could take to the US, which we have done successfully. We acquired as well, a battery
company that we planned to take to the US and have done that as well. We moved into
simulation, and although we had started in armor and batteries, we have built the
simulation business over the last several years. We have a substantial backlog that looks
like we can continue to grow it in 2007.”
CEOCFO:
How does it break up among the three different businesses?
Mr. Ehrlich: “The simulation business
is our biggest and most profitable; it represents about 45% of the business. It is a
high-growth area and one that we continue to concentrate in; and of the remain 55%, about
30% is armor and 20% is batteries. We see the growth principally in the armor and the
simulation group. The batteries are much slower and a growing activity.”
CEOCFO:
What do you do in the simulation?
Mr. Ehrlich: “In the simulation we do
every driving simulator that the US Army drives, every vehicle that is driven in the US
Army, we prepare a simulator for. We have 80% of them stored at Fort Leonard Wood in Missouri,
where everyone is going to be assigned some kind of heavy vehicle, a truck or something
like that. The Army goes through that simulator to train. We also have use-of-force
training for law enforcement officers whereby they are able to decide what kind of a force
to apply in a given police situation. We also have a part of our division in what we call
commercial, which is doing things like bus simulators, ambulance and fire trucks. Our
premiere task is to do the New York subway, which we hope to deliver in the first quarter
of 2007, which will be the state-of-the-art subway simulator for the world, and then we
hope to leverage off that.”
CEOCFO:
Will you tell us about the simulation industry?
Mr. Ehrlich: “There are a couple big
players; L-3 Communications (NYSE: LLL), Lockheed Martin Corporation (NYSE: LMT), and a
few others like that. Then there are a number of the smaller niche players like ourselves
who have very nice businesses, having picked out particular areas where we can specialize,
which is not big enough for the giants to try and take over. We keep looking for other
niche operators that we can somehow bring into our fold to build our business. It is a
business that is dominated by a couple big guys and a number of our smaller companies
having chosen particular areas where we can apply our expertise and know-how and sort of
outclass the big guys.”
CEOCFO:
Is specialization the key to customers for Arotech?
Mr. Ehrlich: “I think we have built an
expertise in terms of vehicle simulation; trucks, busses, subways, and light rail are the
areas we have focused on. Whereas our competitors are looking at big military
applications, land/war kind of scenarios, which are much bigger and costly but also more
competitive because you have the people like Lockheed Martin and L-3 Communications
competing for that business. They have not focused as much attention on a smaller market,
which is maybe a couple hundred million dollars of driving simulation or transportation
simulation, commercial or military.”
CEOCFO:
Do you do much business outside of the United States?
Mr. Ehrlich: “We do business all over
the world. Our simulators are located in a number of different countries. The bulk of it
is in the US military and law enforcement. However, we have installation in Malaysia, Germany,
Belgium and a number of places where we have done simulation projects and obviously look
forward to continuing in a number of places in the world.”
CEOCFO:
What is new in simulation?
Mr. Ehrlich: “The kind of graphics you
can get are getting better all the time. In the future you will have virtual simulation
where you can actually put yourself physically into a simulation situation.”
CEOCFO:
Will you tell us about the armor side?
Mr. Ehrlich: “On the armor side, we
have developed a lightweight armor vehicle that replaces the Jeeps that the Israeli
defense forces use. It carries four to six soldiers. We think it is much more mobile and
better protected than a Humvee. It is much better for close urban fighting and that has
been proven effective here, but we think that has applications in other parts of the world
where there will be urban fighting, as it seems to be spreading in other parts of the
world. We think that business will be growing and the demand we have from the Israeli
military is quite substantial. In addition, we are just beginning to develop product that
we can offer in other markets. We have an opportunity with a joint venture in India where
we are going to be offering armored vehicles to the Indian military. We are also
developing automatic drive cars to offer to the US military because they won’t buy
shift cars which is what we sell to the Israeli military. We see that as a substantial
growth area over the next several years.”
CEOCFO:
You mentioned a joint venture in India; do you often do joint ventures?
Mr. Ehrlich: “This is our first join
venture, and this came about because we are bringing in the armoring know-how and they
have materials and manufacturing capabilities, so the combination is excellent. In markets
other than Israel and the US, you need a local presence to participate, because they have
to know how to deal with the various defense departments. Having a local partner makes
sense and we would do that further in other countries where opportunities present
themselves.”
CEOCFO:
What kind of facilities do you have?
Mr. Ehrlich: "The principal research
that we do is in the area of battery technology in both chemistry and electronics. That we
do principally here in Israel. In armor, it is not so much R&D, as in development of
solutions to come up with for various armor requirements. In the simulation, we do
paid-for development when the military comes up with a new vehicle that needs a simulator
developed for it. The principle research development is in the battery chemistry and
technology.”
CEOCFO:
What is the financial picture of the company?
Mr. Ehrlich: “It is much better than it
has been. We have $55 million in net worth and only $2.6 million in outstanding debt plus
some bank debt amounting to about $6 million. The long-term debt we will pay off in 2007,
so by the end of the year we hope to be long-term debt free. We are cash flow positive, we
are generating EBITDA results that are positive, so we think our financial position is
improving continuously, and we are hopeful it will continue from quarter-to-quarter as we
go 2007.”
CEOCFO:
You also have a nice backlog of orders!
Mr. Ehrlich: “We do, we have the
biggest we ever had. We entered 2007 with about a $42 million backlog, which is twice what
it was at the end of 2005. We think we are well positioned to continue growing the
business in 2007.”
CEOCFO:
Do you need additional personnel to handle the anticipated growth?
Mr. Ehrlich: “Sometimes you need more
labor, but that is pretty accessible. We do not need any more senior executives; we think
we have a very good compliment of managers that can handle more business. We think we have
a management team in place that could easily take the business to $100 million without
having to add a number of additional managers. We think we are positioned to grow from
here to double the size of the company without a lot of personnel addition. Once we get
beyond that, we will have to see what is required.”
CEOCFO:
What is ahead for the next few years?
Mr. Ehrlich: “We continue to see
substantial growth in simulation and in armor. We see that is where we are going to focus
our efforts. We continually look for acquisitions that fit into those two business units.
We will be selective and careful of what we bring on-board. We see internal growth
somewhere in the neighborhood of 15% per annum, which is reliable. If we find a suitable
acquisition, we will add that as well, so we could accelerate our growth.”
CEOCFO:
Why should potential investors be interested and what should they know about Arotech that
does not jump off the page?
Mr. Ehrlich: “In terms of what
investors should look at, they should follow us quarter-to-quarter. In the public arena,
you have to out-perform the same quarter last year, but for 2007 and hopefully into 2008,
we think we can do that. I think that following us on the basis of the magnitude of new
orders that we get, the quality of orders we get and the areas in which we expand our
business. For example, we have introduced a product in our simulation business for first
responders into the command review and we think that product has the potential to become a
substantial market, but it is very new. It would be significant if we could demonstrate
more orders following what we got from Los Angeles. In addition, getting more armor car
orders in Israel and other markets would be significant. From the investor perspective, if
we can steadily continue to grow the business revenue and profitability, well that would
certainly be something that should encourage people to invest and look forward to
reasonable returns on their investment.”
CEOCFO:
Any final thoughts for our readers?
Mr. Ehrlich: “We have a strong
management team, that has been seasoned through some tough times in the last couple of
years and we now seem to have our act together to go forward. We have strong managers in
each of the units and a plan to take the company and grow it over the next couple of
years. I am very optimistic about the next couple of years. One of the things I would like
to point out is that we do not believe that much of our business is dependent on Iraq,
which is significant for a company in the defense and security business. We are basically
into training and protecting and we think that is going to continue and there will be
additional requirements even as the troops come home from Iraq. Therefore, we think that
represents an attractive defense posture for us.”
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